One of the biggest benefits of real estate investing is the power to leverage debt to grow the value of your portfolio higher and faster. Unlike most investment types, real estate allows you to borrow money to purchase assets beyond what you can afford in cash - and often at a favorable interest rate!
As a real estate investor, it’s critical to understand investment financing options to make the most advantageous choice for your projects. The financing you choose for your next real estate investment will dramatically affect the project's success.
In this article, we’re breaking down your real estate investment financing options. We’ll show you:
- 10 ways to finance a real estate investment project,
- How each of these methods work, and
- Which project (or investor) types each method is best suited for.
10 Real Estate Investment Financing Options
Whether you’re looking to finance a quick fix-and-flip or add a long-term rental property to your real estate portfolio, these borrowing strategies will give your project a financial advantage.
1. Conventional Mortgages
Conventional mortgages are among the most popular financing options for real estate investments. With good credit and qualifying income, borrowers can often secure a loan of up to 80% of the property’s purchase price. This means you only have to come up with a 20% down payment.
The loan is typically repaid over 15-30 years, and you can choose to lock in a fixed interest rate or allow your rate to fluctuate with market conditions as an adjustable rate.
You can apply for a conventional mortgage loan through banks, credit unions, and other traditional lenders.
Conventional mortgages are best for investors with strong credit, looking to purchase single-family homes or smaller multi-family units at competitive interest rates.
2. FHA Loans
FHA loans are insured by the Federal Housing Administration, which allows lenders to offer lower down payments (as low as 3.5%) and more flexible credit score requirements. But there’s a catch: the owner must live on the property as their primary residence. This limits the usefulness of FHA loans for real estate investing. But it makes FHA loans ideal for house hacking.
With an FHA loan, you can purchase residential properties with up to four units. So you could purchase a four-plex with an FHA loan as long as you live in one of the units. Then you can rent out the other units for passive income and enjoy the long-term appreciation of the property as well as the tax benefits of ownership.
This is one of the best ways to start investing in real estate! You can apply for an FHA loan through any mortgage lender that offers FHA financing.
FHA loans are best for new investors looking to live in one unit of a small multi-family property while renting out the rest.
3. VA Loans
Backed by the Department of Veterans Affairs, VA loans are reserved for qualified military service members, veterans, and surviving spouses. These loans offer competitive terms like 0% down payment and no private mortgage insurance (PMI). However, like FHA loans, the owner must live on the property as a primary residence.
If you qualify for VA funding, you could invest in a multi-family house hack, exactly as outlined in the FHA loan section above. Or you could use your VA loan benefits to purchase a single-family live-in flip. This is where you live on the property (either in the primary structure or in another dwelling on the property, like a camper parked on the lot) while you renovate the property for resale.
You can apply for a VA loan through any mortgage lender that offers VA loans. You’ll need to make sure your military Certificate of Eligibility (COE) is in order before applying.
VA loans are best for eligible military buyers who will live on the grounds of the investment property while they own it.
4. Hard Money Loans
Hard money loans are short-term loans provided by private companies or individuals at higher interest rates and shorter repayment terms.
Rather than focusing on the borrower’s creditworthiness as the deciding factor in loan approval, they give more weight to the value of the property being financed. This makes hard money loans a good option for real estate investors with less-than-stellar credit.
You may be able to secure a hard money loan for a short-term project, like a house flip, which can be paid in full upon the sale of the completed project. Or you might use a hard-money loan as your initial funding while you improve your credit score to apply for traditional long-term funding in a year or two.
Hard money loans are best for real estate investors needing quick funding for fix-and-flip projects or those unable to secure traditional financing.
5. Private Money Loans
Similar to hard money loans, private money loans are offered at higher interest rates to buyers who may not qualify for traditional financing. However, private money loans generally offer more flexible terms, such as longer repayment periods.
These loans come from private investors or personal contacts who have more control over borrower criteria and how much to lend.
Private money loans are best for investors with strong relationships with private lenders who may be willing to negotiate more personalized repayment terms. This type of funding is suitable for both flips and development projects.
6. Bridge Loans
Bridge loans are short-term loans used to bridge the gap between immediate financing needs and long-term financing solutions. In many cases, bridge loans only require interest payments during the loan term, with the principal balance due at the end of the term.
Borrowers typically pay higher interest rates for the convenience offered by bridge loans.
Bridge loans are best for real estate investors looking to quickly purchase a property before selling another or those waiting for loan approval on a long-term loan.
7. Commercial Real Estate Loans
Commercial real estate loans are specifically for purchasing commercial properties, such as retail centers, office buildings, or residential apartments with more than four units.
These loans are usually held by banks, but they can also be issued through insurers, conduit lenders, or commercial mortgage-backed security (CMBS) lenders. The terms and rates vary widely but generally require a substantial down payment.
Commercial real estate loans are best for experienced investors with a lot of capital, looking to purchase commercial property.
8. Home Equity Loans, Home Equity Lines of Credit (HELOCs), and Cash-Out Refinancing
Home equity loans, HELOCs, and cash-out refis all allow property owners to convert some of their home equity into cash. This can potentially give you the money you need to fund a portion of your next real estate investment. However, each of these three tools works a little differently:
- Home equity loans are lump-sum loans against your home equity. This loan is repaid in monthly installments, beginning immediately.
- HELOCs are revolving lines of credit. You are given a credit limit that you can borrow against as needed (similar to how you use a credit card). You might make interest-only payments during the initial draw period, followed by principal and interest payments during the repayment period.
- Cash-out refinancing replaces your existing mortgage with a new, higher-balance mortgage. You get to pocket the difference between the new mortgage balance and the previous mortgage balance (minus applicable fees). Importantly, the new mortgage comes with a current interest rate. So this is best reserved for when current rates are lower than the rate on your existing mortgage.
It’s important to note that each of these tools uses your home as collateral. So, failure to repay the loan could result in foreclosure of your home.
Home equity loans, HELOCs, and cash-out refis are best for homeowners looking to leverage their home equity to invest in additional properties.
9. Seller Financing
Seller financing (sometimes called seller carry-back financing) is when a property seller finances the purchase directly, bypassing traditional lenders. The buyer then makes mortgage payments to the seller.
The seller benefits from regular cash flow from the mortgage payments and the ability to foreclose on the loan if the buyer defaults.
Seller financing is best for buyers and sellers in a position to negotiate directly. This is often used when the buyer can’t secure traditional financing.
10. Crowdfunding
Real estate crowdfunding is when multiple investors pool money together, usually through an online platform, to invest in a real estate project. The project is managed by a real estate sponsor, and returns are shared based on the amount each investor contributes.
If you’re a contractor or real estate developer, you might join in a sponsor partnership to have an established crowdfunding platform raise funds for your development.
If you’re an independent investor, you might find that it makes more sense to invest in a crowdfunded project rather than assuming all the risk and financial burden of investing in real estate through direct ownership.
Crowdfunding is best for small investors looking to enter real estate markets with less capital and leverage the expertise of the sponsor to make property-related decisions.
Invest in Crowdfunded Real Estate Projects with Gatsby Investment
Gatsby Investment is a real estate investment company that allows real estate investors to buy into unique deals in the hot Southern California market. No need to worry about finding high-potential deals, securing financing, managing construction, or handling the resale - Gatsby expertly takes care of everything for you!
Choose from these pre-vetted real estate investment projects, including house flips, multi-family developments, and long-term rentals. Don’t spend months scouting potential deals and navigating real estate investment financing options. Join Gatsby and earn higher returns with less effort and less risk!