“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie, billionaire industrialist
For millions of Americans, real estate provides the opportunity to build wealth and pursue financial freedom. If you’ve considered real estate as an investment opportunity, you’ve undoubtedly come across the issue of financing your acquisition. Whereas investing in the stock market can require less than $10 for a share of a company, private real estate requires substantially more. Real estate often requires financing due to the price of property – few investors have $200,000 ready to be deployed in full. Determining the appropriate financing method is specific to the investor and the property.
Real Estate Financing Sources
A basic overview of real estate financing sources is included below:
- Cash – If you have sufficient cash, you can simply purchase the property outright. However, many real estate investors take advantage of leverage to maximize their returns even if they have sufficient cash.
- Government-sponsored Loans – There are a litany of government-sponsored loans available to investors depending on their specific circumstances and the property in question, including FHA loans, VA loans, and 203K loans. These loans require you to live in the property for one year but offer investor-friendly terms. Many real estate investors have built their wealth through the use of these loans via house hacking.
- Bank Loans – Banks offer loans for investment real estate, although the specific terms and provisions will be determined by your individual profile. Generally, banks will require at least 20% of the property’s value in down payment for investment real estate.
- Private Money – Due to restrictions on mortgages, some investors find themselves pursuing private money to finance real estate investments. Private money is money that is loaned from non-financial institutions, such as friends, family, or other private individuals. These loans are the most flexible in terms as they are the least regulated, which means that investors should consult with an experienced real estate attorney prior to committing to any private money loan.
- Hard Money – Hard money is similar to private money in that it is not a financial institution lending the money. However, hard money lenders are specialized and often a lender of last resort due to exorbitant interest rates.
- Seller Financing – Sometimes, the current owner is willing to finance the deal. In this situation, the seller both sells you the real estate and gives you the loan to purchase the property from them.
Contact the Law Offices of Richard Palumbo
Financing real estate becomes increasingly complex as investors build their portfolios, with some transactions involving a combination of the above sources to maximize returns. At the Law Offices of Richard Palumbo, we have successfully represented Rhode Islanders in real estate transactions and disputes for more than 100 combined years. We have extensive experience in investment real estate, particularly in real estate finance. If you are considering financing a real estate acquisition, please contact our office to set up a consultation or complete the contact form.