Traditional Mortgage vs. Alternative Financing?

Whether a real estate investor invests in a rental home, or joins a real estate investment partnership, financing the investment is always an important consideration. Leveraging your investment can dramatically increase returns and allow investors to take advantage of more and bigger opportunities. Financing, however, will always include risks and rewards that should be weighed carefully before entering into any real estate investment.

Smart investors will almost always use leveraging when investing, and will also use the risk reduction elements that leveraging can add to an investment. You heard me right, risk reduction. I will address risk reduction in a separate article. Here, I’ll focus on some successful ways our foreign clients are financing their investments, and why.

Better Coast Capital's foreign investors purchasing property in North America can usually qualify for mortgage financing through one of our partner institutions. However, a traditional mortgage isn’t always the best financing method. For both convenience and financial reasons, our clients sometimes choose alternative financing.

WHY USE ALTERNATIVE FINANCING?

Ease of obtaining financing is a basic consideration for Better Coast clients. Traditional mortgages require considerable effort. Verification of assets and income from your home country in a way lenders are willing to accept may be difficult. First time investors will also lack credit history in the United States. When you consider that alternative financing can often offer interest rates comparable to mortgages, it’s worth considering both options for financing your investment.

Alternative financing can also be enticing because of flexibility in the interest rate and fees associated with different financing options. Depending on your situation and the property you are investing in, you may find that you can save money by using an alternative financing method. Some loans offer lower interest rates and fewer fees. Lower monthly expenses translates to higher cash flow on your investment, an appealing proposition for any investor.

Some clients have already made good property investments in their home countries and are looking to diversify into the US market. Given conditions in many places around the globe, the stability of a real estate investment in the United States can be a way to achieve peace of mind. For these clients, the ability to borrow against their existing assets in their home country could be an attractive way to achieve their goals. Some alternative financing arrangements can allow our clients to take advantage of existing assets, even in their home country.

Finally, alternative financing can allow investors to achieve a better LTV (loan to value ratio). Especially for first time investors who lack history in the United States, mortgage lenders may not be willing to take as big a chance, lending less money. Alternative financing can provide a higher LTV, because it’s hard to find a lender willing to lend over 65% on a traditional mortgage. Alternative financing methods can allow clients to finance larger percentages of their investment.

ALTERNATIVE FINANCING METHODS

Now that you’re familiar with the reasons investors might seek out alternative financing, let’s take a look at two alternative ways our clients commonly finance their US investments.

Some clients choose to obtain an equity line of credit against a property in their home country. Many of our clients have valuable homes and properties in their home country that have appreciated greatly over time. In some cases it may be possible to take either a line of credit or a mortgage against their existing properties, providing a higher yielding investment in the relatively safe US market. Interest rates for these lines of credit vary by country and personal situation, and Better Coast can help you decide if this is a good option for your circumstance.

Another option is to use an investment portfolio as collateral for a loan. Many of our clients are able to obtain great loans against investment portfolios and savings accounts. These types of loans often come with low interest rates, sometimes as low as prime - 0.5, which can come to an effective APR as low as 1.15% per year. Those rates are hard to beat! If this option is available to you it can be a huge advantage.

RISKS OF ALTERNATIVE FINANCING

Alternative financing options do come with unique intricacies and risks. Better Coast can help explain the risks associated with your individual situation, but here are a few things to consider when financing in these ways.

Currency risk occurs when you are making an investment in one currency and financing it with a loan in another currency. There is no avoiding currency risk because exchange rates fluctuate, changing the values of the investment relative to the financing

Traditional mortgages are relatively easy to manage once they are in place. When using alternative financing methods, you’ll need to be sure your accountant is well-versed in handling investments with more complicated structures.

Alternative financing options that come with attractive interest rates may also have shorter amortization periods than a traditional mortgage. Therefore, your monthly expenses will be higher, creating some cash flow risk. You’ll need to be sure that you’re prepared to meet the payments required by your financing choice, even if you end up with a vacant property. This risk can be greatly reduced by selecting a qualified property management company. A good property manager will ensure that your property is rented to high quality tenants who pay their rent on time. Read more about selecting a property management company here.

Every client has different goals and a different financial situation, all of which affect decisions about how to finance an investment. At Better Coast, we work hard to select high quality investments for our clients, and educate them about the options available and associated risks. Using our experience and contacts with lenders in the United States, we are able to greatly ease the investment process. The result is investment success that maximizes the potential for our clients and allows them to build wealth. To learn more about how Better Coast Capital can help you meet your goals, visit our website.