When you are investing in real estate, financing is the make-or-break component to your plan. Where’s the money going to come from, and how is it going to influence the investing process? There are 4 common financing options for real estate investments. Each option has advantages and disadvantages, depending on each specific deal.
What are the most common types of financing for real estate investing?
Before we compare the different financing options, here are quick definitions and details for each type. Again, each financing option has pros and cons for every real estate venture. Make sure you take your time planning ahead for each.
1. Traditional Financing: Conventional Approach
Traditional financing includes bank loans and mortgages, going through either a banker, mortgage broker, or a credit union. This approach requires a relatively average interest rate, but consists of a lot of guidelines and rules. If you have an above average credit score, clean background check, and adequate money in the bank, this will work for you. If you don’t have a great record or application, a different approach may be better for you.
2. Banking: Loans, and Non-Traditional Options
Banking includes loans and non-traditional options, with less strict options. Personal loans, buyer’s financing, and seller’s financing are a few of the options. This avenue for financing still requires a cleaner record, and adequate assets. There are more creative avenues within this option as well, for specific real estate investments. For example, if you are rehabbing a property, you may quality for a 203K Loan, which will loan you the money for the rehab costs. Banking options are a pretty safe, accurate, and helpful financing option to utilize.
3. Hard Money: Top Short-Term Financing Choice
Hard money financing is a risker option, but works for many real estate investors. If you plan on purchasing a property, only to quickly resell it, hard money is your top choice. Hard money is financing through a private investor or company, which will in turn charge a high interest rate. So, again, a guaranteed quick turnaround will be the best reason for this type of financing. Most hard money lenders don’t care about your credit, or the same technicalities as banks. If your credit, background check, and assets aren’t going to help you with the more traditional approaches, this is a great option.
4. Private Money: Networking Done at Its Finest
Private money deals work well when the parties involved have a well-established, trusting partnership. This approach is one of the riskiest options, but has shown to be extremely successful. If someone is lending hard money, it’s because that’s their full-time job. Private lenders are more likely to be individuals who are interested in investing, but have different full-time jobs that supplement that type of income. Once you establish relationships with various professionals, you may not have to use a more traditional or formal financing approach. Private money financing can be individualized, and the terms are typically customized for each investment.
Comparing: What financing options are most similar?
As you read through the description, you quickly see that there are similarities throughout all of them. This is a good sign. This means you will rarely not find an option for financing. Your financing options don’t fully depend on if you’re new to the real estate industry, or a long-term investor. What is important is what your potential property’s project plan needs, and where you stand with current funds. As we continue to compare and contrast, let’s put the 4 options into 2 main categories.
· Traditional Financing vs. Banking
These 2 options are most similar due to the parties involved: the bank. There’s a bank or credit union involved in both of these approaches, creating a similar list of requirements and credentials. Traditionally speaking, these are safe and effective approaches for funding. However, if you’re unsure of your credit score helping or hurting you, these may not be your best fit. Inquiring and applying for specific loans for different plans you have for the potential property will definitely benefit you. Ask your trusted bankers and loaners, and see what will work for you.
· Hard Money vs. Private Money Lenders
Hard money and private money lenders are obviously the other two with the most in common. Based on the process and requirements, they demand less technical information. However, they do require you to risk more, and pay a higher interest rate. These approaches work best when you’re more experienced in the real estate industry, and when you know the right people. Both options create long-term partnerships, and create an alternative route for people who need it.
Contrasting: What are the pros and cons for the 2 main options?
Now that we have narrowed down the 4 options into 2 main categories based on similarities, it’s time to look at the differences.
· Conventional Approaches
When it comes to this approach, you aren’t required to really have a working relationship with any individual. If you are just starting out, and are unsure of professionals in your area, banking is your best option. Both traditional financing and banking provides you with the money, and experience working with the delegation of money. Learn what you can with this approach, and see what types of loans work best for your business ventures.
· Riskier, Private Options
Both hard and private money lenders are most successful when there’s a preexisting relationship. If you’ve gotten to know the people in your community, and are well-known for your business, this will easily happen. Some of the best ways to learn and network with private lenders is through local networking events. Hard money lenders are also going to trust you more, the more they see you in their circle of professionals. Get your name out there, and get working on establishing the relationships. If you’ve already done this, these financing options will ensure great success for both parties.
If your goals and plans differ with each potential property, so should your financing options. Assess each real estate venture as its own to determine which financing option will help you achieve your goals. Networking and establishing working relationships with any and all of these professional types is greatly beneficial to the short and long term standing of your business.
- Search for the region which has a strong rental market. It means that the region where the property is purchased as an investment and rented out. This is how you will evaluate that the rent rates are sufficiently high the tax is low enough, that you can expect a positive cash flow.
- Search for the areas where the other out of state investors are investing. You can get the information from the online sources or the best source is the State property advisory experts who are more updated than a search engine, as they specialized in this business niche.
- As soon as you get the area, converse with the individuals about the statistic of market growth. To get the most unbiased information, it is best to talk with the people of the area which has never experienced anything like the hype related to real estate bubble.
- When you got the area in which other out of state investor are purchasing the property, then your work begins. Considering that you are not living in that area, so you need someone who takes care of the local research and legwork for you. The best way is to look for the expert dealing in property is the property advisory services working locally.
- Contact the service provider in your area. It is more convenient working with the real estate property advisors, as they are expert and this is their arena, where they perform the best. The local service provider will put all their efforts and will try to bring the best deal for you on the table for the money which you have put on the table for investing in the out of state property with an idea of generating a good amount of returns with the least possible risk ever.
Real estate investing can be complicated, at least for beginners. There’s a lot to learn, and the room for mistakes is HUGE, given that the consequences can be enormous in the long run. The real estate market might not seem as volatile as stocks, but the risks are high, and the returns are often not predictable. No matter whether you are buying your first home or want to invest in properties with the intention of selling them later, you need to double check the initial steps. In this post, we are going to talk about 5 tips that matter for right real estate investments.
Location. Well, this is probably a no-brainer. A property is valued by its location, either at the moment or in the future. Before you check for other things, this is the first aspect that you need to understand. Keep in mind that a particular location can depreciate or appreciate over a period of time, so you need to consider the right factors.
Seek help. When it comes to real estate investing, seeking help from brokers and agents can be useful. Don’t worry so much about the costs of hiring them, because the benefits and assistance will cover for everything. Agents know the local areas, and they have the right kind of information you would need for a listing. They are also a step ahead in finding buyers and sellers, so if you intend to sell the same property later, they can offer their services, which can ensure a better sale price.
Don’t spend your savings. Most people plan to use their savings to fund their first purchase, which isn’t the right thing, especially if you have a good credit score. Real estate loans are easy to get, and you can choose to get flexible repayment terms. This can largely help in minimizing the immediate financial burdens. Contrary to what many think, real estate loans are actually handy for long-term financial planning.
Understand your goals. Let’s say you want to buy a house immediately. Do you want to sell it off within five years? If yes, you wouldn’t want to purchase a property that needs a lot of urgent repairs. In case you plan to keep the house, you would want a home that’s low in price and can be customized for your needs. Understanding and appreciating your financial goals is not only important but extremely vital in the long run.
Negotiate. The sale price is not always the final price. In most cases, people hire agents and real estate brokers, who negotiate things on their behalf. The price is decided on a lot of factors, and you need to understand these aspects by discussing things with the agent. For example, if the house doesn’t have a well-maintained basement, you can use that as a pointer to reduce the asked price. In short, identify the things that can work in your favor and move ahead accordingly.
Renting out property to others can be a great way to make additional income. In order to get people interested in staying there and paying your asking price, they need to look amazing. People want to live in a home or apartment that is clean and comfortable. Hiring a residential painting company to upgrade the look can be a wise investment.
If you have several properties to maintain, you can hire a residential painting company to get started. If you like what they do at one place, you can pay them to do others down the road. Creating that ongoing relationship is encouraging as it offers benefits for you both. As a landlord, you have to pay attention to issues such as peeling or cracking paint.
While you want as much as you can from the rentals to be profit, you have to put money back into the places. This will ensure you can keep them full of people. If they sit empty because no one wants to live there, you aren’t going to make money from them. Work out the details of the cost with the residential painting company.
You will find plenty of differences in the offers, so don’t hire the first residential painting company you learn about. Instead, find out what they have to offer and other jobs they have done. What is their overall reputation and what type of work ethic do they have? How long has the business been around and do people talk well about it?
There is no obligation when you get the ball rolling and start asking questions. Even if you have a residential painting company come to see the place you wish to have painted, they aren’t going to charge you for that. This will share with you what the price will be. Outside painting can make the place attractive enough for people to come in and look at it.
However, the inside where they will live is where you really need to focus on paint. Since you may have many renters over time, go with soft and neutral colors rather than those that are bold and loud. You aren’t going to know the preferences of those that reside there so go with something that is common and attractive.
Ideally, you want to hire a residential painting company that can get the job done quickly. The longer the place stays empty, the more money you are losing. The faster they can get it done, the sooner you can advertise and get someone in there again. Of course, you want efficiency and quality in addition to the speed.
Find a company you can count on to help you get your goals met and your needs taken care of. Avoid working with those that seem to charge too much or they don’t have the level of professionalism you desire. When possible, go see other work they have done so you can get an idea of what they can do for you too.
For your own protection, it is always encouraged to have a written contract in place regarding such services. This will help you to prevent problems from developing. It also reduces the risk of anyone assuming what the scope of the work will be. You and the painter need to have discussions that outline all of it so you are both aware of what will be taking place.
Such work is worth it as it will make your rentals attractive. Then when one person moves out, you won’t have to wait long for others to be ready to move in there. That is the best way to benefit from those properties you own.
Real estate is a physical asset. It is stable and its value appreciates over time. If the mortgage payments are made properly and insurance is okay, it is very unlikely that one would face total loss by investing in real estate.
When the market is down, there is money to be made in the real estate sector. Real estate is a long term investment which makes it less volatile than other investment options. People will continue to need houses as long as civilization exists. When the market is down, real estate is a good option because one can strike a better bargain.
Depending on the type of real estate and how it has been acquired, the investor may start getting returns on the investment immediately. This could be in the form of rents or moving from a rented house to own house thereby saving on the house rent.
When you buy a property with loan and rent it out, you are paying the mortgage EMI with the house rent. So you are essentially building equity while someone else pays it for you. This makes investing in real estate an attractive option. And when the mortgage is paid off, you obtain the full ownership with no liabilities. You can also sell it off then to get back the money you(and your tenant) invested and more due to appreciation.
Price appreciation is the second benefit of real estate investment. In most markets real estate prices increase with time. So when you purchase a house the price you pay is more often than not, less than the price you get when you are selling the property. This is another reason real estate is a favorable investment.
Thirdly, investments like shares and mutual funds are prone to market ups and downs. When the market crashes, people who have invested in them can face a huge loss. But with real estate a person can always wait for the market to recover again since it is a physical asset. All these reasons make real estate investing so much alluring. However it is a long term investment and decision has to be taken wisely.
Buying residential properties is the biggest investment decision made by any person in his lifetime. For some, it is their dream home and so every square foot of it should be perfect. However, there are many real estate companies in town who con their buyers. Because of the same, most of the people are stressed and worried when it comes to buying a residential property.
Here are 5 things to consider before buying your first home to make a wise decision:
1) Legality of The Place
Make sure that the property you are going to buy is legally authorized to be constructed on the plot it stands on. Along with that, the real estate developers should have approvals and NOCs from the municipal corporation, area development authorities, water supply and sewage boards, and electricity boards. In case, if you are taking a home loan, then the bank you have chosen will investigate the validation of your property before the loan sanction.
2) Size of The Apartment
All the real estate developers usually quote the super area to their buyers and by using this measurement they close the final cost of the apartment. The super area includes the entire area including shafts, elevator space, stairs, thickness of walls and others. The actual size of your apartment is the ‘carpet area’ which is the actual area within the walls of the apartment. If there are two apartments on a floor, then the price of the common spaces gets divided between the two owners.
3) Financing Banks
Financing banks are an important element to consider because there are certain builders in the town with bad reputations and the banks do not finance such builders. Once you are done with finalising the property, search for banks which are ready to fund your property. Lastly, finalise the bank which offers you loan at the lowest rate.
4) Locality Around The Property
It is important to consider the locality around the property as you are eventually going to reside there. How are the people around you? Are you comfortable in that environment? Will it be safer for you and your family at night? Will the ladies and children of your house be able to go out for an hour or two to pass their time? If the answer of any one of the questions is ‘no’, do not invest in such places as your family safety is of more concern than your new house.
The property you are investing in should be such that it is convenient for you to travel to your workplace from your home. The markets, schools, and colleges should be near so that your wife and children do not undergo travelling issues. There should at least be one hospital or clinic and pharmacy store near your property so that it is easy for you to run in case of medical emergencies. Buying a house near to the transportation medium also saves your money and time.
If you owned a spare home or cottage and seeking for earning extra income from this property, then you should need to consult with a property management professional. You can hand over your Airbnb to an expert who can prepare it for short stays for the travelers come to your country during the vacation periods. With the help of a short stay management consultant, you can ensure maximum return on your valuable investment and also provide facility to a guest for a comfortable and safe living for short term. By employing the services of a professional property management consultant, you do not need to worry about any process relating to the property management.
Here are some useful benefits that you can enjoy by hiring the services of a Airbnb manager:
A Proper Marketing Matters:
One of the most important benefits of using the services of management is marketing. Marketing or promotion of your property is most essential part to earn massive income through short-term renting contracts. When you registered your home or cottage with a professional and certified management consultant, then you will get free of cost marketing services for your Airbnb to the travelers worldwide. The property consultant will post ads for your on the internet, and when the people book tours with the help of essential companies like Airbnb, then people will see your home and schedule a short run stay there. With the help of a property management consultant you will not need to spend any amount for the marketing, and you will get the best return on your valuable investment.
It is difficult to manage the property for the stay of tourists if you opt to handle the entire process by self. But when you hire the services of a skilled short stay management consultant, then you do not have to worry about managing anything. The managing consultant will make your home ready for leasing to the visitors and also make it available with proper decorations and also conduct repairing work if required. Your property will be cleaned thoroughly by the team of expert workers so that the guests can stay in a neat and clean environment and also recommend your property to others. The management consultant will also prepare a legal agreement with the short term tenants on behalf of you and provide you income on time that you have earned through the Airbnb.
Linked to the Professional Property Consultancy:
By linking your property with a professional Airbnb management consulting firm, you can expand the percentage of profit up to 30 to 40 percent more than handling the leasing by self. It will also save your time and efforts for searching the tenants, and you can earn money by sitting in comfort at your home. There is nothing better than this that you are receiving effortless income from a property in which you are not living or visit occasionally. You can leave everything to the expert property management consultant and enjoy your life stress-free.
Congratulations on buying your first investment property! Buying a property can be a great step towards securing your financial future. No doubt it is one of the biggest decisions of your life as you are investing huge amount. There are some useful tips that you must need to keep in mind when buying your first investment property.
LOOK AT HUNDRED PROPERTIES: It is not exaggeration at all! Most of the investors just look two or three properties in their area and purchase one of them which lead them to pay more than what it is actually worth. Look for multiple investment properties in multiple areas as it gives you better understanding of what properties are actually worth. Searching is key factor in this market, by doing this you can ensure that you buy a property that is going to move you towards your financial goals. Make sure to look for many different properties prior buying.
RESEARCH THE AREA: Living in an area doesn’t give you the idea of property market and how it is going to perform in the future. If you are buying property out of your area you need to do more research. It is necessary to understand how the area is going to perform in rental returns and in capital growths to ensure your buying is a solid investment.
CONVEYANCERS VS SOLICITORS: Whenever buying your first investment think carefully whether conveyancers or solicitors are better for your situation. Look into both as in more complex transaction, solicitor will might be better option. While a simple transaction could be handled by a conveyancer as they would be cheaper than a solicitor and able to do the same job.
GET A BUILDING AND PEST INSPECTION DONE: Prior buying your first investment get a building or property pest inspection. No matter if you have to pay as it can assure that the property is up to standard and doesn’t have any major issues that are going to cost you an arm and a leg down the track.
SET YOUR INVESTMENT GOALS BEFORE YOU INVEST: The best thing while purchasing a property is setting a financial goal first. People usually make this mistake as they don’t know what properties are going to help them achieve their financial goals because they don’t have any. It is not going to make a whole lot of sense for you to go out and purchase a negatively geared property if you want passive income. Buying a property in a rural area is not a good option if you want fast capital growth.
TALK TO THE NEIGHBORS: Talking to the neighbors sometimes is less about what the neighbors actually say and more about who the neighbors are. By understanding what kind of people live there you can find a lot about an area so talk to the neighbors before buying. You can visit the local coffee shop and talk to the people. Find out as much about the area as possible.
DON’T RUSH: Rushing always takes you to the wrong decisions. No doubt, when you buy your first investment you are extremely excited and everybody wants to own it as soon as possible but hold your horses! There is always something for sale, don’t be in such a rush to purchase and buy the wrong property that isn’t going to deliver the financial returns that you desire.
DO THE CASH FLOW ANALYSIS: Cash flowing is not easy to do but it is very important. Never just assume that because your mortgage is $400 per week and the property rents for $450 per week that your property is going to be positively cash flowed. It probably won’t be. You need to analyze all of the expenses of the property and all of the income.
DON’T JUST NEGOTIATE ON PRICE: Mostly people go in and only negotiate on price although everything in property is negotiable. They don’t consider negotiating on the terms of the arrangement. There are ways through which you can negotiate a better deal without negotiating on price. Do consider the terms and see if you can create a better deal for yourself.
1. Get Educated
No matter where you live, you need to take pre-licensing courses. Thereby, state requirements differ significantly. For this, contact your real estate commission for your state requirements for licensing. Few real estate agencies have particular education requirements, so you may have to opt for an additional course after being recruited on with a company.
2. Pick a Brokerage
A real estate brokerage is a firm or office for which the brokers and real estate agents work. You need to contact the broker before going graduation for your training courses. Brokers have three years additional real estate training and can advise you better when it comes to the working in this domain, as well as selling and listing homes.
3. Obtain License
Real estate licenses need the passing of the national and state exams. Also, you may have to give the criminal background check. Between the courses, licenses and exam fees for the real estate salesperson, you can expect to pay $200 (although rates may vary from state to state).
4. Make budget
While becoming a real estate agent is not too low cost, it is cheaper than entering many professions. The startup costs are between $1,500-2,000.
5. Make the Real Estate Agent/ Realtor decision
To use the title’ realtor,’ you must join the National Association of Realtors (NAR). It is done by selecting a well-qualified brokerage and also attending some meetings designated by your local chapter.
6. Make your Referral/ Client Portfolio
The excellent way to create your portfolio is two-fold, i.e., get a mentor and utilize your network. Pick a mentor in the real estate firm who guides you towards the seller/buyer contacts and splits commission. Ask your friends and family members for the references of people whom you are considering for selling or buying a home. It also helps to start networking well.
Becoming a real estate agent is same as starting a tiny business. Even though you will work within the brokerage of well set real estate agents or realtors, you need a startup fund for the business expenditure and to cover the few months of personal expenses while you create your clients base.