Real estate investments are one of the most common ways to make a profit. Anywhere in the world, people are always looking for properties. So, whether you want to rent a property or to buy it, fix it up and sell it for profit, you have a good chance to make money out of it.
You just need patience and, more importantly, the capital. There are many options for funding your real estate investments, and this is a list of the most accessible and popular ones.
1. Cash Only
That is definitely the best way to do it. No interest, no fees, and you have all the money at your disposal immediately. That can come in handy if you are hunting for a quick close, for instance. Of course, if you are aiming at a fixer-upper, you need to take into consideration the budget for the renovation as well.
And that doesn’t always stay at the amount you have planned. While this is the ideal way to invest, not everyone has that kind of money available.
2. Investment Property Mortgages
This can be a good option especially if you are planning your first real estate investment. It’s basically a conventional mortgage that has been adapted to investment properties. It works exactly like the first mortgage on your home. But that also means there are some strict requirements and pretty high rates.
Not to mention, you will have to make a down payment. And while that deposit is more affordable if you are actually going to use that property as your home, for investment properties the down payment can go as high as 30%.
3. Federal Housing Authority Loans
FHA loans are sponsored by the government, and that warranty can get you better rates from the lender. The advantages are that it’s easy to qualify for it and the down payment is really small. But there are also many drawbacks.
You have to pay high mortgage insurance, you have to actually live in the property for at least a year, and you can only have one of these loans at a time. In addition, the property has to pass strict inspections.
4. Retirement accounts
Your 401(k) balance can be a good source for your real estate investments, but only to a certain amount. On the upside, these loans are granted faster because you are borrowing your own money. But that money was working for you, earning interest, so you will be losing that.
You will probably pay some borrowing fees, but that will go to your retirement account so you will be able to use it in the future.
Another important aspect is that you usually have to pay that loan in 5 years. And if you happen to lose your job during that time you need to clear the entire balance in 60 days, so that is a significant risk.
5. Hard Money
Unlike traditional mortgages, hard money loans come from private lenders, using the property you want to buy as collateral. These are short-term loans and highly risky for the borrower. They are called ‘hard’ money because they are difficult both to acquire and to pay back.
6. Home Equity Loan or Line of Credit
This option means borrowing against the equity in your primary residence. That means that you are risking your home. So, if you intend to rent the property after you buy it, this is not the right option for you. The rental market is not always steady, so you shouldn’t rely on the rent to pay the loan.
7. Portfolio Loans
This option is usually offered to people facing an unusual or difficult situation, like self-employed, borrowers with bad credit scores, people with bankruptcy, or legal problems. Their debt won’t be sold off but kept in-house and become part of the lender’s portfolio. But while these loans are easier to get, you will probably end up dealing with higher rates.
8. Adjustable-Rate Mortgage
As the name suggests, this type of mortgage has its rates adapted to the credit markets. The interest will be fixed for the first part of the contract, and then it will reset on a periodical basis. They sound risky and have even built up a bad reputation, but there are some real advantages as well.
Rates are lower, and borrowing for a shorter period will save you a lot of money in interest. And although they seem scary, it is possible for rates to go down as well, so it can be worth the risk.
If the cost of your future real estate investment is too high for you, you have the option to find an equity partner. You can structure the partnership any way you want. You can use your partner’s money for the down payment or for the entire value. But the rules have to be clear from the start, regarding who makes the decisions and how the profit will be divided in the end.
Your partner can choose either an active or a passive role. In any case, they will share the risk with you; they don’t receive interest, but part of the profit the property generates.
10. A 203K Loan
This type of loan is a combination of a traditional FHA mortgage and a ‘home improvement’ loan. So, it will help you get the funds not only to buy the property but also to renovate it. The advantage is that you only have to pay a low down payment. But there is also a strict rule that the property should be owner-occupied to qualify.
Obviously, all these options have both advantages and negative aspects, as expected. All investments are risky, but the real estate market is a good place to start if you want to have long-term profit. Choosing the best financing is difficult, and there are many factors you need to consider. But you don’t have to be a financial specialist to do it, just make sure you are well-informed so you can make the best decision.