In a perfect world, financing your investment property would be as simple as taking out your personal (or business) checkbook, writing a check, and handing it over - no heavy lifting or strings attached. Unfortunately, for most developers that isn’t usually the case - especially when they’re first getting started in the world of real estate investing and development. After all, the funds to make the purchase need to come from somewhere, and until you’ve got a few flips and sales under your belt that money simply might not be there yet. So, if you’re weighing your options about financing your investment property, let us walk you through some of the best ones.
For most people, their first inclination when seeking to finance an investment property is to contact a traditional lender, such as a bank or mortgage broker. In some instances, this might be the right choice for them, but in many instances when you’re dealing with investment properties and fast-moving real estate deals traditional lenders aren’t necessarily an ideal option. All lenders, whether they’re traditional banks or private lenders, have processes and protocols that they follow when making lending decisions and dispersing funds. With traditional lenders, however, these processes can often take weeks or even months to navigate and in a situation where time is of the essence, the time it takes to close on a deal could be what makes or breaks it. After all, a seller will want to close on a property as quickly as possible and if they’ve got two offers before them - one that can close in two weeks and one that can close in six weeks, they’re probably going to choose the quicker option.
Hard Money Lending
Another option for financing your investment property is to work with a hard money lender to secure your funding. With hard money lenders, there tend to be less regulatory hoops to jump through in terms of the banking industry, which means the lender's decision is up to their discretion more so than it would be with a bank. They’re able to take a holistic look at the prospective project: the cost of the property, the renovation plans and costs, the anticipated resale value, market analysis, and they determine as to whether or not they feel the project would be fruitful for them to invest in. From there, they’re also able to lend funds much more quickly than a traditional bank - sometimes in as little as a week, as opposed to a month. As stated above, this could potentially have a huge impact on the success of a transaction if it means an offer may be accepted over another on the basis of a quick closing.
Of course, within the sphere of hard money lending, there are various forms of loans for financing your investment property. At Walnut Street Finance we offer borrowers fix and flip loans, construction loans, bridge loans, and acquisition loans - each of which suits a different purpose and fulfills a different need for our clients.
Fix and Flip Loans
These loans are ideally suited for projects that are relatively short-term. The loans are essentially used to purchase the property and fund the renovations. They're paid back as soon as the property is resold (flipped).
For projects that may have a longer duration - up to two years - these loans are perfect. Construction loans are a more robust loan that funds more than simply cosmetic modifications - they’ll either fund an entirely new construction project or a major gut job, demolition, or very large and significant addition.
This loan is exactly what it sounds like - a loan that’s earmarked specifically, and only, for the acquisition of a property. The funding from these loans can’t be used to complete repairs or renovations, but they can be used to secure the property so that other funds can go toward beginning the work.
Are you seeking funds to get you from one project to another? A bridge loan is probably what you’re looking for. These are ideal for developers who have multiple projects in progress and are waiting for the sale of one project to come through so that they can purchase - or begin work on - their next project.
Now that you’re caught up on the various ways to finance your investment property, download our guide Building Your Real Estate Empire: Borrower Basics 101 to begin growing your wealth.