The unemployment rate has reached levels not seen since the Great Depression, with analysts estimating the real unemployment rate between 20-25%. This reality is pushing people to find creative ways to make money — including real estate investing.
But financing an investment property often proves an intimidating feat for beginners, even in the best of times. And right now is far from the easiest time to get a loan as a real estate investor. Still, those who can find ways to finance real estate investments right now can see impressive payouts.
A common misconception when it comes to investment properties is that you need a lot of cash to get started—something that many people are short on at the moment. Cash is great to have, but there are many unconventional ways to invest in real estate without having to take out a traditional mortgage.
If you are toying around with the idea of investing in real estate due to the pandemic, try the following options to finance an investment property right now.
Home Equity Loan or HELOC: For Current Homeowners with Equity
One of the most common ways to finance a down payment on an investment property is to take out a home equity loan. A home equity loan is essentially a loan that is funded by your current investment in your home — you use the equity in your home as the funding source for a new down payment or entire loan.
A home equity loan is a mortgage you take out against your current home. It could be a second mortgage, if you already have one mortgage in place. Or it could be a first mortgage, if you own your property free and clear. Like all mortgages, you can take out home equity loans at a fixed interest rate.
A home equity line of credit or HELOC is a rotating credit line. You can draw on it as needed for uses like buying investment properties, usually at a variable interest rate during the draw phase. After a certain number of years, the HELOC switches over to the repayment phase, when it converts to a fixed loan that you make regular payments against like a mortgage.
Bear in mind that you can take out both home equity loans and HELOCs against rental properties as well, not just your primary residence.
Home equity loans and HELOCs work well for investors who do not have much liquid cash on hand, but have money tied up in real estate, such as a home or perhaps a vacation rental. They make real estate investing a more achievable dream for current homeowners.
Downsides: A home equity loan is secured by assets such as your home, which makes it great for finding a funding solution, but also makes it scary for when you’re unable to repay the bank and your house is used as collateral. In addition, if you currently have a property that you are just needing cash to renovate and fix-up, a home equity loan may not be necessary while a personal loan or unsecured business line of credit could meet for your needs.
Business Credit Lines & Cards
The beautiful thing about most business credit lines and business credit cards is that they are unsecured: they don’t attach a lien against your home or rental properties.
And yes, real estate investors qualify for them. Real estate investors are entrepreneurs, after all!
Creditors typically set limits on your business credit lines and credit cards based on your personal credit, your business credit (if established), and your income and revenue. SparkRental works closely with Fund & Grow to help real estate investors get business credit lines totaling between $50-250K, with the average investor getting $150-200K in total credit lines and cards. They also show you how to use credit cards to fund real estate transactions without paying a cash advance fee.
You can use these rotating credit lines for down payments, for renovation costs, or to buy properties outright. And then pay them back on your time, however quickly or slowly you prefer.
Once you have the credit lines, you can keep using them repeatedly, forever. That makes them an excellent ongoing source of funds for deals.
Downsides: While you could probably get one or two unsecured business credit lines on your own, most real estate investors need help with these. They need help with negotiating higher credit limits, with scrubbing the credit pulls from their credit reports, with going through multiple rounds of account opens. See this webinar we held recently on how the process works.
Seller Financing: When You Can Convince the Seller
While portfolio lenders and conventional mortgage lenders have tightened – and in some cases paused entirely – their rental property loans right now, anxious sellers may consider financing your deal themselves in order to settle fast.
In business, you don’t get what you deserve; you get what you negotiate. So if you can’t get financing for an investment property through conventional means, negotiate seller financing.
You and the seller can negotiate everything from the loan term to interest rates and beyond. Usually, seller financing involves a balloon: you have to refinance the loan within a few years, to get them paid in full. It will be far easier to get a rental property loan in a few years from now than it is today, when many lenders have temporarily suspended them.
Downsides: The only downside to seller financing is that it’s not a reliable source of funding for investment properties. The seller must agree to it, and some sellers refuse to consider it.
Still, many do, especially if it means a quick settlement. Push that angle as you negotiate with sellers, and consider combining business credit lines with seller financing so the seller gets to walk away from the table with a hefty paycheck even if they finance the rest.
Personal Loan: If You Need Quick Funding
Personal loans are a great option if you need funding quickly. Many personal loan companies can provide funding as quickly as the next business day to those who qualify. You can typically use your personal loan for whatever you like, which means that you can consider it as an option to help you invest in real estate or make renovations on a current investment.
With a personal loan, you can expect a traditional lending agreement. The lender will provide a loan for you with stipulations that determine the loan term, loan amount, and interest rate. Credit score is a major factor when it comes to interest rate, so improve your credit score to qualify for lower rates.
Downsides: Personal loans typically only lend, on average, $50,000. A few personal loan companies may lend closer to $100,000, but for many real estate investors this won’t be enough cash. Also, personal loans are notorious for high interest rates compared to a traditional home loan: the average personal loan rate is around 10%. If a personal loan seems like it could be the right direction for you then compare personal loan companies here.
Self-Directed IRA: If You Have Strong Retirement Savings
Taking money out of your self-directed IRA for real estate is an option that many people turn to as a way to diversify their investment portfolio. Using your IRA to invest in real estate is considered a tax-free asset which means that your rental income that grows from your real estate investment will be tax-free — bonus!
Using your own money from your self-directed IRA is a great option to avoid the extra costs of traditional loans and interest rates if you have the capital in your IRA to afford it. Many people start contributing to IRAs when they first enter the workforce, making this a great option for those far enough along in their career to have contributed significantly to their IRA fund.
Downsides: Dipping into your IRA does come with complexities. There is a lot of tax and legal red tape that can make the process confusing, owing to the need of professional help to walk through the process and stay out of trouble. In addition, any expenses that are necessary to manage your property must come through our IRA, no other funding sources, making it crucial that you have enough money to comfortably invest.
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Economic Development Grant: For Real Estate in Lower-income Communities
Government funding is an option if you are looking to invest in lower-income real estate. Select government programs are looking to offer grants to real estate investors, hoping that the construction of a new home can bring more employment opportunities in that community.
Besides a grant, the Economic Development Association (EDA) will help provide other technical assistance if an investor meets certain criteria. The hope is that real estate investors and communities will benefit from the government intervention.
Downsides: This option can work well for investors in a lower income community, however you must apply for a grant which can take several weeks to review and the grant is not guaranteed to everyone that applies. Grants also don’t finance all or even the majority of the property – you still have to come up with most of the money yourself, in most cases. Make sure to look at all the details of a government grant before you rely on this option as a source of funding.
Private Money Lenders: For Fast, Flexible Financing
Private money lenders are individuals, not banks, that loan out money to real estate investors. In most cases, they are people you know: friends, family members, acquaintances, and others who feel confident enough in your track record to fork over their hard-earned money.
Because the money comes from individuals, rather than institutions, it comes fast. Theoretically, friends and family members could send you money on the same day you request it!
You can also negotiate your own terms with private lenders, and typically pay lower interest and fees than corporate lenders charge. That frees up more capital to pour into your actual investments, and lowers your monthly costs when you calculate rental cash flow.
Downsides: New investors can’t raise private loans, because they have no track record. It’s not only difficult to ask friends and family for money if you don’t have much real estate investing experience, but it’s irresponsible. New real estate investors make mistakes, sometimes costly ones, and you need to earn the right to raise money privately from friends and family.♦
What options are you exploring to finance investment properties during the coronavirus pandemic?
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About the Author
Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.