Real estate is simply one of the most profitable investment sectors. The cash flow you get from your properties can help you build wealth quite rapidly. We won’t go into details of just how fruitful real estate investing is in this post, but you can always read our previous blog poststo learn more about it. For beginners in real estate investing, we encourage these tips for first-time landlords.
Once you have decided to dive into the real estate market, you will now be looking at sources to fund your real estate investments. This is a tricky part of this business. With increasing restrictions on bank loans for investors, it has become quite a no-go path for some people, especially small-scale investors. However, that has not stopped the real estate market from flourishing over the last few years by finding non-traditional ways to fund real estate investments.
How to Fund Your Real Estate Investments
You might think that you need to slowly save 20% for a down payment. This is the traditional method of buying a property, but did you know there are many other ways to fund your real estate investments? We are now going to look at six ways methods to help you get the cash you need to build your real estate empire. Experts and beginners in real estate investing can take advantage of these funding opportunities.
1. Friends and Family Investing
Family always comes first. This is probably the main reason for you to confide in them and even ask for their help when looking for funding on your investment deals. If no one in your immediate family and circle of friends is financially capable of helping you in this regard, there are always acquaintances that they may be on good terms with.
A very positive point with this source of funding is that you can always count on it even if something doesn’t go as planned. On the flip side, this same point can quickly turn into a lot of negativity and may even harm your relationship with the involved party. Another benefit you may get from this particular source of funding is that if it comes from an immediate family member, they may not want much in return. At the very least, they might not expect to collect interest on their loan.
2. Borrowing hard money
This type of funding is kind of similar to those that you may receive from your friends, family, and acquaintances. The lenders of these funds are not part of any institutions, like banks or money-lending organizations. This is private money where the traditional borrowing and lending rules do not apply. The only difference between this type of funding and the ones from your family and friends is that the borrowing fees in this are usually a lot higher than the traditional funding sources like banks or even family and friends.
Given this fact, you may not want to opt for this source of funding, but that would be unfair to the potential it holds for your investment. Hard money lenders do not care about your past financial records; rather, they just look at the opportunity or value of the investment that you take with you to them. If they like your proposal, the money will be yours. Typically this is a short-term solution for investors to buy and rehab properties, or use the cash to close. Due to the high interest rates, it is ideal to convert to a loan with more friendly terms and rates.
3. Real Estate Crowdfunding
If you have a solid investment plan in hand and an equally good opportunity has presented itself to you, you may be looking for quick funding for this investment. Unfortunately, this is simply not possible with traditional funding sources and in many cases, even with your friends and family. Not many people walk around with enough money to fund your real estate investment.
There is another option that is commonly referred to as crowdfunding. Crowdfunding is similar to hard money in that its fees are much higher than traditional funding sources, but it’s a quick solution for your real estate investment problems. You can take to the internet and begin a campaign. In return for funding you, the investors will expect to receive their initial capital and then some. Learn more about the top crowdfunding sites.
4. Have tenants pay your mortgage
This is probably a lesser known technique of funding your real investment, but it is very effective. If you don’t have too much capital to start with and you are not the biggest risk-taker, this is a very good fit for you. You can buy a property where you move in yourself, but the property has enough space for a tenant to move in as well. This is commonly referred to as “house hacking.” A common technique for beginners in real estate investing.
House hacking is also know as the BRRRR method. This process is an opportunity to buy a rental property as your primary home and re-purpose it to as a rental property. If you’re curious how to get capital for real estate investing, this is a great solution that does not require too much capital.
When you get a single-family home, you will have to share the property with the tenant. If you get a duplex or larger building, the tenants will have full autonomy. There are various mortgages for these scenarios, but tenant income will help increase your ability to pay off the property.
Suggested blog: Multifamily Real Estate Investing – Is It for You?
5. Sell what you don’t need
Again, this may not seem like a very effective way of funding your real estate investment, but it actually is if you get into it. Analyze your lifestyle. What are the things that you can give up to secure your future by investing in real estate? You’ll be surprised by the number of things that you possess that are unnecessary expenses.
Selling these items may bring in enough to reach your financial goals. Old electronics and other items can be sold on eBay, Craigslist, or a variety of apps these days. People might even want your lightly worn clothes or shoes. Parting ways with something you don’t use will put money in the bank and declutter your life.
Also consider giving up certain expenses you routinely accrue. Review your monthly transactions and discover which items you truly need and which are luxury items. Cutting cable and quitting the gym membership, if you’re one of the 15% who pay-and-go, could be an opportunity to save at least $100-200 per month! Eating out and alcohol are also very expensive. You can cut expenses and help save for your down payment.
6. Asset-Based Mortgage
This is another useful source of funding where, unlike traditional funding sources, your personal income doesn’t come in the way of your real estate investment. These lenders are only concerned about the type of investment and how much rental income it can secure for you.
So, even if you currently have an unstable income and you go to these lenders with a solid real estate investment opportunity, they might lend you money. The best aspect is that you can borrow cash for multiple properties using this type of real estate funding, so it’s much more flexible than traditional funding sources.
7. Use HELOC for funding
If you already own property and have enough equity, you can take advantage of that equity. A ‘Home equity line of credit’ allows homeowners to collateralize the equity of their home for access to capital.
Said different, you can get a loan close to the amount of equity you have. If your home appreciated $50,000 over the last 5 years then you can take out a line of credit against that $50,000.
The way HELOC’s work is an available line of credit that charges you interest when you need the cash. Continuing with our previous example, if you got a HELOC for $50,000 but do not pull any capital on it for a year there will be no interest charged. However, if you pull out $25,000 then interest will start to accrue immediately.
Beware the risk of market conditions. If the market suddenly drops 15%, the HELOC lender may ask for their loan due immediately.
A lot of beginners use a HELOC for their first real estate investment.
Friends and Family Investment
Some say never to mix family and business. For some, that is great advice. However, that does not always apply to every relationship. A lot of beginner real estate investors started a successful portfolio with friends and family investment.
This specific topic could deserve its own blog; it’s that important.
Put it in writing
When partnering with friends and family for investment properties, treat this as a professional partnership. Yes, trust is important and starts off high because of the relationship. However that trust can quickly vanish. Any agreement should be put in writing. This protects both parties.
Don’t rely completely on trust. Expert investors behave this way. Beginner investors too often skim over this important advice. You want your capital partner to be interested in funding future real estate investment deals. This is a great strategy to protect that trust.
Avoid beginner mistakes
We added this section to bring extra attention. To best preserve the relationship, it is important to learn the mistakes that many investors stumble through. Avoid the mistakes that beginners make in real estate investing. Read our blog about the biggest mistakes investors make during the buying process.
Your friend and family might make requests, especially if this is your first time. For example, hiring a property manager to manage the investment property. Don’t take this personally. You want them to feel comfortable with the investment opportunity. If they do request this, understanding how to hire a property manager is important.
If you are going to self-manage, take the time to inform them of your strategy. Learn self-managing tips. Set up a system to help automate the process. This is the value that Burbz or other landlord software provide. Convince your partner that your management will be ran organized and not willy nilly.
Funding for investment property
The beautiful part about this blog is it applies to your friends or family for capital! Even if they do not have the available cash, they can tap into their own network to help raise capital.
For example, friends with little cash can utilize the home equity option. Setting up a HELOC and pulling capital when needed.
What to do after buying a rental property?
Once you have your investment property, do you know all the steps to take to maximize profitability? Tenant placement, vacancy, turnover, and maintenance can all become a headache. Beginners in real estate investing often consider hiring out property management. Which typically consumes 18-20% of your gross income.
Instead, consider an incentive-based property management. Simply called Co-Management. Co-Management is for experts and beginners in real estate investing. Co-Management is an affordable and lower risk opportunity to ease into self-managing. Or, perhaps you are an out-of-state investor and need local presence. Landlords have complete control and transparency over their rental properties. Learn more about Co-Management. Or, calculate your potential savings compared to traditional property management.
If you are more of a do-it-yourself person, use our software to simplify all aspects of managing a rental property. You can advertise your rental, find tenants, and collect rent efficiently thanks to Burbz.