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How to pay for your real estate investments?

So you’re on board with the idea that investing in real estate is profitable and think you have the right personality to be an investor? Great! Now comes the hard part: Paying for it. This is THE issue that makes or breaks your ability to be an investor. There are opportunities around every corner, but if you don’t have access to money, your investing days are over before they begin.

Unless you are going to owner-occupy a property,  you simply must be able to bring cash to the table. The days of 100% loan are long, long gone. Putting 25% is pretty much the norm for most loans nowadays. Not only that, but other than FHA 203K loans, finding a lender who is willing to finance repairs is nearly impossible. Most of the best deals on the market today involve distressed properties that need work.  So you’re e going to have to find the money to pay for fix-up if you want to be able to get into these deals. At least until the property seasons long enough to refinance.

Whether you are financing properties or not, the reality is that you are going to need at least $25,000 to do much of anything in this market. Even a $60,000 house or duplex is going to take $15,000 cash down to secure financing, and you’re going to be hard pressed to find something that doesn’t need at least $10,000 worth of work. If you can meet that threshold without overextending yourself, you can probably swing a deal.

So now that you know how much you need, assuming you don’t have a truckl0ad of cash sitting around, you’ll need to determine how you are going to get all that money together. Here are a few options in the current market:

  • Traditional financing: Local and national banks, as well as mortgage brokers, are still going to be the best source for large-sum and long-term lending on anything four units and under. Expect to pay around 25% down, but interest rates should continue to be well under 7% for the foreseeable future. Make sure you talk to at least one mortgage broker and as many banks as possible before settling on a lender.
  • Lines of credit: Pulling out equity from your home or other investments should be done with caution, but is a great way to free up funds. Many investors buy and repair properties with cash from a line of credit, with the intent of financing the finished product six months or so after purchase. You should always check with your lender before taking this route, but it can be a great path to affording multiple properties in a short period of time.
  • Hard money lender: If you are looking for short-term money to leverage a property while  you do repairs, this remains a viable option. Interest rates and fees are generally higher and less hard money is currently less available than in years past, but if you develop a successful relationship with a hard-money lender it can really add a lot of flexibility to what kinds of projects you can take on.
  • Private lending: Technically, most hard money lenders are private, but I am referring to the type of money that comes from a less seasoned source. Someone like a family member, friend, or even an acquaintance with the desire to invest their money. This kind of money relies mostly on your own personal network, but if you can find a backer with deep pockets, you can both benefit greatly. Since you are generally not competing with other investors for these funds, this money can be more reliable and flexible as well.
  • Partnership: In many ways a partnership is a more formal and permanent form of private funding. Instead of just borrowing money under certain terms from someone, they actually have a stake in the property itself. Whether you split profits 50/50 or 75/25, if you need help with managing your investments and/or paying for them, finding a partner can be a great way to open up your options.

Despite the less than ideal lending environment of today, you are not without options. Whatever way you end up paying for a property, just make sure you put any relationship down on paper. Even with family members and lifelong friends, record documents and use caution when utilizing private lending or settling on a partner.If you do your homework and keep your head, the sky is the limit.

So now that you have settled the financing aspect of investing, there is one last thing you need to before you buy: Locate your contractors.


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Matt Kastner

Matt Kastner is an Investment Real Estate Consultant at St. Louis Real Estate Society in St. Louis, Missouri. He is also develops properties on the side through Threshold Properties. When he isn’t representing investors in the purchase or sale of multifamily properties, rehabs, foreclosures and other income producing properties, he is often taking on rehab projects himself. He lives in South St. Louis and has been in the real estate business since 2004.

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5 thoughts on “How to pay for your real estate investments?”

  • David

    March 26, 2010 at 4:33 pm

    Great article and very pertinent to today’s market. I’d say somewhere between 75-90% of would be investors are held back by a lack of funds to invest. Personally, I believe Private lending is the way to go. Hard Money lenders are getting closer to traditional lending these days. I prefer that to partnerships b/c partners will want to call the shots and it leads to butting heads. You’re right: the investor who has access to money has a much better probability of success. I look forward to reading your future posts.

    Reply
    • Matt Kastner

      March 26, 2010 at 4:40 pm

      Thanks for sharing your thoughts. I hear you on the partnerships. I used private investing on the the house I just rehabbed and it went over a lot better than the partnership I had on the previous one. Simply avoids the issue of having too many cooks in the kitchen.

      Reply
  • Kevin

    April 13, 2010 at 4:07 pm

    I’m now an advocate of using your home as a piggy bank for purchasing rentals or rehabbing. People got into problems not because they borrowed money, but because they borrowed it and blew it on things that don’t give a good return on investment or produce a stream of income.
    Whether you go adjustable or fixed rate cashout, the rates on this type of secured loan cannot be beaten. You have to be in a pretty solid cash flow situation though.

    Reply
    • Matt Kastner

      April 13, 2010 at 4:12 pm

      All too true. Now is the time to leverage things in that way. Back in the early 00’s and late 90’s when people were pulling out money they were simply buying toys. And when they bought investments, they often overpaid. Its all about making the right choices.

      Reply
  • Steve

    May 27, 2010 at 9:58 pm

    All too true. Now is the time to leverage things in that way. Back in the early 00’s and late 90’s when people were pulling out money they were simply buying toys. And when they bought investments, they often overpaid. Its all about making the right choices.

    Reply

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