Real Estate Investors - 4 Fail-proof Methods Of Raising A RE Projects Capital
February 21, 2023 (Investorideas.com Newswire) The trend for investing in real estate shows no signs of slowing down, and statistics surrounding the housing market seem to echo this. In the first 3 months of 2022, 9.6% of house sales came through fixing and flipping. This is where someone buys a distressed property and makes improvements so they can sell for a profit.
Also, last year became the highest on record for cash purchases for houses. This indicates there is a bigger appetite for purchasing property purely as an investment rather than to use it as a home.
Real estate statistics from the recent past and present show that in 2020, there were about $500 billion worth of commercial RE transactions in the US. Yet, every real estate project whether it is residential or commercial needs to be financed.
What do real estate projects involve?
Real estate covers a wide area of opportunities and career options, and projects can involve the following:
- Land development
- New builds
- Conversions and repurposing
- Fixing and flipping
- Buy to hold
- Buy to let
- Commercial & Industrial properties
Repurposing buildings could involve buying a property with the intent to convert it into apartments, or retail units. Whereas buying to let is simply purchasing property as a long-term investment and renting it while you wait for the right time to sell.
Real estate investment can involve simply buying a distressed building at auction and quickly moving it on, or it might mean an ambitious project involving large-scale construction and land development.
How can you raise money for a real estate project?
Any type of borrowing involves some risk if you cannot repay it. And the interest payments and penalties will cut into your profit. You also don't want to be making multiple applications for loans and affecting your credit score negatively.
So, a fail-proof method is needed for funding your real estate project. And a visit to https://dfw-hardmoney.com/ shows that there are at least four solid options for financing a real estate project.
Careful consideration should be taken before any borrowing takes place, and a financial advisor could provide assistance here.
1. Hard money loans
These are very common options for individuals who need a cash injection to start or continue a real estate project. Indeed, they are almost custom designed for the purpose, and house flippers use them as well as major investors.
How much a hard money lender will give you will depend on them. What remains the same from one hard money lender to another is that credit scores aren't important, but leverage is.
Hard money lenders are less interested in good credit, and more in what collateral you have. You will have to leverage your real estate normally to be able to secure a hard money loan.
Benefits of a hard money loan
- Quick approval
- No credit checks
- Fixed rates - good in a high-inflation economy
- Short term
- Negotiable rates
Disadvantages of a hard money loan
- High-interest rates
- You will be charged points
- You can lose your property if you fail to repay the loan
Because the interest rate is fixed, you won't need to worry about jumps in inflation, but typically the rates will be higher than conventional loans. The biggest risk with a hard money loan is that you could lose your collateral if you default.
These are included here because hard money loans are often referred to as bridging loans, and the terms are sometimes interchangeable. Like a hard money loan, a bridging loan is a short-term solution to keep a real estate project moving when cash flow becomes a problem.
You can obtain these through different lending sources, but you should pay attention to current interest rates if your loan isn't fixed.
2. Conventional bank loans
Hard money loans are useful for anyone that has a less-than-dazzling credit score and needs cash fast. But, if you know how to maintain good credit and have no concerns in this area, you can approach traditional banks and lenders.
To obtain financing through conventional methods will mean that you have to pass a strict application process and meet the lender's set criteria. They will look at your debts, assets, outgoings, borrowing history, and credit rating.
You will be expected to make a large down payment too. Unfortunately, conventional bank loans for investment properties demand bigger down payments than standard mortgages. Expect to be asked for up to 30% of the purchase price as a deposit.
Benefits of a conventional bank loan
- Good credit is rewarded
- Reputable lender and regulated by FTC
- Competition provides more choice
Disadvantages of a conventional bank loan
- Interest rates may rise
- Lending criteria can be strict
- The bank can foreclose if you default
While you can't negotiate, you may be rewarded for good credit with lower down payments and low-interest rates. But, if you default you can still lose your property.
3. Home equity loans
This type of loan is sometimes known as cash-out refinancing, mortgage refinancing, or in the UK, simply remortgaging. This type of loan allows you to realize some of your equity without having to sell the property.
You can borrow money based on the value of your property and use this to finance your project. If all goes well, you can repay the loan when you sell the investment property and see a profit.
In 2020, 80% of business loans were rejected, 33% of mortgages were said to be declined, and 42% of Americans were rejected for financial products of all kinds last year. This includes credit cards and overdrafts also.
So, to obtain a home equity loan you need to match the lender's requirements including a minimum amount of equity, and credit score.
Benefits of a home equity loan
- Allows you to finance your investment with your home
- Many lenders to choose from
- Low fixed interest rates
- Can use the loan for any purpose
Disadvantages of a home equity loan
- You could lose your home
- You need to take a lump sum
With a line of credit attached to your equity, you can draw money when you need it, but with a home equity loan, you take the full amount in one go. This means that you are paying interest on the total loan from day one. However, you have the freedom to use the money for any purpose.
4. Private money loans
This means borrowing from an individual rather than a corporation and could simply mean your family or friends. You can, of course, find a private investor who is not personally known to you, but often people will get financing from those they know.
Being successful at RE Investment requires certain things to be in place, including finances. A private money loan comes with certain risks.
Benefits of a private money loan
- Can be acquired through friends and family
- Terms can be negotiated
- Credit scores aren't important
Disadvantages of a private money loan
- Could seriously damage relationships
- Higher interest rates due to the risk involved
If you borrow from your family and then default it could cause more than just friction, you could see your property being foreclosed, and years-long relationships destroyed. However, you can use a private money lender with no links to you, and you can negotiate terms that work for both parties.
All of these lending options are available, and easy to be accepted for as long as you fit the criteria. Hard money loans and private lenders have little need to do credit checks, so these are fail-proof options if you have collateral to leverage.
You can get better interest rates through conventional loans and realized home equity, but you will need to have a good credit score and match the lender's stricter requirements.
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