Investing in real estate is one way to build wealth and secure your financial future. Real estate has historically appreciated over long periods of time, so it’s hard to go wrong with it. But to invest, you must have capital. How do you fund that first investment?
One of the dirty little secrets of property investing is that successful investors rarely pay cash for new properties. Even if they have a ton of cash lying around, they tend to want to preserve it for other things. They prefer outside funding when they want to purchase new properties.
Are you looking to purchase your first investment property? If so, here are your primary funding options:
Bootstrapping
Bootstrapping is just the modern term for self-funding. There are lots of ways to bootstrap. Maybe you have significant equity in your current home. You could leverage that equity through a second mortgage or home equity loan, then combine it with your savings to purchase an investment property.
Some people bootstrap by selling assets, using their credit cards, taking loans against their retirement plans, etc. The key thing to know about bootstrapping is that you are acting as your own bank.
Bank Loan
Your next option is a traditional bank loan. However, do not assume it will be easy to get one. Banks are incredibly careful about lending for property investments because they are averse to that sort of risk. You could apply to ten banks and be turned down by all of them.
Your chances of successfully arranging a bank loan could be higher if your main reason for buying is to use the property as a vacation property or a secondary residence. Vacation properties are common tools new investors utilize to get into the market.
Hard Money
When banks will not help you out, another option is hard money. Hard money lenders are private lenders who have considerably more freedom to decide which projects to invest in. There are several important things to know about hard money:
- It is asset-based (you need to have collateral)
- Interest rates tend to be considerably higher
- Loan terms tend to be considerably shorter.
Also note that, according to Salt Lake City’s Actium Partners, certain hard money firms will not invest in certain types of properties. Actium is a good example. If you are looking to buy a piece of commercial real estate, they might be interested in helping out. If you’re looking at a residential rental, Actium won’t go near it.
Peer-To-Peer Lending
About 10 years ago, peer-to-peer lending really took off. Peer-to-peer lending is a combination of hard money and internet technology. In a peer-to-peer situation, a company sets up an online platform through which investors can contribute and borrowers apply for loans.
Peer-to-peer platforms generally operate like hard money lenders. Their loans are primarily asset-based, their rates are higher, and their terms are shorter. The one thing to be careful about with peer-to-peer lending is the reputation of the lender itself. Peer-to-peer lenders do not have to follow the same standards as banks and credit unions.
Seller Financing
The last option on the list is seller financing. This isn’t the norm, but there are times when sellers want a quick sale without any interference from lenders. They are willing to sell the property and take payments on it. When you go this route, you pretty much set up an instalment plan with the seller.
If you are looking to buy your very first investment property, you have funding options. Investigate all of them thoroughly before making a choice. They all have advantages and disadvantages.