By Michel Lautensack
The author has permitted the reprinting and redistribution of this article.
There are many sources of financing available to use as a real estate investors. It is important to know the different financing options for structuring your real estate investment business. As you will see in this report, private lending has several advantages to the other sources.
Mortgage Loans are the traditional type of financing for real estate investments and are generally provided by banks, mortgage companies and saving & loans. Mortgage loans are usually 15 to 30 years in duration with interest rates in the 6% to 8% range depending on your credit score and history. Mortgage loans require you to go through a qualifying process and involve lots of paperwork and can take weeks, if not months, to finalize.
Mortgage loans have several primary weaknesses, including a 20% to 30% down payment, a credit score of 700 or more and tight limits on the number of loans one person can make. In fact, the down payment requirements for investors have moved up to 40% in some cases. Banks and other financing organizations are also seriously clamping down on credit scores and typically require scores over 700, whereas, just a year ago, they would led on a score of 600 or less from a real estate investor.
Mortgage lenders will only let you acquire a certain number of properties before they will cut you off from any further funding. Fannie Mae and Freddie Mac, who really control the US mortgage market, recently imposed new lending restrictions and now only allow a maximum of 4 loans per investor.
Mortgage lenders are also very reluctant to make loans to LLC’s or corporations and generally require you personally sign for the loan. This defeats many of the advantages of LLC’s or corporations of asset protection and limiting liability.
Hard money loans are also referred to as rehab financing. Hard money loans tend to have very short time frames of 6 to 12 months and hard money lenders expect you to pay them off after 12 months with a new mortgage loan. These types of loans tend to have very high interest costs that will sometimes be over 20% with very high upfront and backend fees. On the positive side, hard money loans generally require less qualifying on the part of the investor because of the very low LTV ratios.
Creative financing is a blanket term for techniques such as lease options, subject to, and owner financing that will allow you to acquire control of a property without putting money down. These techniques are great when you can use them, but are not applicable when the seller needs to sell for cash.
Revolving Credit Sources – Revolving credit sources include business lines of credit and credit cards. While these can be flexible sources of financing, the interest rates tend to be high and require high monthly payments. They also limit you to the size of your available credit line.
Private lender are individuals with money to lend for investment purposes. They may or may not be wealthy, but they do have excess cash or assets available over and above what they need to live on. These individuals are willing to lend for a higher return than they can get with bank CD’s or money markets. There are no limits on the number of private lenders you can have or the number of real estate deals you can do using private money.
Private lenders are looking for returns in the 9% and 15% range and secured by local rental real estate. This kind of return will provide investors with positive investment return of almost 300% over CD’s and money markets. The result is a perfect match of private lenders looking for better returns on their money and secured by real estate and real estate investors looking for cash to fund deals and the ability to pay higher returns.
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If you would like to take advantage of the market and learn how to invest in real estate and you are local to the Dallas Fort Worth area, I know a really great teacher and mentor here in Arlington Texas. Please take a look at his web site: DennisJHenson.com, Dennis has a great Mentoring and training program, I know because I am one of his former students. I learned a lot from his one on one teaching technique. – Michael Harman 817-457-7572 email@example.com>