6 Ways to Finance Your Real Estate Projects

So you found the perfect house flipping deal that you have been reading so much about. It’s exactly the kind of real estate deal you see on HGTV. You’ve called your realtor, toured the property, your neighbor who’s a contractor worked up a renovation estimate, you’ve looked at comparable properties and convinced yourself you have found the needle in the haystack. The perfect deal. Let’s look at some important factors before deciding how to finance your real estate investment.

Create A Strict Budget

The first thing you need to do is work up a strict budget. This is not something to draw out on the back of a napkin. Your potential real estate investors want to see that the investment follows a strict budget. A couple factors to consider when creating a strict budget for your new investment property are as follows.

• Closing & carry costs – insurance, utilities, interest, title insurance, survey, etc.

• Sales costs – commissions, home warranty, transfer stamps, etc. (usually they total about 8 percent).

Once you know your budget and you have made an offer and the seller accepted subject to financing, where will the capital come from?

Where Will the Capital Come From?

Will you use your own resources or will you be leveraging all or part of the project? If you’ve done your numbers, the more you finance the greater the return on every dollar you invest out-of-pocket. This example demonstrates the difference between using your own capital and financing:

Using Your Own Cash
Purchase Price: $100,000
Renovation Costs: $50,000
Cash Out Of Pocket: $150,000
Sales Price: $200,000
Profit Amount: $50,000
Return On Investment (ROI): 33%

Using 70% Financing
Purchase Price: $100,000
Renovation Costs: $50,000
Costs of Financing: $10,000
Cash Out Of Pocket: $55,000
Sales Price: $200,000
Profit Amount: $40,000
Return On Investment (ROI): 73%

In this example, while financing your project lowers your total profits, it increase your profit margin tremendously and, with only a fraction of cash invested, you are able to avoid locking your assets into individual projects and spread them across more investments.

Leveraging Your Assets

Even though you may have the ability to pay cash for your project that doesn’t mean you should. As shown in the example above, leveraging your assets increases your return on investment (ROI) and gives you the ability to spread your money and fund multiple projects, while lowering your risks.

Get Financing for Your Real Estate Investments

Traditional Lenders

Banks and credit unions are on the top of the traditional lender list. Traditional lenders typically carry the best rates available but be prepared for a proctology exam. Most traditional lenders require a credit score of 680 or more, full documentation of income and debts, full appraisal and inspection reports, background check, significant “skin-in-the-game” (down-payment) and upfront fees for underwriting the deal. The process can be painful, slow, and repetitive. But, if you have your ducks in a row and are willing to put in the effort, this could be a cost-effective strategy for you.

Seller Financing

This is an ideal scenario since very little documentation is required and it is a quick part of the negotiations. But be wary, because some sellers will offer financing only on the condition of a quick sale. This quick sale may hamper your “due diligence” by forcing a close before you can adequately perform recommended inspections. Sellers are less likely to accept this alternative unless they are either looking for an income stream, subject to taxation on the sale or simply hoping you default.

Hard Money

hard money lender

Get the most from your real estate investments

Hard money is a loan that is issued by private lenders. These loans are normally asset-backed loans that are short term and lent against the After Rehab Value (ARV). These are loan instruments that real estate investors can use to finance a quick fix and flip deal. But beware, quick and easy is not necessarily the best solution.

Hard money loans are not only expensive, but short term. You should expect fees going in and coming out as well as rates to be near usury.  Hard money loan terms are short, so don’t miss a payment or you risk losing the property. There are a lot of solid Hard Money lenders available, but you need to spend considerable time underwriting the issuers.

Family And Friends 

Approaching friends and family is also easy, and they need less convincing than other moneylenders. Have your plan together or, better yet, some portfolio to show and you should have little resistance building to your capital stack.

Keep in mind that family members tend to come with their own sets of complications, whereas with friends or associates, these kinds of emotional issues tend not to occur. Just know that whenever family is involved in business, things can get complicated.

Partners

Partnerships can be a great way to get started investing in real estate. Typically, a person might go to a private investor to get funding in exchange for doing the labor and management in preparation for the resale. You will end up splitting the profits in half, sometimes even more but it is a quick way to build momentum when investing in real estate.

On the upside, this type of partnership isn’t necessary to draw up any formal agreement as you can work on a deal-by-deal basis. But, on the downside you are likely to lose some of the decision making and control over renovation and deal making.

Crowdfunding

Crowdfunding is a relatively new alternative to creative financing real estate acquisitions. The SEC passed a law in 2012, which opened the floodgates for open solicitation of investment opportunities as long as the investors qualify as an accredited investor. With crowdfunding, you can expect competitive rates, underwriting and unbelievable fast turn-around time.

Real estate crowdfunding companies sprung up overnight to raise capital through online portals for investors. Because of this rapid influx of real estate crowdfunding businesses, it is necessary to exercise caution as a majority of these companies are run by technology entrepreneurs and not industry experts. Real estate professionals have the experience and knowledge to properly advise when an investment deal will be viable and worthy to investors.

Finding a company with years of real estate experience that understands the intricacies of finance, development, asset management and acquisitions is very important to successfully financing your real estate endeavors. RealtyeVest has a team of real estate professionals that will assist you in raising capital and leverage your assets to increase ROI for each property you find.

So, if you are a real estate developer interested in leveraging your assets or raising capital for your real estate investment properties, register with RealtyeVest to learn more about becoming a sponsor today.

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