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    Flint Foley Real Estate Blog

    7 Finance Options For Your First Real Estate Investment

    10/25/2016

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    Are you someone who wants to buy investment property, but you just can’t figure out how to finance your first buy? If so, this article is written for you.  

    Below are seven solid types of financing for your first investment property. For each financing type, I will tell you:
    1. What it is
    2. The good
    3. The bad
    4. Who can use it (i.e. owner occupied, non-owner occupied, 1-4 units, or any property)
    5. Possible investment strategies with this financing type (i.e. house hacking, live-in flips, rentals, etc.)
    6. Where to find this financing

    1. FHA (Federal Housing Administration) Loans
    What it is: These federally subsidized loans generally have lower down payment requirements (3.5% as of 2016) and easier qualifying standards than other loans. They also have low, fixed interest rates for 30 years.
    The Good: Easier to qualify, attractive terms.
    The Bad: Fees can be higher than other programs, the closing process is not fast — typically limited to one deal at a time, major fixer properties won’t qualify.
    Who can use it: Owner-occupied only.
    Investment strategy: Good for house hacking or live-in flips, 1-4 units only.
    Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders.
     
    2. VA (Veterans Administration) Loans
    What it is: These are also federally subsidized loans only for U.S. military veterans. The terms of these loans are usually the same or even better than FHA, including a 0% down payment.
    The Good: Easier to qualify, attractive terms, multiple loans are possible.
    The Bad: Like FHA, closing process is not fast, and while multiple loans are possible, there is a limit based upon your maximum entitlement; major fixer properties won’t qualify.
    Who can use it: Owner-occupied only.
    Investment strategy: Good for house hacking or live-in flips, 1-4 units only.
    Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders.

    3. Conforming Loans
    What it is: Conforming means the loan conforms to the rules and guidelines of mortgage giants Fannie Mae and Freddie Mac. While the requirements are a little more stringent than FHA or VA, conforming mortgages are still a great mortgage product for investments. Although 20% down or more is the standard for non-owner occupied loans, programs do exist for 5-10% down payments on owner-occupied loans if you hunt around.
    The good: Attractive terms with low interest over 15-30 years, faster qualifying than FHA/VA.
    The bad: Larger down payment than FHA or VA, limited to 4-10 loans; major fixer properties won’t qualify.
    Who can use it: Owner-occupied OR non-owner occupied. Non-owner occupied typically requires more money down, higher interest rates, and other more stringent requirements.
    Investment strategy: House hacking, live-in flips, rental real estate; 1-4 units only.
    Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders.
     
    4. Portfolio Loans
    What it is: Portfolio loans are kept by the bank or lending institution that made the loan, unlike conforming loans which are sold to Fannie Mae, Freddie Mac, or other mortgage investors. This means the requirements and loan terms vary depending upon which lender you use. This was how I financed my very first deal, which was a fix and flip property.
    The good: More flexibility, potentially larger number of loans than conforming, possible to get loans on fixer-uppers and commercial.
    The bad: Terms are not typically as good as FHA, VA, or conforming loans, you may have balloons in 3-7 years and/or adjustable interest rates, credit and down payment requirements more strict than FHA or VA.
    Who can use it: Owner-occupied or non-owner occupied; 1-4 units, multi-units, commercial.
    Investment strategy: House hacking, live-in flips, rentals, fix-and-flips.
    Where to find it: Banks (especially local ones), savings and loans, credit unions.

    5. Hard Money Loans
    What it is: These loans are asset-based loans, meaning the primary concern of the lender is the property serving as collateral. The individuals or small groups that make these loans are in the business of lending, so they can usually move fast, which makes them attractive for purchasing investment deals.
    The good: Fixer-uppers are OK, technically no limit to number of deals, can often borrow all or part of repair costs.
    The bad: High interest rates and other costs, may not loan to brand new investor who has no experience with real estate, typically short-term loans.
    Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial, land.
    Investment strategy: Fix-and-flip, rental property (for purchase, will need to refinance).
    Where to find it: You can also usually find several lenders at your local real estate investor association.

    6. Private Money Loans

    What it is: Private money lenders are individuals or their self-directed IRA accounts who make loans against real estate. Unlike hard money lenders, these individuals aren’t usually in the business of lending.
    The good: More flexibility and faster closings than bank mortgages, potentially lower interest rates and costs than hard money lenders, potentially longer length of terms, and often lending relationships that last for years or decades.
    The bad: You can’t walk into a bank and ask for private money. It’s usually a result of relationships with other local investors built over time. Because these investors aren’t in the business, there is usually a limit to the number of loans based upon their available funds.
    Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial.
    Investment strategy: Fix and flip, rental property.
    Where to find it: Networking online (like BP Forums or Marketplace) or at local real estate associations or business meetups.

    7. Seller Financing
    What it is: Seller financing means the seller of a property accepts all or part of the purchase price in monthly installments. Unlike a bank, the terms are completely negotiable. The final result is just what works best for both you (the buyer) and the seller.
    The good: Typically great interest rate and terms, small down payment is possible, no credit or formal approval process.
    The bad: Requires negotiating skills and knowledge of real estate finance and contracts, not every seller has enough equity to seller finance and many with equity want cash (at least initially), you will need to fund your own repair costs.
    Who can use it: Owner-occupied or non-owner occupied; any type of real estate.
    Investment strategy: Best for rental property or house hacks; also works occasionally for fix and flips or live-in flips.
    Where to find it: Direct mail campaigns and other ways to generate leads directly from potential sellers; also possible through knowledgeable real estate brokers.

    What financing source seems to be the best fit for you? What is your wealth building stage and real estate strategy? Is there anything I can help you with as you take action towards financing your first investment property?
    I look forward to hearing from you in the comments below.

    Curated from: Bigger Pockets

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