Thursday, December 18, 2014
Sources of Cash
Conventional buyers rely on savings for a down payment, and then qualifying through a bank or lending institution for a conventional mortgage. But many lenders today will put a limit on the number of residential mortgages that may be held in your name. Or require a significant cash reserve, or lower debt to income ratios. This source of cash is not infinite to any investor, and the true investor will be looking for other sources of funding.
Here are just a few.
Seller financing is typically the least expensive form of financing for the purchase of real estate. The Seller may be willing to carry 80-100% of the financing, for as long a term as a conventional bank, depending on the issues surrounding the sale of their property. Typically, sellers will provide this kind of financing if it is impossible to get bank funding on a property, due to its condition or other factors; if the seller is trying to minimize their tax burden upon a sale; or simply to speed up the transaction or attract more buyers. The terms of this financing are negotiable to the buyer, and may be anywhere from 0% to whatever the market will bear.
Short-term financing will typically have the highest interest rate, as will a second- or third-lien position of the Seller behind another mortgage. Some sellers will help finance the down payment, when the Buyer can come up with a conventional loan, so this interest rate will tend to be shorter-term and for a higher rate.
Buyers may also take out a home equity loan or home equity line of credit on another property they own to come up with the cash they need for a new purchase.
Sometimes buyers will offer collateral to make up the difference needed for a down payment. This might be in the form of an automobile, boat, airplane or something else of value to the seller.
Buyers may work out installment plans, or offer to do a lease with the option to purchase later at a set price.
Many cash buyers will get hard money loans from non-bank lenders. Hard money loans are issued by professional money lenders, who usually offer terms with shorter-timeframes, higher interest rate, and lower loan-to-value ratios (requiring some skin-in-the-game by the borrower). This funding tends to be the most expensive.
Buyers may find private lenders, generally private individuals they know who are willing to lend money at a lower interest rate. Family and friends are a good source of this type of financing.
Buyers may come up with cash by doing a joint venture with the seller or another partner. Partnerships may be formal or informal, and take the form of true partnerships, limited liability companies, corporations or syndications.
Buyers who are at least 59 1/2 years of age may make withdrawals from their IRAs or life insurance policies without penalty. They do however have to pay taxes on any distributions.
Buyers may sell something else of value to come up with cash quickly, such as a car, gold or other collectibles.
There are many different ways for a Buyer to come up with cash, if they want something badly enough. Or they could broker the deal for another buyer by selling their interest for a wholesale price to another Buyer prior to closing.
Real estate investment can be enormously creative, and finding cash is not as difficult as some investors make it out to be. So get out there, and start finding property!