Interestingly, individual investors own 70% of all rental properties. This means that only 30% of rental properties are owned by institutional investors or real estate investment groups. Typically, investors invest in real estate because it is a compelling way to produce passive income, multiply your net worth, benefit from debt paydown by tenants, and secure tax advantages.
Are you considering investing in real estate? If so, you’re going to have to figure out how to fund your purchases. Given this reality, let’s explore the different types of real estate investment funds that you can use to grow your real estate portfolio.
Read on below to learn about eight real estate investing strategies you can use today.
1. Personal Network
First and foremost, you can use personal network. This can be money that you have saved up, money that your family will lend you, or funds that friends are willing to invest.
If you’re using funds other than your own, please have clear terms and conditions around how you will pay it back, at what interest rate, and when.
It is also important to clarify what will happen if you default and whether your supporters will have a right to take possession of a property if this occurs. When it comes to using funds from friends and family, this aspect isn’t always clarified and it really should be.
As my mentor has always told me, “Friends sign contracts.” The meaning of this statement is that having clarity around expectations benefit everyone involved.
2. Traditional Bank Financing
Traditional financing is funding that is offered by a bank. Typically, although not always, a bank will require you to put 20% down on an investment property. In some rare cases, you may only have to put 10-15% down.
On the other hand, if you put 25-30% down, banks will often lower your interest rate slightly because their risk profile decreases when you have more equity in the property upfront.
Given today’s high real estate prices, these high down payment requirements can make using traditional financing a bit of a challenge for many new investors.
3. FHA Financing
FHA stands for the Federal Housing Administration and is primarily used to purchase a primary residence. However, some investors use this type of loan if they’ve purchased a multifamily home or a home with several parts and intend to live in only part of the house.
This means they can rent out the other part without breaching any laws. Investors consider this type of loan because they can qualify for it and the down payment is more relaxed than others.
4. Hard Money Lender
Next, a hard money lender is a provider that will provide a loan or funds based on the asset the loan is being sought for. The loans provided by a hard money lender are usually shorter loans with a higher rate of interest than other lenders.
The guidelines implemented when borrowing from a hard money lender, compared to a bank, are more flexible, which means you can access the funds given much quicker.
When you apply for this type of loan, whether it’s given or not will be based on the property, rather than the investor’s current income or credit history. If you have a low net worth or low credit score, this can be extremely helpful.
Also, if your goal is to sell your house fast, this type of loan can help you because you don’t have to wait long to secure your funds.
5. Private Money Lender
Private money lenders are people who work in the real estate sector business or are investors. These people prefer to put their money into real estate investments, and they get their money back through various fees and lending interest rates.
If you cannot obtain a traditional loan, this could be one of the property financing options that you consider.
6. Self Directed IRA Funds (SDIRA)
Do you have an IRA account that has performed well over time? If so, you can convert it into a self directed IRA and use it to invest in real estate. With self directed IRA funds, they can be put towards the purchase of a property or a portion of the down payment for the property.
While this is an exciting way to invest tax-advantaged retirement funds into physical property, like real estate, there are a lot of rules around how this must be done.
With this approach, your first step should be to find a custodian who specializes in real estate IRAs. One you’ve identified this person, or company, they will be able to help you execute this process correctly.
Also, you’ll need to hold title to your real estate in the name of your IRA, not in your personal name. And, your SDIRA funds must be used to buy an investment property, not a primary residence that you live in.
7. Home Equity Loan
A home equity loan is a type of loan that is secured against equity that you have in another piece of property, often your primary residence. The reason it is popular is that it is a convenient way for you to access funds without having to sell an existing property that you own.
Typically, these types of loans have interest rates that don’t change over time, but the risk is that if you’re unable to pay the loan off, the property on which you’ve taken out of the line of credit can be foreclosed on.
Another fact to remember when considering this type of loan is you might have to pay several fees before the loan is provided.
Typically, lenders will allow you to take out a home equity loan for around 80-85% of the equity that you own in a home.
8. Seller Financing
Finally, you can often get a seller to act as your “bank” by purchasing their property using seller financing. Seller financing is a method where the seller acts as your lender so that you don’t have to acquire a mortgage.
With this approach, you buy the property from the seller in installment payments, which can lower their tax liability (by preventing a large capital gain all at once) and provide them with consistent monthly payments.
Importantly, seller financing offers benefits to both parties. It allows buyers to avoid having to having to quality for a conventional loan. It also allows sellers to sell their property faster, earn interest income, and broaden the pool of potential buyers by offering flexible terms.
An example of seller financing on a $200,000 property purchase could be as follows: The buyer and seller agree on the terms, including a 10% down payment of $20,000. The remaining $180,000 would be financed by the seller. The seller and buyer negotiate an interest rate of 5% with a repayment term of 10 years (120 months). The monthly payments would be calculated based on these terms.
Using an mortgage calculator, the monthly payment on the $180,000 loan at 5% interest over 10 years would be approximately $1,908 per month. So, the buyer would make monthly payments of $1,908 to the seller for 10 years until the loan is fully repaid. During this time, the seller would retain the legal title to the property.
Once the buyer has made all the payments according to the agreed terms, the seller would transfer the title of the property to the buyer, and the buyer would become the sole owner of the property.
Get Creative with Raising Funds for Real Estate
When you commit to investing in real estate, there are several strategic angles you can use to fund your investments. Above, we’ve provided descriptions of the most common ones.
Want to know more about real estate investing and how to achieve financial freedom through this asset class? Explore the real estate section of this site.
What questions do you have about funding real estate investments? Ask them in comments below.