Wednesday, November 3, 2010
Finding Money for Real Estate Investing
You are ready to invest in real estate; you even have found the right property and a willing seller, and now that pesky problem: where to find money?
Most buyers simply go out and borrow money using a conventional lender, i.e. getting a mortgage on the property. However, limits on the number of properties that can be mortgaged under one name, and the tightening of conventional lending requirements may make it difficult for some investors to finance non-owner-occupied properties this way.
Several other options are available. One option may be using your HELOC. A HELOC , or Home Equity Line of Credit, is extended to a homeowner by using his home as collateral. There is a maximum amount that the owner can borrow, but he may draw on that line of credit as desired. The interest charged is usually the prevailing prime rate. Repayment schedules, which can vary from 5 to 20 years, are negotiable as long as the interest payments are made monthly. This option can be particularly powerful for the investor if he has amassed equity in his home, especially as historically-low interest rates are now available. This may be a viable tool for investors, even in today’s market, if they have owned their homes for a long time.
Secondly, credit cards may be a viable option in the short run, if you are looking for funds that will be cashed out when the remodel is finished and sold, or if those funds will be replaced by a traditional mortgage or by other private funds. Hang on to those promotional offers from credit cards! Many offer a 0% interest rate during the promotional period, for a low balance transfer fee of 3-4%. Read the fine print, but keep this option open.
It is a good idea to periodically request increases to your credit card limits, if you are a good borrower. This will give you flexibility in financing options for the future.
Often times, relatives and friends are willing to partner in sound real estate investments. Don't forget that rich Uncle! You may be doing him a favor in providing an investment with better returns than his other investments are currently paying. Sometimes co workers or clients are open to investment opportunities, and through pooling such resources, you can accumulate a sizable amount. Talk it up and ask around – people have pulled money out of the stock market and are looking for investment opportunities. REAPS featured a panel of private money investors at its August meeting, where this topic was discussed with real world examples from our own backyard.
Consider limited partnerships- such arrangements may give you the immediate cash flow benefit you need. The seller himself can often be creatively induced to enter into a funding agreement with you, particularly if he is highly motivated to sell, as many are in this economy.
Become educated on the dos and don’ts of private lending. REAPS invited the Washington State Department of Financial Institutions to our October meeting to discuss state and federal regulations and exemptions for borrowers and lenders.
Don’t forget retirement funds! You may self-direct your Individual Retirement Account (SDIRA) to invest in real estate, not just securities! Your 401 K is a great source of funds that can be partially liquidated, or you could borrow against the cash value of your insurance policy.
Stocks or other equities may be cashed in, and proceeds rolled into a self-directed IRA or used to fund purchases directly.
Of course, hard money lenders are always a possibility. Sometimes lenders can be flushed out by perusing the 'wanted to buy" ads, or even a more direct approach- take out a newspaper ad yourself asking for potential lenders who may be eager to invest in a real estate project with you. Tell the potential investor how he benefits. An example may be: " I have the opportunity to buy a $200k house for $100k, but I need a cash investor. I do the work, you invest the cash, and we split the profits.”
Sometimes YOU can be the best source for private money- and that's OK! If you have cash under the mattress, pull it out and get in the game! Or partner with other investors.
The only limit to finding private money for your real estate needs is your own hesitation. With creativity and a little knowledge, you can be the greatest source of generating needed capital.