Many people dream of owning a home; putting money into an investment that they can one day pass on to children or use to finance retirement. Once you have your primary residence, however, you may find yourself interested in the prospect of earning a passive income through rental property, making some quick cash flipping houses, or entering into other real estate investments.
Unfortunately, you could find the prospect of acquiring bank loans for this purpose daunting. There are a few things you should know before you seek funding if you want the process to go smoothly. Here are some tips to get you started.
1. Alternative Funding
You may find that you have trouble getting approval for traditional lending (i.e. bank loans) for real estate investments for any number of reasons. If this is the case, private money lending could be a suitable alternative.
This type of lending is mainly used for real estate investing and it has some advantages over traditional bank loans. For one thing, credit score and history generally isn’t an issue and you could secure funding much faster.
That said, you may have to meet other requirements regarding capital and collateral, among other things, in order to secure funding. Do your research to find out if this type of lending is right for you and your investment.
2. Down Payment is Important
When you buy a primary residence, you may only need a small down payment to qualify for a mortgage loan. Real estate investing, on the other hand, could require that you come up with 25% or more for a down payment.
In addition, you might need some form of collateral to back the loan and you could pay slightly higher interest rates. They say you have to spend money to make money, so be prepared to pony up a fair amount of dough if you want investors to cover the rest of your funding.
3. Understand LTV Ratio
Loan-to-value ratio is an important concept in real estate investing. Unlike a bank, the amount of your loan does not depend on the current value of the property you wish to purchase. Private lenders will allow the borrower to borrow up 65-70% of the final market value. This higher loan amount can finance a majority of the loan and renovation/construction costs making it a profitable venture for the real estate developer without having to invest all of the 30% equity required.
4. Choose Suitable Property
Private money lenders are interested in the best opportunities to make money, and rather quickly. They tend to prefer properties that are in areas with abundant comparable values (i.e. plenty of buying and selling nearby) as well as low crime rates.
Since private money loans are short term, generally 1-3 years (although possibly more), the right properties help to ensure repayment on time and in full.
5. Create a Solid Plan
Investment property generally requires some work on your part, whether you’re planning a flip or you want to lease to private or commercial interests. With proper planning, investors are more likely to approve your loan. And always have a good exit strategy in place.