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Loans for Real Estate Investing
Loans for Real Estate Investing – Do They Still Exist?
There are plenty of opportunities for real estate investing in the current market. Using loans for real estate investing is one way I have been taking advantage of these opportunities. You should understand what loans are available to see if and how you can use them.
Although the real estate lending environment in the United States has changed drastically since the financial meltdown started in 2007 I have seen other investors able to borrow money. The following types of loans are the most common ones I have seen in my area.
1. Hard Money Loans
This is basically a company that has gathered a large pool of money from many investors. They then lend this money to real estate investors on a short term basis, typically six months here in Atlanta.
The typical interest rate I have seen for these loans is 12-15% plus 5 points payable at closing. Usually they will only lend 60-70% of the after repair value (ARV) of the property. Some might then lend some additional money that can be used for repairs.
These loans for real estate investing are almost always geared towards flippers since they are intended to be paid off in full at six months. Otherwise you can use them if you have figured out another way to refinance the property and pay off the hard money loan. Since they are expensive you need to make sure the potential profit in the deal will cover the costs of this loan.
On the other hand some of the positives are that they are the same as cash allowing you to make cash offers on the property you want. Getting approved for one of these is not solely based on your financial qualifications but also on the merits of the deal. If they think you got a good deal they might give you the money even if your credit isn’t great.
Who are they for?- mostly flippers and other real estate investors that have a plan to get out of the property or the hard money loan. This is not a buy and hold loan.
2. Fixed Rate Mortgage Loan
This is as the name suggests a fixed mortgage interest rate and remains unchanged until you pay off your mortgage amount completely. The loan is amortizing in the sense that you pay off the loan completely at the end of the term. This term is easy and reliable and very transparent. This is usually for 30 years and if you take out this mortgage loan, your monthly payments are the same throughout the life of the mortgage. There are a lot of fixed rate mortgage calculators that can help you calculate the amount you are going to pay every month based on how much you intend to borrow.
Who are they for?- these make good loans for real estate investing if you are a buy and hold investor. However, in the current lending environment to qualify for one of these you will have to provide full income documentation for at least the last two years, probably a W-2, a sizable down payment (20-30%), of course a good credit score - probably 700+, and lots more...
2. Adjustable Rate Mortgage (ARM) Loan
This is just the opposite of the FRM. Typically you can have a fixed rate from one to seven years and then the rate will adjust to whatever the contract says. It can be a pre-determined rate, a rate based on a market index or some other combination.
If you as an investor don't want to hold on to the property for a long time, you can go for the ARM. It will also require a down payment and qualifications similar to the FRM.
Who are they for?- Buy and hold investors that either will sell their properties in 1-7 years and/or have the cash reserves or the cash flow from the property to be able to absorb an increase in the monthly payments if the interest rate in the loan jumps up after the variable rate period expires.
3. Balloon Mortgage Loan
These have become rare but still out there. This is the mortgage loan where the payments are calculated based on long term amortization, say 20 or 30 years but, and this is a big but, the balance of the loan is due much earlier than the 30 years. The balance could be due anytime between 3-10 years from the date it was originated.
This loan basically gives you the payments of a 30 year fixed but you will HAVE to either refinance out of it before the end of the term or pay it off when it’s due.
Who are they for? - Investors that have a short to mid-range plan for the property. Whether they are selling the property to a lease purchase buyer or maybe renting for two to five years and then selling the house.
4. Private Money Loans
This is nothing more than a loan from someone who is not in the mortgage or lending business. It could be anything from a loan from uncle Joe to a partnership with an individual that has the money but does not have neither the time, knowledge or desire to mess with real estate but wants to get a good return on their money.
Since it is not an open market product the terms and conditions are fully negotiable between you and the person giving you the money. This is how I bought House #6 and I know other investors that have used this extensively.
To make it attractive to the lender you pay the person a good return, better than what they can make in the open market, anywhere from 8-15% or more. You can pay points too if they want and the interest can be paid monthly or one lump sum at the end of the deal. It can be a six month loan or five years or more. The possibilities are endless.
What you need to consider is that this can be an endless source of funding for investing in real estate since you don’t have to put up with the limits and guidelines that banks require. The only limit here is your ability to find private lenders. I have a feeling that with the limited availability of loans for real estate investing from banks and the meager returns that banks are paying on investments, this form of lending will become more prevalent in the coming years.
Although there are more types of loans for real estate investing out there these are the most common products available right now. The implosion of the real estate and mortgage markets of 2007 has severely limited the availability of loans for real estate investing. But investors will always find a way...will you?
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