How to finance investment property in today's real estate market

Real Estate Agent with Chartwell Realty

I work almost exculsively with investor clients who are buying in Kansas City from all areas of the country.  Some are buy and hold for long term rental buyers, others are wholesalers, many are flippers, and all of them have one common need - FINANCING!

Did you know it's a little harder in today's real estate market to get investment financing?  I bet if you work the investment arena you know this fact well.  It's probably stopped you from doing transactions with your prospective investor buyers and sellers in your local area.

There are still at least 5 good ways to finance investment purchases:

The investor can use his or her own money (cash buyers)

Cash buyers are buying foreclosure properties up all across the country!  All you have to do is look at statistics on purchases and you'll see investors, especially cash buyers, are buying and buying right now.  A cash buyer is of course one of the perfect investor clients you can have but also won't accurately reflect the majority of your investor clients, as most will need some type of financing to complete their investment purchase. 


The investor can use a traditional bank, mortgage broker, or regular lender

There are still many traditional banks who are providing loans to real estate investors on investment properties.  Most seem to be requiring 20-25% of the loan amount, and many will not loan on properties needing rehabbing or that aren't move in ready. 

What if the invesment property needs some rehabbing?  Smaller, local banks are sometimes great options for rehab loans.  Many smaller, local banks have their own rules on doing investment property and some will still do rehab loans.  A rehab loan is simply a loan on the rehab and work needed on the property in order to bring it back to a more livable or retail condition.  Many investors get rehab loans for foreclosures they are buying and fixing up.  What you don't see are a lot of the bigger, regional and national lenders doing rehab loans.  Local banks and local banking relationships will often give you some financing options you haven't thought of before.

Traditional lenders are of course scrutinzing investment purchases and investor's personal financial situations in order to determine whether or not to provide a loan.  There is usually a requirement for a lot of documentation to the lender and the closing period seems to be 30-45 days on average.


The investor can use private money or hard money

What is hard money?  Hard money is money that comes from a non-traditional lending source of funds, such as a hedge fund or institutional funds, that is used for a specific type of loan, often to buy and rehab a property, and is provided at a higher interest and higher fees, but often requiring less money down and less qualifying from the borrower.

Private money is essentially the same thing, although most people associate private money with a person or non-institutional source of funds.  Private money lenders may not charge as high as fees as hard money lenders charge.  For the sake of the length of my blog, I am going condense hard money and private money lenders as the same type of source of funds for your investor clients deals.

Hard money lenders usually require smaller down payments, even in today's chaotic lending world, and will usually finance the purchase price of the property, the rehab amount needed for the property, and some hard money lenders will even finance their points (or fees) and interest for the duration of the loan term.   Hard money lenders may or may not have the borrower pay any monthly interest - it usually depends on the loan term.  Hard money lenders can also close quickly, often in as little as 7-14 days.

Hard money lenders do all of this at a price... a higher price in terms of both fees and interest.  It's not unusual for a hard money lender to charge 5-10 points (remember a point is 1% of the loan amount) for fees and interest ranging from 8-18%.  Whoa!  That's a rip-off you say?  There are countless great reasons to use hard money and private money lenders.  I personally use hard money when it's available and I'll tell you why in tomorrow's blog post.

I have a lot of investor clients who will use a hard money loan to initially buy and rehab the investment property.  Once the property rehab is completed and it is rented, the investor will then look to a more traditional lender to do the refinance and provide the long term fixed rate financing on the investment property.


The investor can use business partners

These might be friends, family, coworkers, or money partners.  A business partner could really be any person who would bring to the table something your investor client cannot, and generally this is financing capability in the form of cash or credit (lending available).  The investor client will benefit from the business partner because chances are the investor client couldn't do the investment without the business partner.  The busines partner should benefit because there is an opportunity for a financial gain he or she may otherwise not have been aware of or had the experience to complete themselves.

Business partnerships should be handled with correct legal documents so that everyone is protected.  I am not a big proponent of partnerships but the fact of the matter is many of your investor clients will likely have a partnership.  Most commonly I have seen my investor clients with partnerships establish a limited liability company (LLC) to operate their investment business.


The investor can use retirement funds or IRAs

I admit I have had little experience on using retirement funds or IRAs to fund investment properties so I would highly recommend you always have a good attorney or tax or financial advisor give your investor clients information on how to best use these funding sources on their investment purchases.  There are usually local banks or local financial advisors who do have experience and can offer your investor clients the guidance they need in order to use this source of funding.


Regardless the type of financing your investor clients are using on their investments, there are a few key points to always remember to reiterate to them. 

First, please encourage your investor clients to NOT quit their job or primary source of income when doing real estate investing.  It is extremely important your investor client maintains their regular job.  Your investor client will probably not understand that real estate investing doesn't provide a weekly or bi-weekly source of income, at least not for awhile.  If everything goes right, your investor client's investments should yield them a positive amount of money either through monthly rental income or a larger chunk of income when the house sells as a flip.  I have seen people quit their day job and try and do real estate investing full time.  This is a very bad move.  This is NOT the time for your investor client to play around or learn on the weekends.  Just like your real estate is your business, real estate investing for your investor client should also be treated as a business, not a hobby. 

Second, investment financing is really about both the property and your investor client's personal financial situation.  Lenders care that the property has equity and that your investor client is a good risk.  It used to be some lenders didn't care about the borrower's financial situation as long as the property was a good deal.  In today's lending world though, I don't find this to be the case anymore.  Most lenders, including private and hard money lenders, will require both a good property and a good borrower.  

Third, encourage your investor client not to buy more real estate investments if they have a short term loan to pay off in a current investment property.  For example, if your investor client takes out a 6 month hard money loan for their investment property, encourage them to not buy more real estate during the 6 month term of their loan unless they have discussed doing so with their lender.  Buying additional property in this 6 month time frame (or whatever your investor client's loan term is) can be deadly for a refinance. 

If you are a real estate agent and want more information on how to best represent and work with investor clients, check out this site.


Comments (2)

Donnie McKinney
Purchase Realty Group - Paducah, KY
Donnie McKinney CCIM, Purchase Realty Group

Hi, JJ,

Great info for would-be investors. Actually, I just launched a new free course in investment real estate you might be able to help me with by checking it out and inviting some folks to join. It's free and there aren't any catches. We're working on the first lesson right now ;)

I just posted a Blog on ActiveRain to introduce it to Realtors. The long-range plan is to educate people about investing IRA & 401-K money in real estate for safer income-producing investments and avoid the stock market crashes that keep wiping us out ;)

Jun 11, 2011 06:31 AM
Maria Morton
Platinum Realty - Kansas City, MO
Kansas City Real Estate 816-560-3758
Jj, great article on investor financing options! You covered all of the bases succinctly.
Sep 08, 2011 06:59 PM