When financing investment properties, many investors turn to traditional lenders first but there are many other creative options to consider.
Option 1: Traditional Lenders – work well when investing in residential real estate from single family homes up to four unit properties. Banks and mortgage companies are considered traditional lenders. They often require a 20% down payment from your own funds and verify credit, income and assets.
Option 2: Commercial Lenders –best option for larger multi-unit properties, retail, office, industrial, etc. Large banks usually offer commercial loans and require 20% to 35% down payment. They often are a little more forgiving with credit, income and assets than a traditional lender and often look at the strength of the project as the dominant factor. Other independent commercial lenders are available that may offer other options.
Option 3: Private Lender – an option available to some investors who often know someone personally or can be introduced to someone who would be willing to finance a project for them. These individuals can act as a bank and other times they may want a percentage of the project.
Option 4: Seller Financing – creative financing option that some sellers are willing to entertain especially for a short period of time such as a Lease Purchase Option. Sellers could act as the bank for the entire duration of the loan but often sellers want to cash out immediately. Again, in certain circumstances some sellers may be willing to hold papers for 1-3 years until the buyer obtains other financing.
Option 5: Self Directed IRA – investing with tax-advantaged accounts could dramatically increase your wealth. This type of IRA provides a contributor with the ability to save for retirement and to choose where the money is invested such as in real estate. Monies can be transferred from existing retirement accounts over to a self-directed IRA so that an investor can start investing in real estate right away.
Option 6: Hard Money Lenders – this type of financing is usually used by investors who cannot get financing any other way. The down payment and interest rates are often much higher than any other lending choices but credit, income and assets are not usually factors. This may be a good option for a short term loan.
Option 7: Crowdfunding – this is the newest financing option on the scene and it has taken the commercial real estate market by storm. It is estimated that more and more large projects will be financed by groups of investors pooling their funds together rather than relying on commercial lenders. The government has now come out with guidelines regarding crowdfunding on large real estate projects to protect the public. Smaller investors are pooling funds as well on smaller projects with mixed success.
Knowing all of your options for financing investment properties is key in the commercial real estate market!