Every investor needs to be familiar with the different ways of financing real estate deals. The primary methods are traditional mortgages, hard money loans, private investor loans, partnership deals, owner financing and lease options.
Traditional mortgages are how most people get the money to buy investment real estate. However, with the recent tightening of standards to qualify for a loan, and Freddie Mac’s announcement that beginning in August, they are reducing the total number of loans an individual investor can hold from ten to four, other financing strategies are important to have in your investor toolbox.
Hard money loans are typically short-term loans at relatively high interest rates. They typically come from people who are in the business of lending money. Most investors use these loans with a plan either to flip the property or to get new financing on it in the immediate future.
Private investor loans usually have better terms and can be used long-term for an investment property. These lenders are not in the formal business of lending money and are usually individuals who are looking for a better return on their money than, for example, certificates of deposit can offer.
Partnership deals are a great way to get around Freddie Mac’s new four loan limit. These types of deals can be structured in many ways, but basically, one partner finances the deal, often through a traditional mortgage, and the other partner manages the property on an ongoing basis. If you have already maxed out your four loan limit, but have the time and knowledge to find good deals, than this is a great way to increase your portfolio with a partner.
Owner financing is simply asking a seller to “carry back.” The seller acts like the bank and you pay the seller regular payments on the purchase price of the property. This is another good way to get around the Freddie Mac loan limit.
Lastly, lease options provide investors the opportunity to control property without getting any type of financing. The seller of the property would give you a lease – just like a rental agreement – for a specified period of time, and you would also get an option contract that gives you the right, but not the obligation, to buy the property anytime during the lease. In an uncertain market, this is a great way to stay active as an investor, but with limited risk, since you can always walk away at the end of the lease.
In conclusion, there are many ways to keep investing, despite tougher lending conditions. As investors, we must keep in mind all of our options when it comes to financing new deals.