Knowing how to finance new projects or deals is very important for new investors and startup businesses. Most beginner investors lack awareness when it comes to the different financing avenues that can help them fund their new projects. Ironically, it’s always possible to acquire capital even if you don’t have access to any capital. The same concept applies to the real estate industry which offers investors many personal and financial benefits.
The majority of Americans that reported profit returns of more than a million dollars within the last 50 years said they obtained their income from real estate investment. However, beginner investors on average still face many financial problems before learning how to obtain real estate funding and spend years before being able to make wealth. Here, we put together this short guide that explains what real estate financing is and what financing options are available to help you fund your real estate business.
Understanding Real Estate Financing
Contrary to popular belief, you don’t need a lot of money to start investing in real estate. Many financing options are out there to fund any kind of new investment and beginner investors can choose from several funding possibilities to start their real estate projects. Before digging into your financing options, it’s critical to understand the aspect of financing first; this is because the funding method of any deal affects its outcome significantly. Additionally, the type of property and situation you’re in decide your financing approach for you. The financing approaches that work for another investor may not necessarily work for you and vice versa, you just need to find the perfect strategy that works for your type of business.
Cash Financing
Cash financing is a golden ticket for new investors that helps them get more of their offers accepted. This method is also widely known for increasing cash flow, saving on interest, and helping investors in receiving instant equity. Besides, it’s a great way for investors to save a lot of money on the purchase amount. According to recent studies, all single-family homes and condos buyers paid about 23% less per square foot than all other recorded purchases for the same category nationwide. However, don’t let these numbers fool you, it’s very important to differentiate between the times where paying cash is the perfect method and the times where it’s better to consider other financing options.
Conventional Loans
Conventional loans are probably those you’re most familiar with. Basically, you borrow a loan by giving a down payment to the bank or lender and they pay the rest of the amount in exchange for securing a lien on the property by a mortgage. The trick is investors need to put down higher down-payments than most borrowers who occupy their purchased properties as their main residence. This is because most banks only allow these types of borrowers to put down payments as little as 6% or 5% of the whole price; typically, investors who plan to profit from the purchased property don’t get the same excuse. The specialists behind Newsilver.com say that these loans are not meant for investors looking for short-term loans. Further, conventional loan lenders do not provide short-term financing, and these mortgages are provided for a term of 10, 20, or 30 years on average. This means that these mortgages cannot be used for flipping houses; they are more of a solution for buy-and-hold investors who wish to build a business of profitable rental properties.
FHA Loans
FHA or Federal Housing Authority loans are sponsored by the government to offer borrowers a down payment of only 3.5%. For these loans, the FHA does not provide the money to the borrowers, it rather insures the payment from the borrower’s side to the lender, therefore, making it easier for borrowers to qualify for the loan.
FHA loans are easier to qualify for than conventional loans and most lenders offer intriguing interest rates. In fact, you don’t even need a credit score higher than 600 to qualify for the loan. Many real estate investors use these loans to fund their business and kickstart their income in its early stages.
The real estate industry is booming with new successful investors every day who are constantly browsing different financing options to see what suits their type of business better. The key to good financing is understanding the different investment options out there that may not all necessarily suit your situation. Smart investors acknowledge the strategies that don’t work with their type of business and instead, go after the ones that serve more flexibility. Real estate is all about investment and investment is all about the right choice of funding.
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