Investment Funding
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How to finance an investment property
Conventional loan
While conventional mortgage lenders usually aren’t the best option for flips, they can be great for your first one, maybe two rental property loans. Why only one or two? Because conventional lenders operate within tight credit guidelines. First, they almost always report to the credit bureaus. That means your conventional rental property mortgage will appear on your credit report. Which is fine for one or two mortgages. But most conventional lenders won’t lend to you if you have more than a couple mortgages appearing on your credit report. The good news about conventional rental property mortgages is that they tend to be less expensive than other financing options. Lower interest rate, lower points and closing costs, the works. Think of them as training wheel rental property loans. Great to get started, but then you’ll want to move on.
Hard Money (Asset Based Lending)
A hard money loan is a short-term loan that is most suited to flipping an investment property as opposed to buying and holding, turning it into a rental, or developing on it. If you don’t plan on flipping the property then using the other options would be more cost effective and convenient. The benefit to using a hard money loan to finance a flip is that it can be easier to qualify for than a conventional loan. Hard money lenders still take into consideration your credit and income but the property’s profitability is the primary focus. Typically, hard money loans can fund and close a lot quicker than a conventional mortgage. This is another reason why this type of loan would be beneficial when flipping a home. There are drawbacks to hard money loans. The main one being, the interest rates can be significantly higher than a conventional loan. Some lenders may even give a short timeframe to repay the loan.
Repair Financing
A construction loan is a short-term financing option that is used for new real estate or renovation projects. The purpose of this type of loan is to pay the costs of renovating a property or building a new one. Typically, those who utilize a construction loan will only borrow what they need and the loan is only applicable for the time it takes to finish the project. In other financing options, the loan is usually given directly to the borrower but with construction loans the funds are distributed directly to the contractor. It is given in segments that are called “draws.” Draws are given at certain points of the project, marking when a particular part of the project is completed. The main appeal of construction loans is that they enable investors to build a new property or renovate an investment property. But with that freedom, comes higher than average interest rates.
Security
- Closing at a title company
- Any reputable real estate company will utilitize the services of a title company to ensure the transaction is done legally and that clear title is delivered.
- Title Search
- Once the executed contract is sent to the title company and title is opened on a property they will start the title search process. This includes the following:
- Check ownership of the property
- Search for any liens that may be attached to the property
- Check the property taxes
- Once the executed contract is sent to the title company and title is opened on a property they will start the title search process. This includes the following:
- Escrow Agent
- No money changes until all closing documents are signed by both parties
- The escrow agent is a neutral third party in the transaction