Mark Twain once suggested, “buy land, they’re not making it anymore.” And this was before current times when, thanks to low inventory and heightened housing demand, real estate prices are skyrocketing, making real estate investing a more attractive proposition than ever before. Not convinced yet? Just consider the following:
- Investing in real estate can provide a steady passive income stream.
- Real estate appreciates in value, ensuring increased future earnings.
- Real estate is a fantastic way to diversify your overall investment portfolio.
- There is a ton of flexibility with real estate investing.
- The homestay and vacation rental market has helped to open up even more lucrative real estate investment opportunities.
Mark Twain sure knew what he was talking about!
Those who are new to the real estate investing game might not yet have those coveted real estate investor deep pockets, so finding types of real estate loans to finance their real estate ventures during those early days can be challenging. This inability to secure financing is widely considered to be one of the most prevalent barriers to entry for real estate investing. Fortunately, there are several types of real estate loans for real estate investors available.
Conventional bank loans
Leading the list of types of loans for real estate investors is securing a mortgage through a financial institution, typically a bank or credit union. A mortgage is a conventional bank loan that a borrower uses to buy or maintain a home or other property and agrees to repay it (with interest) over a period of time, usually in a series of regular payments (monthly, bi-weekly, or weekly). Because the borrower and lender agree that the house itself serves as collateral, meaning that the lender can take it from you if you default on your mortgage payments, a mortgage is considered a secured loan.
While taking out a mortgage with a major bank is the go-to method for most homeowners, things like foreclosures, short sales, credit problems, and earnings history can significantly affect one’s eligibility to take out a traditional bank loan. The process of obtaining a traditional bank loan can be long and tedious as it takes time for the lender to research the person and their credit history. Traditional loan lenders take steps to minimize the risk they take on when lending money to an individual, and, as such, an individual may have a hard time qualifying for a mortgage.
What a mortgage payment ultimately looks like depends on the interest rate at the time of signing. Consider the following scenario:
- A real estate investor purchases a $350,000 property with the intention of using it as a rental property for the next several years.
- A down payment will be required. This down payment can be as little as 3% for someone with a decent credit score who is looking to purchase a home as their primary residence; however, for an investment property, a minimum of 15% is typically needed.
- This brings the mortgage amount required to $297,500.
- At the time of writing, the average interest rate for a 30-year fixed mortgage (which, incidentally, is the most popular mortgage product) is 4.69%.
- This will equate to a $1,541.16 monthly mortgage payment (note, this does not include property tax, insurance. or any additional housing costs).
For an investor purchasing a property of the same value in the year 2000, when the average interest rate was 8.15%, the monthly mortgage cost would be $2,214.14. For an investor purchasing in 1981 (when interest rates hit their highest point in modern history), their monthly mortgage would cost upward of $4,152.13.
Using existing home equity
A home equity line of credit (HELOC) is another financing option that real estate investors often consider. A HELOC is a type of real estate loan that can offer more flexibility than home loans, but they also have higher closing costs and varying interest rates, which can mean paying more over time. Using a HELOC to buy an investment property, a rental property, or a second home can give prospective real estate investors more flexibility than a mortgage because they don’t have to borrow the money upfront.
HELOCs are also easy to qualify for if the borrower has home equity. Be aware, however, that some lenders may have restrictions on the source of your down payment and may not be willing to take out a mortgage on another home if you are using a mortgage for investment purposes.
Private funding loans
Another popular type of real estate loan for investors is a private funding loan. Private property finance lenders are non-institutional lenders that provide short-term loans to investors to purchase or renovate investment property. Private lenders usually offer upfront financing for real estate investments with a defined payback period for investors looking to increase property value in a short period of time.
Private money is an especially attractive type of loan for real estate investors because, in some cases, investors can even incentivize potential lenders with a share of the profits (rather than repaying the loan). In this particular situation, it is essential to remember that private lenders want to work with investors for the same reason that investors want to work with them; both parties can earn money on a successful transaction. A private lender’s chances of getting money for future projects increase when they know they’ll be paid back on time and can trust the borrower. When a real estate investor works with private lenders, earns their trust as far as paying off their loans, and demonstrates that they can bring them a good return on their money, this sets up a long-term and mutually beneficial relationship.
Hard money loans
A hard money loan is a short-term loan secured by private investors or individuals rather than other traditional institutions such as banks or credit unions. Hard money lenders are often individuals or businesses that see value in this potentially risky venture. Given the higher risk that hard money lenders are taking on, they typically charge higher interest rates (typically over 10% higher than traditional mortgage products) and fees, and they may request a larger down payment.
Hard money lenders often make loans for almost any type of property, and some real estate investments have been created solely with hard money. Despite the high-interest rates and high fees, these short-term hard money loans can be a godsend when an investor has found a great investment opportunity and needs cash quickly, as borrowers can typically access funds faster with this approach. Hard money loans are primarily based on assets purchased rather than approvals.
The fractional real estate alternative
It would be a disservice not to mention fractional real estate investing as a viable option for wannabe real estate investors. Fractional real estate investing brings prospective investors into the real estate market without some of the common headaches accompanying the real estate investment game, including the need for significant funds.
For as little as $100 or less, prospective real estate investors can dip their toe into real estate investing by purchasing fractions of a piece of property and then experiencing the high returns that make it so appealing. And all through the convenience of a mobile app.
There you have it—five ways to buy land, since, you know, they aren’t making it anymore. As real estate investing grows in popularity and earning potential, the market responds with ways that the average consumer can enter this formerly cost-prohibitive market. Enjoy real estate investing the new way.
Learn more about Ark7 to get started with fractional real estate investing today.