As an investor, there are really only a couple of different ways to go about funding real estate deals. Each one does have its own set of advantages and disadvantages, and each individual financing method will also vary based on the current real estate and the individual investor. There are two primary methods that you can use when financing a real estate purchase: cash and credit. In this article, we’ll take a look at each one.
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One of the more common ways for real estate investors to fund their deals is to utilize what’s called a “junior” loan. These types of loans are basically for-sale by owner loans. This means that the investor has to sign over the title of the property (which they in turn control) to the lending company. Typically, these loans carry very low interest rates, so they’re an attractive method of real estate financing for new investors. Visit Abocapital.com for more details.
Another type of real estate financing is what’s called “peer-to-peer lending.” This is typically done through private money lending services, which essentially means that investors can access the money that they lend to peers, rather than having to go through a traditional lender. The key benefit to this type of lending is that investors can receive money from a large number of lenders without having to go through the hassle of going through a single lender. Private money lending services typically have higher interest rates and require a larger down payment.
On the other hand, if you’re looking to obtain real estate loans with a lower interest rate tied to a shorter term, then you’re looking at working with what’s called “hard money loans.” These types of loans typically have a much higher interest rate than private money loans, but they don’t require the owner to put up the entire down payment or to have a long term financial plan. It typically only requires that the owner have some collateral, such as a second home or car, which he or she could use as collateral until the loan is paid off. Since hard money loans are secured loans, the interest rate is often substantially lower than it would be with private money lending services. This makes them an attractive choice for those who don’t want to commit to a long term loan.
The third type of financing that you’ll come across when looking to obtain commercial real estate loans is what’s called “asset-based loans.” This type of loan is very similar to the private loans that you might look at; it just has different terms. Instead of working with a traditional bank or credit union, these loans are made between companies that agree to co-sign on the loan. For example, a local grocery company might offer a single private commercial real estate loan to a farmer in rural Iowa. The farmer would in turn have to apply for a loan from the grocery company’s local lender.
While this arrangement can be convenient, it comes with one major limitation: the interest rates. They will often be much higher than they would be with conventional commercial real estate loans. This can be both good and bad, depending on your own particular situation. If you need the money right away, this can be great – you’ll immediately have more cash available to you, but you also run the risk of defaulting on the loan and losing whatever collateral you’ve put up. On the other hand, if you’re looking to get the loan over a longer period of time, the interest rates can add up to significant sums of money, even with conventional financing. If you’re already facing high interest rates with your mortgage, this may not be the best option for you.
