Choosing the right type of financing for your investment property can make or break your deal. Today we will look at the 4 most common types of money for financing, the associated costs, and when to use them.
Cash
They say “Cash is King” for a reason. It’s quick, flexible, widely recognized, and cheap (not considering opportunity cost, which is an entirely different topic). Cash buyers sometimes have access to deals that are not offered to financed buyers, and they almost always get preferential treatment. Furthermore, cash buyers can sometimes get away with paying lower prices because there is no risk for the buyers financing to fall through.
Leveraging cash with the next 3 money options can increase returns exponentially.
Bank Financing
Bank financing is usually the cheapest form of financing you can get. Banks will require experience, great credit, and strong cash reserves. Given that, this is not always an accessible source of funds for investors. They also are notorious for being SLOW getting to the settlement table/funding construction draws. When using bank financing, make sure you have plenty of time to meet all the requirements of the bank, and have some runway on your contract expiration.
Expect to pay a 4-7% interest rate when considering bank financing for your next deal.
Private Money
Often times called “Friends and Family” money, raising private capital is a great way to leverage the benefits of cash without needing any of your own. There are some great books written about private money and the best ways to utilize it. The cost is dependent on what kind of return you can offer an investor on a specific deal, your relationship with the investor, and how much risk each party is willing to take on. You might consider paying in the 8-12% range for private money.
I personally like to use this type of financing to purchase and renovate, OR cover the out of pocket costs while mixing with Hard Money.
Hard Money
Hard Money financing is a great tool underutilized by investors. Hard money lenders can close quickly, and can lend on a variety of assets/borrowers. Rates may vary and are deal dependent, but you can expect to pay between 8-15%, typically. Hard money lenders are often investors themselves in your local market and can be a huge resource for you as an investor. Hard money lenders will often times require you to have “skin in the game” by asking you to bring a downpayment. If you’re tight on cash, you might leverage hard money lending with private money lending for 100% financing on your next deal.
Having a good hard money lender in your back pocket is a strong key to success when growing a real estate investment business.
In summary, there are many ways to finance your next investment property. Consider these 4 types of money and how they can affect your return on investment.
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