Where to find Funding
A major hurdle for any investor is funding or raising capital; especially if you’re just ‘starting out’. You will find that there are many opportunities in this arena for creative financing and ‘out of the box’ strategies to purchase real property. Some are more intricate than others; as a result, ‘attention to detail’ must always be your top priority. Cash is Always ‘KING’; if you don’t have any of your own, below are a few fairly straightforward ways to fund investment deals.
- private money
- hard money
- owner financing
- traditional financing
- 401k/self directed IRA
- equity from current residence
You can usually source ‘private money’ from people that you know either intimately or whom you cross paths with on a somewhat regular basis. Essentially what you’re doing is asking family and/or friends to invest in your transaction by funding the cost to purchase and rehab real property. The key to successfully pulling this off is working out all of the kinks upfront; then presenting a tangible proposal showing the details of how and when the borrowed funds will be paid back. Along with the amount of money the investor will make from the interest negotiated.
Similar to ‘private money’ however the requirements, terms, and details are more complex. The biggest difference is that you are typically dealing with a company instead of private individuals. Whether or not you’re approved will heavily depend on the overall profitability of the property in question (the after repair value). Further approval is based on your assets, and credit worthiness may still be a consideration. You can expect ‘cough up’ a sizeable down payment, as well as have cash on hand for junk fees and points. Overall; this type of financing is somewhat easy to access; yet very expensive with a number lender required ‘checks and balances’ involved.
As the word implies; the property owner finances the purchase. The property is financed directly through the seller with terms agreeable to both parties. Sometimes interest will be a part of the terms, however there aren’t typical closing costs such as points or loan origination fees. Seller financing ‘mirrors’ a traditional loan in that the buyer promises to repay the loan (via a promissory note) and the title is transferred to the buyer.
There are a variety of traditional loans available that can be used to finance investment properties. Some of these include; conventional, FHA/VA, and jumbo loans. There are also commercial loan products specifically designed for certain types of real estate investments.
401k/Self Directed IRA
Using your 401k or self directed IRA to finance investment property is possible. However; there are specific details that you should be aware of when considering this option.
Depending on the type of 401k and retirement plan you have; it may be possible to borrow a specified amount (usually up to $50,000) from your funds.
Although self directed IRAs provide more flexibility, there are restrictions that prevent you from being completely ‘hands on’. For example; you can purchase property within your IRA, and write checks to pay for services associated with the purchase; however you don’t have the ability to pay yourself from your IRA or benefit from it in any way. This includes living in the property full or part time. This rule extends to family members as well. Any repairs or management of the property will have to be sourced to a third party.
If you own a home or any type of property, one of the benefits is the ability to ‘tap into’ the equity that has been acquired over time in the property. By borrowing against the equity or getting a line of credit based on the value of the property, you’re essentially considered a ‘cash buyer.’ With this being said; cash gives you more negotiating power.
Tips for Investing in Real Estate
don’t immediately QUIT your day job
structure a business plan
expand your network
organize starting & working capital
have a certain level of knowledge
don’t be afraid to ask for help
ALWAYS know what the market is doing
know your source of information
know your numbers & your exit strategy UPFRONT
assess what’s working/what’s not working-make necessary adjustments