How to Fund Your Real Estate Investments
Real estate investment is an excellent way to simultaneously generate profit and provide sellers with lucrative alternatives to traditional property sales. However, buying property in Hawaii to begin your investment operation requires capital. Many with the knowledge, skills, and energetic capacity to begin investing in real estate are deterred by a lack of funding.
If you’re looking to break into real estate investment, don’t fret about limited cash flow. There are several venues through which new investors can secure adequate funding and create a rewarding real estate investment operation.
Cash
The simplest way to go about buying property in Hawaii is to strike “all cash” deals. Of course, “all cash” doesn’t mean paying thousands in bills, so don’t go buying a larger wallet just yet. Typically, paying “in cash” requires an investor to write a check to a title company. The title company will then, in turn, write a check to the seller. In other instances, investors and sellers exchange funds through a wire transfer from the bank.
Though all-cash deals are straightforward and simple, they are not necessarily practical for new investors. If you are investing in your first property, you do not yet have the luxury of re-investing profit to grow your capital. Unless you have considerable personal income, you may want to dodge cash deals and instead examine your loan options.
Mortgage
While 24% of US investors finance their investments utilizing their own funds, the majority of investors choose to make a down payment on a traditional mortgage. In many instances, financing is more profitable than all-cash deals. You are likely to obtain a larger return on your investments making down payments for mortgages on multiple rental properties than by utilizing all of your funds to purchase a single rental property.
Conventional mortgages are the most popular mortgages issued to homebuyers. They typically require a minimum 20% down payment and offer the lowest interest rates. Investors can access these loans through banks, credit unions, and mortgage brokers. These institutions usually borrow funds or sell your loan to government supported institutions instead of utilizing their own capital.
Portfolio Lenders
Because most conventional mortgage lenders do not use their own capital, these loans are typically attached to several regulations and restrictions, often making them prohibitive to new investors.
Portfolio lenders, on the other hand, use their own funds to issue loans. In so doing, they are able to offer loans that are less stringent than conventional mortgages. Portfolio lenders also have more lax criteria for qualifying borrowers, rendering them more accessible to new investors buying property in Hawaii. However, many banks do not make their status as a portfolio lender explicit. If you are looking for a portfolio lender, you will likely have to make several direct inquiries to lending institutions.
Hard Money
If you don’t want to use a bank, you may want to consider hard money for buying property in Hawaii. Hard money is a short-term, high interest loan issued by either a private business or a professional individual. Hard money financing is beneficial because you can pay it off quickly, provided you are reaping adequate returns on your investments.
Many hard money lenders will not verify your income or demand credit references. Additionally, a hard money loan will have no impact on your credit score. Thus, hard money is ideal for investors with substandard credit and/or limited income. However, many investors find themselves in a financial bind at the end of the loan term. If you choose to use hard money, you want to be confident that you will have an alternative form of financing when your loan term ends.
Private Money
Non-professionals looking to reap a greater return on their cash issue private money to real estate investors buying property in Hawaii. Unlike hard money, private money is incredibly flexible, as private moneylenders often have a connection or relationship to the borrower. Fees are modest to nonexistent, and both interest rates and terms are negotiable.
Borrowing from a private lender is not like casually borrowing from a friend, though. The private lender will obtain a promissory note or a mortgage on the property that you are investing in. If you fail to make payments to a private lender, they can foreclose on the house.
Like hard money, private money’s accessibility is largely outweighed by its long-term consequences. Without a proper exit strategy, investors using private money may suffer losses. Private money is great for investing in properties to which you know you can add significant value in a short period of time, selling at a high enough value to pay off your loan and make a profit. For new investors who are still learning the game, hard and private money may be too risky.
Owner Financing
Owner financing may be an option when investing in a property that the current owner already owns; that is, the current owner has paid off their mortgage. Owner financing requires that the owner fund the property. The investor then makes incremental payments to the seller rather than to a lending institution.
Owner financing can be a great way to fund investments for both pros and novices buying property in Hawaii, provided the owner is capable of funding the property. Before settling on owner financing, establish clear and direct lines of communication with the owner to assess their capacity to fund the investment. Having quantifiable, specific, written agreements is a must.
Home Equity
Home Equity Lines of Credit and Home Equity Installment Loans allow you to leverage the equity of your personal home to purchase investment properties. Oftentimes, banks have little interest in what it is that you are utilizing your loan for so long as your are capable of repaying it, making the loan more accessible to those purchasing properties in need of repair.
You might be surprised just how substantial your Home Equity Loan is. It is not unusual for lending institutions to loan you 90% of the value of your home. However, that 90% represents the total permissible debt on your home. Whatever portion of your mortgage is yet unpaid will be subtracted from that 90% value. For example: If your home is worth $300,000 and you are allowed a 90% debt on the house, your permissible debt is $270,000 dollars. However, if you still owe $200,000 on the home, the bank will only loan you $70,000.
This type of loan is ideal for investors who own valuable property and are looking to flip investment properties that banks would typically be reluctant to finance. Many investors also take out Home Equity Loans to fund down payments and obtain mortgages on their investment properties. If you are a renter or a new homeowner who hasn’t made many mortgage payments, a traditional line of credit may be more appropriate.
Commercial Loans
If you are looking to invest in a commercial property, a commercial loan may be your most suitable option. Like residential lenders, commercial lenders will examine your credit and income to determine how much they will lend you. However, they also pay more attention to the revenue that a commercial property will generate. The more lucrative the property, the greater the amount your commercial lending institution will be willing to loan you. They may even offer business lines of credit to fund repairs or remodels. Commercial loans are excellent for investors that have low incomes but are confident that they are purchasing commercial properties that will generate abundant revenue. Be wary, though, that the shorter terms and higher fees and interest rates are prohibitive, particularly to low-income investors.