PROPERTYSPARK ARTICLE

Real Estate Transactions: Safe Finance For Property Investors

With rental income rising around the world, now is a good time to invest in real estate to generate income in the short term and build generational wealth in the long term. Financing a rental property is more expensive than financing a residence, and the terms are more stringent since the lender also takes on some amount of risk. However, the tax benefits, cash flow from rental income and the opportunity to build equity on the property as well as the ability to use leverage to get higher returns are all attractive incentives for potential property investors.

Investing in property is neither easy nor cheap, so there are several investment options for real estate investors. You do not necessarily have to sit on a big pile of cash to be able to invest in real estate. There are lots of financing methods available which can be utilized to generate income from rental properties. Different methods can be used to finance a purchase or an investment, and we will take a look at some of them.

Cash

One of the easiest and simplest ways to finance your investment is to use cash. In this way, you pay the full price of the property upfront. Naturally, it requires you to have the available funds to be able to pull this off.

The best part about financing your investment with cash is that it removes any financing capacity questions that the seller may have regarding you. In exchange for cash offers, you could also acquire the property outright at discounted rates. Moreover, you save a lot of money compared to hard-money loans or other forms of borrowed financing, where interest payments are required.

However, this is a rather conservative approach, and while there is no risk involved, there are no capital gains either.

Private individual lenders

Private lenders operate outside the purview of traditional financial institutions and offer financing to those who increase the value of their investment properties. The biggest advantage of private financing is that it is not as strict as bank financing, where the borrower is scrutinised closely as well as the amount of financing is regulated. If private lenders see you as a good investment, they will invest in you even if you do not have a good credit rating.

The downside of this is that private lenders charge a much higher interest than banks and other financial institutions do, especially when they are taking a credit risk that the former would not. Moreover, you may have to do quite a bit of networking to be able to get funds from a private lender.

Hard money lenders

Hard money lenders charge very high interest rates and lend money for much shorter terms than traditional financial institutions. These are useful for investors who are looking to flip a property instead of buying and holding it for years or looking to secure more stable financing.

Hard money loans can get approved very quickly, sometimes in less than a week, because the scrutiny process is not as rigid as it is with banks. However, the interest charged is significantly higher than traditional bank loans.

Bank loans

This is the most common method for commercial property financing. Essentially, a bank or similar financial institution lends money to a borrower based on their credit history as well as their ability to pay back the loan in the future. The interest rates for investment property are higher than those for residential purchases, but lower than the rates charged by private and hard money lenders. Moreover, depending on how much cash you have for the down payment, you can maximize your returns using a bank loan.

The downside is that banks have very strict requirements when it comes to being able to apply for financing. The overall lending profiles are stringent and the approval process takes very long. Moreover, banks can have a limit on the number of conventional loans a borrower can have open at a time.

Financial hurdles are a part of real estate investment, and all property investors have to face them at some point. If you want to add real estate financing to your investment portfolio, it is time to look through the available options to understand which works best for you.