Sure, real estate is a lucrative asset class. But it also requires heavy capital investment: a barrier to entry that’s precisely why returns are strong.
Since it also involves taking significant financial risks, you have to take calculated risks. Fixer-uppers are a great starting point for real estate investors who want to flip or rent them after. Fewer people are lining up to buy these properties, and you can remodel them however you like.
But how do you get started without enough money to buy the first property?
Try the following options to cover the cost of your first investment property.
1) Hard money loans
This ranks among the easiest options when it comes to investment property loans if you don't want to deal with the frustrations of conventional loans. Hard money loans are provided by private companies that keep the loans on their own books rather than selling them to international corporations.
However, as much as this is a convenient option it is also more expensive than conventional loans. The money is paid back in less than 12 months and in most cases the interest rate is 6-14%. They also charge points (one point is equivalent to 1% of the total loan amount) which are paid upfront. Usually, this doesn't go beyond 2-4 points. The loan limit is based on the ARV of the home. Since you deal with the lender directly, you can always negotiate for favorable repayment terms depending on your financial situation.
2) Private money lenders
Some individuals or companies have specialized in providing financing to real estate investors. Private money lenders don't have any affiliations with the government or financial institutions which sets them apart from hard money lenders. Consequently, they dictate the loan terms. Even though the interest rate is on the higher side, private money lenders can get you the needed capital within hours to a few days. Thus, if you stand to lose a deal for lack of financing then private money lenders can save the day. Since there are no third parties involved, private lenders require some insurance policy to guarantee their investment. A trust deed, mortgage, or promissory note are some of the commonly used collateral.
Crowdfunding is also another option to finance a fixer-upper. It relies on collective contributions from individuals or institutions. Lenders in crowdfunding are referred to as investors and they earn some interest on the money invested towards funding the borrower's loan. The traditional crowdfunding sites may not provide enough money to fund a fixer-upper since that wasn't their intended goal. However, there are specialty crowdfunding sites that serve real estate investors now.
In some cases, the companies will pre-fund the loan so that you can get the money within a short time as they wait on investors to provide funding. However, some don't finalize the loan until investors have provided all the needed amount. These sites will lend you money no matter the number of mortgages you have since they only consider the deal on the table and the collateral provided. Thus, they are suitable for people with a bad credit history. Nonetheless, you should plan adequately when it comes to loan repayment given the high interest rates charged.
4) Seller financing
You may not have to look far to get financing for a fixer-upper if seller financing is an option. Some sellers can offer you the money you need to close the deal. However, given the financial risks involved the interest rate is usually higher than what traditional lenders charge. Nonetheless, this option has the benefit of a faster closing process. Not only is it a good deal for the buyer but the seller as well since he/she won't have to pay the capital gains tax immediately. Also, the seller gets to enjoy the profit from the sale over a period of time instead of getting it all at once. Seller financing can also be used if you need to repair and remodel the house, from replacing kitchen cabinets to replacing the windows.
5) Family financing
Since 2012, it is possible to get a loan from a family member. Therefore, if there is someone in your family who can lend you the amount you need to buy a fixer-upper it is an option you should consider. The better part is that the family member can gift you part of the loan to reduce the amount you owe.
6) Take out a HELOC
Some people finance investment property purchases by taking out a HELOC(home equity line of credit). However, ensure you can repay the loan. Failure might cost you the home. Also, you stand to lose if the real estate market takes a dip. Not only can a HELOC offer you enough money to purchase a fixer-upper but also remodel it. Given the financial risk involved in this option, go through all the terms and conditions of the agreement before signing. Understanding prepayment penalties and how long the line of credit will be open for you is crucial.
7) Refinance your home
A home refinance can provide the needed funds to finance a fixer-upper. However, this is not for everyone. You can only refinance if you have a significant amount of equity in the home. Also, have a contingency plan in case real estate market changes negatively affect the property value.
8) Pay cash
If you can afford to pay cash for the fixer-upper then do it. It saves you from paying high interest on a loan and speeds up the closing. However, many people don't have hundreds of thousands of dollars in their bank account every day. Unless you win a lottery, it takes time to save enough to buy a property in cash. Thus, it is good to start saving early even if you haven't found the right property to purchase.
Many sellers and contractors offer a cash discount which can significantly lower the buying price. Also, you have more freedom in remodeling if you have enough money and these kitchen remodeling ideas will come in handy. Given how expensive it is to fix a property before you rent or flip, make sure it can withstand natural calamities like a hurricane.
No matter how bad your credit is or how many mortgages you have, there is always someone willing to take a chance on you. Thus, don’t give up on your dream to become a real estate investor just because you don’t have enough capital. There are many financing options you can take advantage of, not to mention the wealth of information available online to ensure you actualize your dream.