I’m sure you’ve heard the saying, “there’s more than one way to skin a cat.” First off, that’s the most messed up saying ever! Who the heck is out there skinning cats?!?! That’s just wrong!
But when it comes to real estate financing, it’s true - there really is more than one way to skin a cat.
In this article, I’m going to outline a few of the different ways to finance a real estate investment. If you’re looking to make your first purchase, this article will be even MORE impactful. Because, low key, you DON’T need a crazy amount of money to purchase your first investment property. Emily and I bought our first investment property - a value add four-plex in South Minneapolis - with less than $10,000 in the bank! And we did a $150,000 renovation within the first two months of ownership! How the heck is that possible with less than $10,000…? I’ll tell you, there’s more than one way to skin a cat. ;)
Ok, let's dive in!
Below are four popular (and creative!) ways of financing a real estate investment property:
The holy grail for the first time investor! Literally, I don’t think it gets better than this! The FHA loan allows buyers to put down just 3.5%! Think about this, if you want to buy a $300,000 property that’s just $10,500. I think that’s so slick! Getting into an investment with little money out of pocket where you get to realize 100% of the cash flow, now that’s a win!
Here are some of the catches… 1) you HAVE to live at the property - meaning, if it’s a multi-family you’ll need to occupy one of the units. 2) There are loan limits on single families, duplexes, triplexes, and four-plexes. Those limits can be found here. 3) The FHA appraisal/inspection process is notoriously brutal - meaning, Sellers are less privy to accepting FHA financed offers and if you’re lucky enough to get an FHA offer accepted there may be some work you need to do to past FHA guidelines (peeling paint, broken windows, handrails, etc.).
All things considered, if you’re looking to get into real estate investing and aren’t rolling in the dough, then FHA financing could be a great way to get started.
Conventional financing is the typical way we think of financing a property when we’re talking about getting a mortgage. Conventional financing typically is 20% down - although, there are lower down payment conventional options out there.
Conventional financing is a great route for the traditional buyer or the buyer that has been frugal enough to save up a sizable down payment for their investment purchase. This was certainly NOT ME when I first got started!
Private Equity/Hard Money
Ok, this is where things get creative! Maybe you’ve found yourself a great deal but you have NO IDEA how to finance it..? This is where private funding and hard money comes into the equation. First off, what is private or hard money? Essentially, it’s a person (maybe a parent or co-worker) or an entity (hard money lende) that personally loans you the capital required to purchase the real estate investment (potentially including money for renovations) and then you pay them a set interest rate over a period of time (typically on a short term hold).
The monthly fees associated with private and hard money are generally the most expensive - between 8-16%. Although, if you’ve got a great deal or need capital for renovations this is one of the best routes out there.
Let's paint a scenario… You’re looking at purchasing a duplex. You’re talking directly with the Seller. You come to find the Seller has owned the property for twenty-five years. They own the property outright. And they HATE managing the property but DON'T want to sell right now because they don’t want to pay the capital gains that come with a sale. Solution? The Contract for Deed (or seller financing).
In this scenario, you negotiate the terms directly with the seller. You agree to pay them a small down payment (again, negotiable) and then a set interest rate, paid monthly, until a balloon payment is due for the entirety of the purchase price at a later point in time.
This allows the Seller to step away from day to day management. They still get to the cash flow from the property in the form of interest payments. And they get to prepare for the tax event to come down the road. And you? Oh yeah, you got yourself an investment property with little money out of pocket! BOOM!
These are just a few of the ways to finance your first (or next) real estate investment purchase. Things begin to get REALLY exciting when you start to COMBINE these different forms of financing into the same transaction - like when Emily and I bought a six-unit apartment building with $0 out of pocket! The Seller carried 90% of the purchase price and we privately funded the remaining 10%. Now that was a homerun!
As always, I’m more than happy to dig into any of the above or do a DEEPER dive into other creative solutions to help you step into your first deal.
Schedule time to connect with me anytime: https://meetings.hubspot.com/paul314/chat-w-paul.
Posted by Paul Begich