When you start your journey in real estate investing, you have lots of options when it comes to securing funding.
To know that you’re in good hands, it helps to understand your choices and the different types of lenders as well as what they do. Figuring out what’s best for you will help you discover what’s best for your financing strategy to maximize your cash-on-cash return.
Whether you’re investing in fix-and-flip or rental properties, it’s also important to understand the types of financing available to you as you try out your first investment property. This guide will introduce you to the types of lenders you’ll meet along the way and which lending options are right for your goals.
Hard money lenders specialize in private, short-term loans using the property being rehabbed as security. These lenders look at the property's value and earning potential rather than the borrower's personal credit profile and finances.
Traditional banks offer various real estate loans, including commercial mortgages, residential mortgages, and construction loans.
Credit unions provide real estate financing options similar to banks, often with competitive rates that may have more flexible lending criteria.
Mortgage companies focus on providing loans for a variety of real estate purchases. They offer a range of loan products tailored to different types of properties and borrowers.
Brokers are intermediaries who connect borrowers with lenders. They have access to multiple lending sources and can help borrowers find competitive loan terms and rates.
Private lenders are individuals or groups of investors who provide financing directly to borrowers. They may offer more flexible terms and be willing to take on higher-risk projects that traditional lenders may not consider.
Crowdfunding platforms connect individual investors with real estate investment opportunities. Investors pool their funds to finance specific projects and earn returns based on the success of the investment.
Real estate investors more often bypass traditional loans because of their long-term nature. Turning to hard money loans — and a hard money lender — offers more benefits for investors:
Hard money lenders usually have a more simplified application process and faster approval times than traditional lenders. This can make or break a real estate project in a competitive market or when you need to act quickly to outbid a competitor or acquire a new property.
Hard money lenders focus primarily on the property's value and future earning potential rather than the borrower's creditworthiness or financial history. This flexibility allows investors with less-than-perfect credit or unconventional income sources to access financing when needed.
Hard money loans are typically short-term loans with terms ranging from a few months to a few years. Short-term financing is ideal if you plan to buy, renovate, and sell properties quickly. This allows you to secure the necessary funds for your project without getting locked into a long-term loan obligation
Hard money lenders like Kiavi base lending decisions on the collateral property's value and income potential, which is ideal for investors working on properties with significant potential for improvement and appreciation in value.
Because the focus is on the property's potential rather than your personal finances, you are given greater flexibility in real estate investments.
Hard money lenders typically have less stringent documentation requirements and underwriting processes compared to traditional lenders. These factors make it easier and faster to secure financing without the extensive paperwork and time-consuming approval procedures associated with conventional loans. (This is important when you’re in a bidding war for a property or you need quick approval to enjoy the fruits of a great market.)
Hard money lenders may offer more flexibility in structuring loan terms. They can often tailor loan amounts, repayment schedules, and interest rates to meet the specific needs of the borrower and the investment project.
Hard money lenders are more willing to finance unconventional projects or properties that may not meet the strict criteria of traditional lenders. This opens up opportunities for investors to pursue properties that others may overlook, potentially leading to bigger returns on your investment.
Hard money loans typically come with higher interest rates and fees compared to traditional loans. Additionally, they are typically secured by the property, so there is a risk of foreclosure if the borrower fails to repay the loan.
Knowing that you’re choosing the right lender is as important as finding the right property. Consider what you’re looking for in your loan and your lending options before signing on the dotted line.
Compare interest rates, loan terms, closing costs, and additional fees required by each lender. You’ll want to consider factors like fixed or variable rates, the length of the loan, and any prepayment penalties. Then, choose a lender that offers competitive rates and favorable terms.
Different lenders may offer different loan programs tailored to different types of real estate transactions, such as fix-and-flip, fix-to-rent, or buy-to-rent.
Research each lender's reputation and experience in the real estate industry. Look for reviews and ratings from previous borrowers, and consider their track record in funding successful real estate projects. Working with an established and reputable lender can provide peace of mind and a smoother borrowing process.
Consider whether the lender offers flexibility and customization options. Real estate deals can be complex, and having a lender willing to work with you to structure a loan that fits your specific requirements is critical.
Time is often crucial in real estate transactions, so consider the lender's ability to process loan applications quickly and efficiently. A lender providing a streamlined approval and funding process can give you a competitive advantage when acquiring and renovating properties.
Review the lender's customer service policies and track record. Make sure you’re working with a lender who communicates effectively, responds promptly to your inquiries, and provides excellent customer support throughout the loan process.
Some lenders offer additional resources like financial guidance, educational resources, or connections to other professionals in the real estate industry.
In real estate investing, as in life, good relationships are key. Finding the right lender and establishing an ongoing relationship is the key to building a profitable real estate portfolio.