You have the goal of building a profitable real estate portfolio. In most cases, you’ll need the help of real estate finance to get your portfolio off the ground. Luckily, there are many options to finance a real estate investment.
As you explore your financing options, there are expensive pitfalls to avoid along the way. Want to avoid the most costly mistakes a real estate investor can make? Take advantage of our FREE guide to the 9 biggest mistakes made in real estate.
Today we’ll take a closer look at real estate finance options that could work for you.
What is real estate finance?
First things first, what exactly is real estate finance. Essentially, real estate financing is money that you can use as leverage to get properties. Although you’ll be taking on more debt along the way in most cases, you’ll also be expanding the number of units in your portfolio.
Depending on your situation and your goals, the right type of real estate financing will vary. Let’s explore the range of your real estate financing options.
Hard money lenders
A hard money loan is secured by a piece of property. In most cases, a hard money loan is obtained through a private company or individual instead of a bank.
If you have less than perfect credit, hard money lenders may still be willing to work with you. However, you might face steep terms if you have bad credit. Since the property is put up as collateral for the loan, the lender may be more lenient on your credit requirements.
You’ll still have to make a down payment on these loans, typically in the 10% to 25% range.
Private money lenders
Individuals with expansive network connections may be able to tap into private money lenders. In this case, the lender may be an acquaintance or friend that is in the business of providing loans for worthwhile investment opportunities.
You’ll often find set interest rates and a quick repayment time frame. However, the details will vary based on the private money lender you connect to.
Self-directed IRA accounts
If you have a self-directed IRA, then you may be able to tap into that opportunity. With enough savings in that account, you may be able to use the funds as capital for your real estate investments.
Seller financing, sometimes referred to as owner financing, is another funding option. In this case, the owner of the property would set up a payment plan with you. The owner will create a cashflow on a property that might be difficult to sell. And you’ll have the opportunity to get into real estate investing.
Seller financing deals are closed through a promissory note that details the terms of the agreement. The exact terms surrounding your interest payments and consequences for default should be included in the promissory note.
Let’s say you are interested in investing in real estate.But you don’t have the best financial foundation set up for a traditional mortgage or other financing application. A motivated seller may be willing to work out a unique arrangement with you.
Want to learn more about owner financing? Here’s our full article.
Peer to peer lending
Peer to peer lending is an option for real estate investors to raise capital in an unconventional way. As a borrower, you can connect to potential lenders through online platforms. Depending on your situation, you may find capital through this option.
If you are uncomfortable taking on debt, then cash financing is your best opportunity. You can finance real estate deals through large amounts of capital.
Don’t have any capital on hand? That’s okay. You can start building your real estate investment fund with the help of a side hustle. Or try your hand at house hacking to supercharge your savings.
Bonus! Download our free House Hacking Quick Start Guide to slash your housing costs.
How to finance a real estate investment
The idea of financing a real estate investment property might seem daunting at first. But luckily, there are a variety of financing options to help you get access to the funds you need.
Take some time to assess your situation. You’ll need to choose the financing opp you best qualify for.
How hard is it to finance real estate?
The answer will depend on your situation. If you have a solid financial foundation, then qualifying for real estate financing might not be too difficult. But if you have a rocky financial history, a lender may not be willing to work with you.
If you aren’t sure where you stand, take the time to get your financial house in order first. With a solid financial foundation, you can help to make things go more smoothly.
Real estate finance books to help you learn the ins and outs
Want to learn more about real estate finance? There are countless books on the topic that promise to help you learn more. But these four books are my top recommendations to help you succeed.
- The Book on Rental Property Investing: How to Create Wealth with Intelligent Buy and Hold Real Estate Investing by Brandon Turner – A step by step guide that includes options to help you find creative deals. Plus, actionable ideas for financing rentals.
- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert Kiyosaki – A classic personal finance book that can help you approach real estate opportunities with new eyes.
- The Book on Flipping Houses: How to Buy, Rehab, and Resell Residential Properties by J Scott – Flipping houses a different strategy that requires different solutions.
- The Book on Tax Strategies for the Savvy Real Estate Investor: Powerful Techniques Anyone Can Use to Deduct More, Invest Smarter, and Pay Far less to the IRS by Amanda Han – A must-read for any real estate investor. Want to learn more from Amanda? Listen to our podcast interview.
With the knowledge gained in these books, you’ll be ready to build the real estate portfolio of your dreams.
The bottom line
Financing a real estate investment can seem overwhelming. But with so many options, it is likely that you’ll find the perfect solution to your capital needs.
Want to avoid expensive mistakes while building your real estate investment portfolio? Then you have to read our full guide to the most expensive mistakes that real estate investors make.