Real estate is an investment and a big milestone for anyone, and while it may take longer to acquire, real estate value will always fluctuate. Before you know it, the property you eyeing could have increased in value. This is how real estate financing options will help you secure your property. It is a necessity for anyone since not all have the financial capacity to purchase upfront. Understanding financing options for startups will also help fund your first deal if you’re considering on increasing closed deals. Real estate financing will provide options to make closing much easier.
Financing Options in Real Estate: What and Why
Real estate financing is the process of securing funds through several financing options. Investing in real estate requires a considerable amount of money. Financing options ensure security when buying or renovating your property.
Financing options are essential in real estate startups for several reasons:
- Affordability: Much like purchasing a condo for sale, real estate requires a certain amount of money. Financing options make these accessible to buyers by allowing them to afford various methods.
- Encourage homeownership: Owning a real estate is a milestone for most individuals. It is not only homeowners but those that have families as well.
- Diversify your portfolio: Instead of a single property, investors can maximize their portfolio through multiple properties, reducing risk, and having higher returns.
- Credit building: A great opportunity for those increasing their credit score.
- Flexibility: Financing options are catered for individuals with different budgets and allocate to their specific needs. Besides that, not only for private real estate but also for commercial buildings.
Knowing the right type of real estate financing to choose will help maximize your portfolio and will depend on the requirements you can fulfill.
What Are the Real Estate Financing Options
Traditional options
FHA Loans
Federal Housing Loans are more accessible and affordable for homeowners especially those with lower credit scores.
If you want to get a loan with more flexible requirements, FHA loans also have a lower down payment and easier qualifications. In the Philippines, the FHA loan is similar to the PAG-IBIG housing loan.
Bank Loans
When a real estate startup needs funds, one of the most popular financing options is bank loans. Bank loans provide necessary capital however, have specific requirements.
Keep in mind the following when choosing to finance through bank loans:
- Credit Scoring: Having a good credit score is needed to avail of a mortgage loan.
- Loan Terms: Documentation, agreement, and duration are other terms that the borrower and lender need to agree upon.
- Income Source: Lenders need to know that you have the capacity to make your monthly payments or the ability to pay a loan.
- Down Payment: Depending on the loan type, borrowers are required to make a down payment to secure the loan.
Non-traditional options for financing
Private money lenders
Private money lenders offer flexible and accessible financing options in real estate investment. Rather than traditional banks or institutions, these are individuals or companies that offer short-term loans.
If you’re looking for quick access to capital or if you have a low credit score, private money lenders will offer loans for your startup. The interest rates for private lenders are higher than traditional loans.
Lease-to-own
Lease-to-own or rent-to-own, is a loan typically for buyers who cannot pay upfront or immediately. It’s beneficial for both parties since the buyer can move into their property whereas, the owner can earn monthly income through rental.
The loan typically has the following conditions:
- Agreement: Contract to specify the time period
- Initial payment: Make upfront or down payment by the lessee
- Monthly payment: Similar to traditional rent, payments are allocated to purchasing of real estate.
- Option to purchase: At the end of the lease, includes an option to purchase the property.
- Decision point: Decide whether they will purchase the property.
Hard money loans
Hard money loans are the type of short-term loan offered by private money lenders. This type of loan is secured by a property’s value (collateral).
When applying for hard money loans, the process is quicker which is preferred by real estate investors looking for fast cash.
Private money loans whereas, have a more flexible and personalized approach considering the individual borrowing circumstance.
Seller financing
This type of financing option allows buyers to borrow from the seller themselves instead of applying for a mortgage loan or through financial institutions.
It is usually preferred by individuals who do not have enough credit scores, lack sufficient down payment, and wish to avoid paying closing costs.
The buyer makes direct payment to the seller through installments on the agreed duration. Once payments are completed, the buyer will then be the full owner of the property.
Angel investors
Typically known in business ventures, angel investors in real estate financing options, invest their funds in real estate projects or ventures. This is in exchange for the profits gained from the sale or rental income.
Keep in mind that this type of real estate financing option requires the business to have a foreseeable income or promising opportunity for them to invest.
Alternative financing options
REITs
Real estate investment trusts are companies that pool funds from multiple investors from income-generating properties such as commercial buildings, malls, hotels, and the like.
REITs allow investors to invest in real estate without having to directly own a property. Similar to mutual funds, REITs have diverse portfolios for real estate properties.
There are risks similar to most investments such as fluctuating property values, interest rates, and economic conditions. However, they offer higher ROI or return on investment than the traditional financing options.
Crowdfunding
Another way for startups to earn funds is through crowdfunding. This method is similar to borrowing money, you raise funds to fund a real estate project.
Like REITs, return on investments are higher and allow investors of real estate to invest even with small capital.
Home Equity Loan
Home equity loans are another valuable option for real estate startups. They allow homeowners to borrow money equivalent to or against the value of their home.
Home equity has lower interest rates and fixed monthly payments. Besides that, home equity can also be used to invest, renovate, and buy properties.
Before proceeding, it’s important to seek financial assistance to know the risks and ensure due diligence.
Tips to Get Funds for Your Real Estate Startups
Improve your pitching
Regardless of how good your real estate business is, if your pitches are not enticing your clients, it will be difficult for you to communicate your proposal. Better pitching could increase your sales, improve client relationships, and get more recommendations. After all, closing deals are important in real estate.
Use technology
Technology may not be at the forefront of real estate but it could help in building your real estate startup. So venture into different opportunities on how to get into real estate financing.
Managing
Managing your startup allows careful planning and areas of growth such as setting your financial objectives, diversifying your portfolio, conducting due diligence, and monitoring your performance such as staying active in your real estate startup.
Prioritize cash flow
Secure clients where that will generate or boost your sales. Networking helps in real estate, so it’s important to meet new people and be the person they first call when making real estate deals.
Related Blog: How to Close Deals Better
