Different Types of Real Estate Loans for Emerging Investors
Investing in real estate is one of the more popular investment options for entrepreneurial-minded individuals. When starting out, you will quickly discover that real estate acquisitions require a greater amount of upfront capital than other business ventures. Such a large capital outlay can sometimes be a barrier, which is the reason many real estate investors look to debt financing and the various loan options available.
Traditional loans are popular among first-time and even subsequent home buyers. Such loans are funded directly from the lender, usually a bank, and typically require a 20 to 25% down payment to avoid purchasing mortgage insurance on the residential property serving as the collateral. For those that intend to initially occupy the residential property, rates are generally a little better than for those that intend to immediately use the home as an investment property. The downside to such loans is that they generally take longer to fund, and require more documentation to evidence owner income and existing debt.
Hard Money Loans
A hard money loan is a good option for an investor looking to secure capital quickly. Hard money loans are offered by private investors, as opposed to banks or other traditional financing institutions. Such loans are short-term in duration, usually offered at higher interest rates, and are secured by the property being purchased. Hard money loans are used for quick turnarounds between the purchase and sale of a property, or for immediate financing until the buyer secures a traditional loan.
Bridge loans are similar to hard money loans, but offer a bit more flexibility. A bridge loan may be obtained from private investors or from a traditional lender. And bridge loans may be used for a variety of purposes whereas a hard money loan will be secured by a specific asset, or property. In short, a hard money loan is a type of bridge loan, bridging the gap between a purchase and sale or between short-term and longer-term financing.
Business Line of Credit
If you have a good credit history, you may be able to finance your real estate investment using a business line of credit. You can be approved for a specific credit line limit and pay on the balance over time. This is ideal for investors that plan to purchase multiple properties in the future as the credit line is revolving and can be used repeatedly. Additionally, a business line of credit may permit payments as low as interest only, allowing you to better manage cash flow.
If you’re considering debt financing as an option for your real estate investment venture, then consider using one or more of the options discussed here. Whether you’re just getting started, or looking long-term to grow your real estate portfolio, there are a number of real estate financing options available to you.