September 6, 2017 by Brandi Jackson
Real estate investing is about leverage. Getting the highest return on investment often means putting the least amount of capital into the project. This means that the real estate investor must be comfortable with borrowing money in order to finance a project. This means that the investor has to be aware of sources of capital when looking for real estate loans.
Seeking Funds From Family and Friends
A significant percentage of entrepreneurs and real estate investors got their first seed capital from this source. While the downsides are obvious, the potential to share wealth in the form of investment return is also part of the equation. Keep in mind that when borrowing from family members the IRS establishes a minimum interest rate that must be charged to avoid imputed gifts. The Applicable Federal Rate depends on the term of the loan and can be either accumulated or paid monthly.
Loaning Money From Banks
Banks are in the business of lending money, and a good banking relationship can be a real asset to the real estate investor. Traditional Banks tend to be on the conservative end of the lending spectrum. Banks may not be as sanguine about a project as the real estate investor. Providing sufficient documentation on the ability to repay a loan may be difficult for a larger project. It may also be difficult if the real estate investor is still working a full time job.
Hard Money Loans to Fund Real Estate
Hard money refers to lending done by private investors to others. Loans are secured by the real estate collateral and are typically shorter in duration than bank financing. The interest rate is also typically higher than that charged by a bank. However, hard money lenders are able to make credit decisions more quickly and with less paperwork than a bank.
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Real Estate Crowdfunding For Your Loans
Crowdfunding is a method of financing real estate by allowing multiple lenders contribute portions of the total loan amount necessary for the project. It requires an online lending platform, such as Sharestates, to act as the intermediary between the borrower and the multiple lenders. It is an innovative method of financing real estate transactions that can have a higher interest rate than hard money lenders. But on the flipside, crowdfunding can also lend on more innovative projects.
Where to Go For The Best Loans?
The most obvious answer is that the best place has the lowest rate. This is because the cost of borrowing is a direct deduction from the return produced by the real estate investment. A lower rate means a higher return for the real estate investor. Terms of the loan, including personal guarantees can influence this decision. In general the lower the rate the more attractive the financing package.
One important caveat is that borrowing from the same source for a second project is easier, assuming a successful completion of the first deal. This was alluded to when discussing the value of a good banking relationship. So, the type of real estate projects the investor is contemplating in the future may influence where they turn for borrowing. Investors who plan on growing in the business might be well advised to choose a lender that is a better fit for tomorrow, over a lower interest rate today.
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