Investing in real estate can revolutionize your financial wealth. Reports said that about 71 percent of Americans who declared millions of dollars in their respective tax income in the last five decades were all in real estate. This goes to show that real estate investment is never a bad idea.
Ironically, though, it is not easy to find and obtain real estate investment financing opportunities, especially for beginners. So, if you want to learn more about this aspect, you may want to continue to read this post.
Introduction To Real Estate Finance
Real estate finance encompasses all of the financing methods utilized by and available for investors when buying a home, land, or any other type of property. It is worth noting that, despite being an investor, loans are, most of the time, needed to push through with the sale. Accordingly, this is where financing options come in, as this is the process of securing capital from outside sources to proceed with the purchase.
Whether you are a homebuyer, realtor, or real estate agent, you have to understand what real estate finance and financing means. Failure to comprehend this might cause inconveniences for all parties involved, and may even cost the deal more.
About Real Estate Financing For Investment
There are several options to obtain real estate financing for investment. While every investor has the freedom to choose which way will work best, it is important to keep in mind that not all financing offers are created equal.
As noted, each financing option has its own pros and cons. Depending on your investment, as well as the situation you are in, in terms of investing in real estate, your financing approach will vary. Therefore, what works best for others may not be the ideal solution for you.
Real Estate Financing Options
Here are some of the real estate financing options that you may check for your investment. Ensure to do thorough research for each before making a decision. Nevertheless, these are the most common ones:
Cash financing is ideal for investors who have immediate access to a significant amount of capital. This enables savings on interests, as well as an increase in cash flow and instant equity in the investment.
Most of the time, this option helps investors save on the purchase amount, too. This is why many individuals who want to proceed with the deal free and clear opt for this financing tool.
Hard Money Lenders
Hard money lenders are another effective financing option for investors. But, this is more fitting for those who want to obtain short-term loans.
Generally, hard money lenders do not fund the entire deal. Instead, they cover only a percentage of the total amount, making it a popular choice among individuals who want to renovate properties.
Private Money Lenders
Real estate investors may also opt for private money lenders. This financing option for property investments usually applies to those who have established links and connections.
The lenders are typically those who provide investors with cash to proceed with the transaction. The terms are established upfront, with a specific payback timeline.
Another common financing option is peer-to-peer lending. As the name states, the finance needed for the investment comes from other investors or groups of investors.
Cash for homes, a platform dedicated to real estate and financing, noted, as well that this is similar to private money lending. But, peer-to-peer lending is much more flexible, and it has much lower interest rates.
Structuring Financial Instruments
Structured finance is an instrument for investments with more complex financing needs. In short, they are not solvable by using the conventional options to obtain capital.
Check these pointers to help you understand this further:
Leverage is the use of borrowed funds or debt for the purpose of amplifying returns from the investment. Many investors today use this instrument to increase their buying power. Accordingly, it is one of the most effective strategies.
Keep in mind that when a property is referred to as “highly leveraged,” this only means that the investment entails more debt than equity. But, while this instrument can magnify gains, it can also increase the risks of losses.
Loans are a common form of debt. This means that mortgages, personal loans, and even credit card debts are also under this instrument.
As the public knows it, debt is simply money borrowed from other individuals or institutions. Although some experts would say that debts are generally bad, there are debts that “good” and beneficial for investments, as well.
Equity is a degree of residual ownership in an investment or an asset. This comes after the debts are subtracted, though, from the asset.
It also represents the stake in a firm, asset, investment, or even a company. It can be calculated after subtracting the total liabilities from the total assets.
Additional Investment Elements and Their Effects on Financing Strategies
When strategizing your financing options and plans, you have to understand that there are several factors affecting the whole dynamic. These elements are the following, and make sure to keep them in mind:
Loan duration or loan term is the timeframe set for loans until it is paid off. For instance, the most common duration for mortgages is 30 years.
Loan fees are one of the charges that lenders place on a loan. Other types of fees include services and application fees. Accordingly, these charges are simply the fees needed to cover the overhead costs in processing and underwriting a loan.
Some lenders charge prepayment penalties when you pay part or all of your loan off on a much earlier period. Keep in mind, though, that not all lenders have this kind of service, and not all mortgages come with prepayment penalties.
Investing in real estate is not easy but, when done properly, is rewarding. It has the power to improve your financial status, as well as the quality of your life.
This post is just a quick guide to help you get started with your investment. While this may help, you must ensure to do more research and studies to understand the whole deal and transaction.