Home finances are important and must be taken seriously. There are many points of view when it comes to finances but there are general rules and advice you can follow to stay on the right track. When it comes to your finances, make sure you are in good standing before you take on the financial burden of buying a house.
I like making more than one offer to people because it shows negotiation without really budging. When you go in with an offer make the offer as appealing as possible, consider these 3 ways to negotiate on the price based upon the funding method.
2) Partially-owner financed
3) Fully-owner financed
- I can pay you $40k cash right now
- If you can do owner financing I can offer you $46k
- Or if you finance the purchase and the rehab acquisition of it I could do $52k
Funding Your Real Estate Investment with Equity Partners
Another money source for real estate investment is equity partners, or otherwise referred to as EP's. This source is one that can be a goldmine for investors of all shapes and sizes, and is a hybrid that allows you to combine the other money sources to get deals funded. Who are these EP’s? They are the same people as mentioned before in the private funds/lending section. They are a catalyst to get funding for deals by leveraging their good credit and income.
The potential EP will have the credit scores and income you need to secure financing, but not the money in some cases, so by definition he cannot be your private lender. EP's are financing the deal you present, and longer-term financing, through money source number one, which is another distinction between this source and the private lending source, which is usually just short-term financing.
Seller held financing is definitely a viable option in today’s world of real estate, especially if the market is soft. While there is a pretty large amount of risk for the seller through this method, it is a better situation than they are currently in. The biggest risk for the seller is if you (the buyer) should default on the loan.
There are many advantages to the seller financing scenario as well. The first is that it presents a way for the buyer and seller to close on a deal that may not otherwise be possible with conventional financing. Secondly, as a buyer, if you are qualified but have a low credit score, banks may not be willing to loan even if you have the means to make the payment.
So you’re ready to start investing- but what money do you spend, and how? Here are a few tips about making your down payment, and managing reserve funds.
Acceptable sources for down payments include any of the following:
- Personal checking
- Personal savings
- Money market
- Cash value in a life insurance policy
Another source for a down payment is a home equity line of credit on your primary home. Please note that banks want to see funds have been in your account for 60 days for it to be acceptable. To get good loan approvals on investment properties from Fannie and Freddie, they want to see that, since you don’t live at the property, you have six months payments for the new house payment in reserves or as liquid assets. You also need two months reserves on other investment house payments you already have, for up to four houses, and you need six months payments on all investment houses from house 5 and on. These reserves start to add up so you must always be conscious of what you need in reserves in order to get financing. Also, you should know that you are allowed to use you primary home line of credit for down payment which most investors never explore, let alone even think about.
The pros are:
- Banks have deeper pockets.
- Best terms.
- Lowest interest rate and fees.
The cons are:
- Requires more money down (typically 20%).
- Intensive approval and underwriting process.
- Longer to fund and close.
Are you starting to see why I’ve mentioned grooming on this first money source of bank financing? You need to look pretty and not get stuck. It is all about fitting in, so it is my job to teach you how to look, and your job to have a good deal before you get to the table.
Did you know that single-family financing is easier than multi-family financing? Multi-family financing is typically .5% higher per deal and about $500 to $800 more in costs; this is because banks see the multi-family as having more risk involved.
Also note that smaller loan sizes do not equal smaller costs. Our blog shares that the proper execution of your real estate planning blueprint is that you can get bank financing without ever spending any money for a down payment! This money source is a place to raise real estate cash, and in the end most dealmaker investors will tap into the source as much as they can. This is where you can get the best financing terms for investment real estate on the planet, and this is an area you absolutely should focus on when securing money.
Investing in rental properties, and real estate can be complicated, that’s why many choose to work with professionals like Starting Point Real Estate. If you’re interested in learning more about financing your next investment, contact us today. Be sure to follow us on Facebook, Twitter, Pinterest.
Money Source: Bank Financing – Meet Fannie and Freddie
Most people read a book on investing or watch a late night infomercial and lose sight of the most fundamental money source available; which is a bank. Let me take this opportunity to ‘groom’ you to look good on paper from a bank’s perspective. To unlock the potential of this source one must understand the risk factors that the banks use to evaluate, in order to approve or to deny a loan. To do that, we must dive into basic underwriting principles, specifically the role that Fannie Mae and Freddie Mac play within the lending industry.
Money Source: Exploring Private Funds
Another source of money when financing your investment is private funds. This is one of my favorites because there are so many different definitions that people have for private funds. Some investors think it means that you get money from some sort of mystery Swiss Bank account, or that you don’t know where the money is coming from. Private funds in the real estate banking world simply mean ‘funds used to secure real estate from a non-institutional lending source.’ This means any source of funds used to buy real estate that is not linked to regular financing institution rules. Private money is not always as difficult to find. Just remember to use the money wisely, as it’s one thing to lose your own money, but it’s another thing to lose someone else’s money.
So, why are private funds a good source to use in real estate?
Some hot property deals need to close fast, and private lenders can typically close faster because they don't need approvals, appraisals, work verifications and so on. Private lenders are not looking to sell the notes they place against the property, thus they can make quick internal decisions to close the deal quickly and without all of the red tape involved. However, private funds do expect higher interest rates, which helps offset the higher risk they may take by lending money (without appraisals and approvals in some cases).
Another reason for the quicker closing is that these loans are short term loans, typically, and therefore the intention is not to evaluate a risk based upon a 30 year note. You may not qualify for the first money source, of bank financing, so therefore this is your best bet for money. Private lenders may let you borrow more against a home because they believe in you and not care as much about the property…this is an extremely valuable point.
The biggest reason the real estate investing community loves private funds is because there is less red tape. You're providing them with a way to increase the return on investment, as opposed to them investing in other sources. This type of money typically comes from an individual, not an institution with a committee. This source of money makes itself available when you can demonstrate three crucial items that are triggers for them to open their pocketbooks.
- The first one is that private lenders can earn better returns by investing in your ability to bring a great equity position deal to the table then they can by investing within the regular investment marketplace.
- The second is that their investment is secured by real estate at low loan-to-value’s (LTV's).
- Lastly, the repayment terms are clearly defined.
Who can be a Private Money Lender?
Who are private money lenders? Anyone. Find me anyone that fits these categories: lost money in the stock market or 401(k), has an IRA, inherited some money, has tons of equity in real estate, has well-off family members, co-workers, or other investors, or are just flat-out rich, and I'll show you a private lender in the making.
Anyone you know can be your next private lender. Then why would they want to work with you when you have done nothing yet? Don’t sell yourself short on this point. They typically do not want to do the heavy lifting and only care about a good return on a solid investment.
Where do I find these people? And when I find them how do I get them to lend to me?
Are you ready to know where the private lenders are? How about family, friends, co-workers, newspapers, craigslist.com, retirees, and neighbors? Now you have potential lenders in the making.
Finding private lenders is easy, but ensuring your next investment is worth your money and theirs isn’t always a breeze. Working with professionals like those at Starting Point Real Estate, and following are blog can help you ensure your next real estate investment is a deal. For more information about professional real estate investment, be sure to follow us on Facebook, Twitter, Pinterest, and Google+.