Despite a certain level of volatility in the national and global economies, the U.S. housing market has rebounded strongly, opening the door for an influx of new investors. For seasoned real estate investors, the current upswing of the housing market has simply opened another area in which to play, because they find ways to make the market work for them despite any current volatility.
With prices stabilizing in most of the major markets, now is the ideal time for new investors to get their feet wet. Still, many potential investors are somewhat apprehensive and question their ability to effectively procure investor financing.
The truth is that there are abundant methods for acquiring the funding necessary to invest in residential real estate, though many require creativity and flexibility.
Joints Ventures sits atop my list of financing tips for new investors because it presents a number of benefits in addition to the ability to raise capital. The best real estate investors are not necessarily the ones who have or know everything; they are the ones who are smart enough to surround themselves with people who know what they don’t. Building a solid investment team is one of the best ways not only to enhance financing options, but to increase the level of collective experience and expertise.
Some benefits of creating a joint real estate venture are:
• Shared liability
• Fewer tax burdens
• Stronger borrowing and buying power (increased capital)
• Increased collective investing IQ
This collective has the power to influence the approval decision of potential lenders. Lenders consider numerous variables when assessing risk factors for potential investors. Working as part of a collective theoretically improves the chances of being approved. Depending on the size of the group, the weak link (in terms of credit score) can be omitted from the application, subsequently improving the chance of loan approval.
When building an investment team, it is wise to ensure that each person has something unique to add to the team, so that the collective seems strong to the lender.
Have a Sizable Down Payment
Although this is not always possible and there are ways around it, a sizable down payment will open you or your group up to more conventional financing options. Mortgage insurance does not cover investment properties, so in order to qualify for a more traditional style loan, you will have to put down a minimum of 20 percent. If you are able to put down 25 percent, you will qualify for an even lower interest rate.
If you don’t have the down payment, there are some ways that you can come up with it, especially if you prefer a conventional loan. One of the most common methods of acquiring the down payment is through obtaining what is known as a second mortgage. This is not always easy to do, but it is a viable way to come up with at least 20 percent of the loan. There are agencies, like 14th Street Capital, that specialize in helping investors obtain loans that are specifically designed for investment properties.
Be a Strong Borrower
There are a number of variables, including loan-to-value ratio and lender policies, that can impact the ability of an investor to obtain a loan. Of those, the one variable that will have the greatest impact on your ability to obtain a loan is your credit worthiness. This is why you should check your credit score before attempting to do a deal. If there are any adverse entries on the credit report that can be challenged and removed, that should be done first.
Due to some questionable lending practices that led to the financial crisis in the middle of the last decades, lending guidelines have become stricter with most lenders. Consequently, approval becomes increasingly difficult to attain as a FICA score drops below 740.
This does not mean that someone with a low FICA score cannot still find financing; it simply means that some of the more conventional avenues will be closed to that borrower.
One alternative you have if your score is below 740 is to pay points based on your score. This basically equates to paying a higher interest rate for the property. This is not necessarily a terrible thing, especially if there will be a rapid turnaround on the sale of the property in question.
Additionally, having reserve funds in the bank to cover any investment-related expenses for a minimum of six months after the property is acquired will also improve the chances of being approved with a lower score. When there are multiple investment properties, lenders now want to see reserves in the bank to cover expenses for each property.
Private Money Lenders
This is where your ability to be creative starts to come in. Private money lenders are used quite often by investors, because they can set the terms and don’t necessarily have to jump through as many hoops. Another reason that private money is so popular is that private lenders don’t have to abide by all of the restrictions and guidelines that conventional lenders do. Private money lenders don’t have to be concerned with certain risk factor guidelines. In many cases, private lenders will totally disregard the creditworthiness of the investor, as long as the property in question has built-in equity or presents a great opportunity to turn a profit quickly. The lender will use the property as collateral and if the borrow cannot pay, the lender will simply foreclose on the property. Depending on the property and the terms of the loan, a default may or not be reported to a credit reporting agency.
The interest rates for these kind of deals can be higher than with conventional loans; therefore, it is imperative that you figure the cost of the loan into the numbers associated with the investment deal. There have been occasions in which investors have lost money or barely broke even because they failed to properly account for the cost of the loan. Private loans are rarely used for new home construction, which normally requires conventional or highly specified equity lenders.
Hard Money Lenders
Hard money loans are similar to private money loans, with the primary distinction being that not all hard money loans come from private lenders. There are large lending institutions that will provide hard money loans. With a hard money loan, the terms of the loan are extremely short term. There are many hard money loans that mature in as little as 60 to 90 days while others can extend as long as three to five years. Like private money loans, hard money loans place more emphasis on the value of the property than the creditworthiness of the borrower. With the property as collateral, it is a win-win situation for the lender. Hard money loans are ideal for investors who are working on fix-and-flip deals.
Stay Away for Big Banks
Unless your credit is ideal and there are no extenuating circumstances, you should avoid larger banks. It is better to seek out smaller neighborhood banks for financing investment deals. These smaller lending institutions will have more flexibility in what they will be able to approve and the terms and rates they will be able to offer. You’ll also get a more “personal” touch from them, rather than being seen simply as another number entered into a computer system. You will also be able to take advantage of a more proactive and involved philosophy from the bank.
These local banks will also have a better understanding of the local real estate market, which will allow them to better understand your investment strategy. If there are some problems with improving your application, a smaller bank will most likely guide you toward the steps you need to take in order to get approved.
Pursue Owner Financing
When you find a motivated seller, there is a good chance that that person will be willing to owner-finance the deal, especially when there is a promise of a rapid turnaround. This can be true even when the owner of the property is a bank; however, this works best with private owners. There was a time when a request for owner financing would make a seller suspicious. This was because almost anyone could qualify for a loan. With the tighter lending restrictions that are in place now, sellers are more likely to accommodate the request in order to expedite the deal.
Working with an Lending Organization
As mentioned earlier, lender organizations offer a variety of loan options to investors to help meet their short-term financing needs. These organizations can offer a large variety of loans that are specifically designed for investors, and they have an exceptional amount of experience in the real estate industry.
Working with an organization can really help simplify the process for a newbie. There is a lot to consider when entering the world of real estate investing. By working with an organization that can help simplify the loan acquisition process, you can focus on other strategic matters associated with your investment strategies.
Learn to Think Laterally
Being able to think “outside the box” is vital to being able to put real estate deals together. For instance, if you are working on a solid property that has the potential to produce a high profit, you should consider securing a down payment or renovation funds through home equity lines of credit or even using credit cards to get the down payment. There have been instances of investors who put down payments on a credit card with 60- to 90-day no-interest and completed the deal in time to pay off the balance on the card before any interest had accrued. The key is to be resourceful.