Wondering how to find the money for your next investment acquisition and the expenses that go along with it? We’ve got some great ideas to help you move forward.
One of the biggest challenges real estate investors face, whether they are new to the process or seasoned experts, is finding the financial resources to take advantage of opportunities when they arise so that they can fund their real estate investments in a timely manner. That’s because real estate investing is not only capital intensive, it’s time-sensitive. After all, a great deal waits for no one and there is always someone else out there who is ready to move forward if you are not able.
Financing for real estate investment is necessary for a variety of purposes, including:
- the acquisition of properties
- carrying costs, including property taxes, utilities, insurance, and loan servicing
- rehab and renovation suitable for either fix and flip or buy and hold properties
- closing costs and professional fees associated with the acquisition, management, or sale of the property.
You don’t want to wait until you’ve got a great deal in your sights to begin thinking about your financing strategy. By exploring a variety of options now, you’ll be ready to move quickly when opportunity comes knocking.
Options for Financing Your Real Estate Investment
Fortunately, there are a variety of options available to you for putting together the funding you need for every stage of your real estate investment life cycle. Choosing among them will depend on your level of experience and expertise, your timeline for monetizing the property, your available financial resources, and the quality of the investment property itself.
Traditional Mortgage Lending
If you’re just starting out and have good credit, the easiest way to finance your first few properties is with a traditional mortgage through a bank, credit union, or other lending institution. In 2009, Fannie Mae increased its maximum property limit to ten properties; however, most lenders will only write loans on four properties, including your primary residence. Still, with today’s low interest rates, this is a smart and affordable option for those who are purchasing their first few investment properties.
Once you have acquired several properties, it’s time to begin looking for additional financing strategies. Private financing can offer you a great deal of flexibility, including the option to close quickly and finance construction and carrying costs along with acquisition costs.
In addition, private financiers may be less concerned about your creditworthiness, since they will require you to use the subject property to collateralize the loan. In exchange for this flexibility, you’ll pay a higher interest rate, so it is important to have an exit strategy in place upfront in order to minimize your carrying costs.
If you already have some properties in your portfolio, you may be able to use them to fund your latest acquisition through a 1031 Exchange. This exchange of like-kind properties allows you to consolidate an existing portfolio or upgrade the quality of your holdings without the need for new financing.
One advantage of the 1031 Exchange is that it allows you to defer capital gains taxes on your real estate holdings indefinitely. You can also use a 1031 to move up from one asset class to another. Keep in mind, there are a number of strict requirements for 1031 Exchanges, so be sure to work with a real estate broker or attorney experienced in this type of transaction in order to ensure that you are in compliance with the rules.
Home Equity Loan or Line of Credit
Similarly, instead of taking out a new mortgage loan, you may be able to finance some or all of your latest investment through a home equity loan or line of credit on one or more of your current real estate holdings. Carefully analyze your potential cash flow and ensure that it will be sufficient to cover the expenses related to the loan or line of credit so that you maintain profitability.
Peer to Peer Lending
There are plenty of investors who are looking for investment opportunities without having to undertake the logistics of acquiring and managing a real estate investment portfolio. Peer to peer (or P2P) lending allows you to connect with partners who are willing to finance your work in exchange for a negotiated return on investment (ROI). If you have a track record of profitability and effectiveness, you may be able to connect with moneyed investors who are willing to stake their funding on your expertise.
Financing your real estate investment is a product of careful research and connecting with experienced investors and financial experts in order to find the strategy that works for your investment property and your investing goals. The more you connect with fellow members of the REI community the more options and opportunities will come your way.