4 Sources Of Capital For Your Next Deal
Posted by JD Esajian // June 8, 2016
The first step of any real estate deal is securing financing. Any grand real estate plans you have are based on your available capital. It will directly impact the market you choose, the purchase price, repair budget and everything about your transaction. One of the most common complaints in the investing business is the inability to find financing. What savvy investors know is that with a little digging there are multiple options available in almost every market. Depending your investing style and goals some of these work better than others. Never let a lack of capital stop you from pursuing a deal. Here are five popular sources of capital for your next deal.
- Bank Financing. Depending on your investing goals bank financing can be your initial starting point in finding capital. Bank financing is best used for buying properties you plan on keeping for the long term. With bank turnaround times near 45 days coupled with low interest rates this becomes a viable option. There are a few hurdles when working with a bank. Gone are most of the programs for borrowers with any kind of damaged credit. Today’s investor programs require a mix of above average credit scores coupled with low debt to income and a significant down payment. If you are weak in any one of those areas your approval will be in jeopardy. On the positive side lender financing gives you the ability to take advantage of record low interest rates with a reasonable amount of closing costs. There are certain programs, like FHA, where first time homebuyers can purchase a 2 family house with just 3.5% down payment. Under this scenario they can live in one of the units and rent the other side all the while gaining valuable landlord experience.
- Private Money. The odds are you probably know more people interested in investing in real estate than you realize. In a nutshell that is what private money is. You find a friend, family member or co-worker that has surplus capital they are willing to invest in real estate with you. This partnership can be a onetime deal or something that you continue for the long term. In the simplest terms you supply the deal and they supply the capital. You can take care of the day to day operations and they provide the financial backing. The beauty about private money partnerships is that there is no set structure that has to be achieved. You can allocate the work load and returns any way you desire. The most important thing is that you get everything on the table as before you get going. As great as working with someone close to you is it can also turn ugly once finances come into play. The more you discuss before you start the easier the relationship will be.
- Hard Money Lenders. Over the past five years a flood of hard money lenders have entered the real estate business. While they may sound intimidating hard money lenders are a great source for capital. These are individuals or groups of individuals who lend money as an alternative to big banks. They have a set of terms, fees and guidelines that are agreed upon before any funds are issued. On one hand they are similar to traditional banks but on the other they couldn’t be more different. Instead of evaluating credit score and tax returns they look at the property and the potential profit. They can use personal assets as collateral and don’t follow the same underwriting guidelines that big banks do. Working with hard money is very similar to having a personal line of credit. This access allows you to make offers with quick, cash closings and close more deals. If you reach out to your real estate agent, attorney or mortgage broker you can quickly find a hard money lender. Additionally they are at most local real estate investment club meetings. Hard money lenders may not work for every deal but they should be considered for rehabs and flips that benefit from quick closings.
- Existing Portfolio. You may be sitting on capital without even realizing it. If you are struggling with options take a look at your existing portfolio. Sift through every property you own and evaluate the available equity. Property values have increased over the past few years. You may have more options with your property than you think. Increased equity allows you to explore the possibility of refinancing or taking a second mortgage. With rates still low you can pull cash out and still maintain a comfortable monthly payment. The same is the case with a second mortgage. A home equity line of credit (HELOC) allows you to keep your first mortgage in place and use the HELOC to borrow from. You only repay on the capital you use and most second mortgages offer a low interest only payment option. Additionally the fees and expenses with a HELOC are minimal, at best. A final option you can find in your portfolio is the option of selling a property. You may have been waiting for the right time to sell and feel that trying to time the market perfectly is too much of a challenge. By selling and reinvesting those funds you may be able to avoid any tax penalty and get a property you really want.
With just a little legwork you can find available capital. Use these four options as a starting point for your next deal.