How to Finance Your Property Investment

October 27, 2020

Whether you finance your property investment with cash or you need to turn to an outside source, it’s important to know your options.

When you want to invest in property, there are many steps along the way, from picking the right property to profiting from it—whether that means finding a long-term tenant or flipping it. In order to purchase a property, of course, you’re going to need some kind of financing. Let’s take a closer look at the available options when it comes to financing your property investment.

Finance your property investment with cash

If you have the money, it may seem like financing a property investment with cash is a no-brainer. However, even if you have the cash, there are reasons why you might not want to pay that way.

Pros:

  • All-cash offers are often agreeable to a buyer because they skip a lot of the red tape that comes with financing.
  • Buy with cash and you won’t pay any mortgage or interest fees.
  • A property that’s owned outright can be used to borrow against in the future.
  • With no mortgage to pay, any money you make goes right into your pocket.

Cons:

  • Spend all your money on one property and you won’t have cash for future investments.
  • Your return on investment might be lower with one purchase than with several.
  • You may suddenly need that cash for other things.
  • Most financial advisors suggest you diversify your investments.

Finance your property investment with hard money loans

House flippers and real estate developers favor hard money or bridge loans from private lenders because they allow short-term access to funds. This works well when the goal is flipping or a quick resale of the property.

Pros:

  • Borrowing money means you can buy more properties. Many hard money lenders will finance most of the purchase price and often all the renovation expenses.
  • Hard money loans tend to move quickly, allowing you access to funds in weeks.

Cons:

  • Hard money loans often come with origination fees, junk fees, and interest rates that are higher than on conventional loans.
  • Hard money loans tend to have a much shorter repayment period (often 12 months) vs. traditional loans.
  • Hard money loans can slow your transaction, and they require documentation. They can also require an appraisal and include additional recording fees for loan documents.

Finance your property investment with private financing

Private financing is money outside of traditional means, like from friends or family or lenders of the non-professional variety.

Pros:

  • Private financing generally requires less documentation and restrictions when compared to a traditional bank loan or hard money financing.

Cons:

  • Your ability to raise private financing is dependent on your connections.
  • You need to be aware of SEC restrictions, and you may want to consult with a lawyer to ensure you don’t break any laws.

Finance your property investment with bank financing

This is your typical bank that will allow you to use a line of credit. These are usually smaller banks or credit unions.

Pros:

  • Bank financing tends to be the cheapest of the financing options (excluding cash, of course).

Cons:

  • Banks may be choosy about who they lend money to, so securing a loan this way requires a strong relationship with your bank.
  • Bank financing is not known for being speedy. You’ll be required to provide loads of documentation and usually a full appraisal.
  • Since banks tend to be risk averse, they offer lower leverage limits than hard money and private financing.

Which lender and financing type is right for me?

The type of lender financing that you choose for your property investment will vary depending on your own financial circumstance and the kind of deal you’re trying to close. If possible, you may want to compare several different lending options to get the best financing. A few things to consider:

  • If you are turning deals quickly, using a line of credit from a hard money lender or a bank is usually best.
  • If you do only a few deals a year with slower turn times, cash is best if you can float it.
  • If neither of these apply, private financing and single asset hard money loans are recommended.

While it’s good to shop around, it’s also imperative to build a relationship with your lender. After all, they’re a partner and you need them to help you grow your business. Switching between lenders too often can hurt your relationship. Showing loyalty to a lender can lead to lower costs and more flexibility with terms. As well, a great lender can help you fund a speedy deal, but also can help you when a deal goes south.

Further reading: How Much Money Do You Need to Start Property Investing?

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