Follow the Money Trail: Financing Solutions

[Rick Howell]

One of the most common complaints in the investing world is the difficulty in finding financing. Savvy investors have options outside traditional channels. If you know your personal investment style and goals, you can find an option that works for you. Here are four popular capital sources.

Bank Financing

Traditional banks are the most commonly used source for capital. This works best for buying properties you intend to keep in your portfolio long term. Interest rates are competitive, and the turnaround time can range from 30 to 45 days. However, there can be a few hurdles, including few programs for damaged credit. Banks are looking for borrowers who fit their criteria, which include:

• good credit
• low debt-to-income ratio
• significant down payment

Private Money

As the name implies, private money comes from individuals willing to loan you the cash. A friend, family member, or co-worker may have the means and desire to assist in securing the property you want to rehab. You are creating a partnership. Mixing money and friends or family can be tricky, so proceed carefully. Communicate goals, hesitations, and strategy before committing. On the plus side, these arrangements are more flexible than traditional channels and you and your partner can allocate the funds as needed.

Hard Money Lenders

Working with hard money is more like securing a line of credit, rather than a traditional loan. These lenders have terms, fees, and guidelines, but instead of evaluating credit scores, they look at the potential profit. They can also use personal assets as collateral. Closings are quick, and hard money lenders are easy to find. Most real estate agents, attorneys, and mortgage brokers have connections to hard money lenders. This option may not work for every deal, but they have their place in the industry.

Existing Portfolio

Don't forget to look at your own portfolio if you need money. Since property values generally increase over time, you may be able to sell off some assets to raise capital. By reinvesting that money, you might be able to avoid tax penalties. You can also look at refinancing or taking out a home equity line of credit (HELOC) on a high-performing property. With a HELOC, you only repay the money you use, and interest rates are generally competitive.

While the prospect of securing financing can seem daunting, the money is out there. Any of these four options are potentially the right solution for you. With some due diligence and an understanding of your personal goals and strategy, you can find the capital you need.