Let’s face it, you can’t achieve financial independence without getting your finances in order. But for those who can gain a modicum of investment capital one of the most popular areas to park their money is real estate.
This makes sense as they aren’t making any more land. However, this strategy is not without its challenges – how to finance your real estate investments. As such, we will explore some strategies that you can employ to get the cash you need to get you on the road to financial independence.
Why Real Estate?
For those who don’t know there are several advantages to investing in real estate. These include tax credits for property tax and interest payments, capital appreciation, and the cash flow boost investors can get from revenue-generating properties. This is a big reason why the IRS reports that many taxpayers report revenue from real estate investments.
But even with the large number of people investing in the sector, many don’t understand how to properly finance these transactions. A big reason for this is that many of the purported ‘professionals’ in real estate finance (e.g. mortgage brokers and bank officers) don’t understand it either. Sure, real estate investing can be complicated – especially if you need to factor interest reserves for construction loans or sale-leaseback agreements. But there really is that very few investors will ever need these tools.
Instead, what most people need are simple solutions to what are relatively straightforward investments. However, you want to keep in mind that there is no such thing as a ‘one size, fits all’ option when it comes to finance. As such, you want to look carefully at the pros and cons when based on the specifics of the investment opportunity you are considering.
Start with Due Diligence
While most investors believe they are experts when it comes to conducting due diligence, the reality is that very few are. However, this doesn’t mean that you can’t acquire the skills and the knowledge to properly research an investment opportunity.
As such, you want to start with a standard approach for every opportunity including the documents you need to check and the metrics that you use to measure whether the opportunity is right for you. It doesn’t matter if you are looking at commercial or residential real estate investments taking a standardized approach to due diligence will save you money in the long run.
An example of this might be looking at the numbers and then seeing how you can use your self-directed IRA to help get the funding needed to close the deal. While this approach does require consideration, it might be a good fit depending on the situation.
Another approach to consider are house flipping loans; as the name implies, flippers use these loans to finance their transactions. However, you want to keep in mind that these loans are best used when you only plan to own the property for only a few months.
- Cash is King
Ok, you might not have a couple of million sitting in your bank account but when it comes to building your real estate empire cash is king. The key here is to be strategic in its use. Maybe you use cash to close quickly on a property and then turn around to refinance after you own the property outright.
Another way to use cash is to decrease the Loan-to-Value ratio of the property you have in mind. In fact, you use the cash to purchase zero-coupon Treasuries – also known as ‘bullets’ – at pennies on the dollar and then turn the bond over as collateral. This approach allows you to lever up your cash without taking on additional debt.
- Conventional Loans
This might be an old-school way to go about real estate financing but for millions of homeowners and investors, it is still the best option. The reason is that ‘conforming loans’ usually offer the lowest interest rates. As such, these loans remain an important option when it comes to financing real estate investments across the country.
- Get Hard
While the name hard money lending might draw to mind images from a Scorsese movie, the reality is that these loans are a favorite tool of real estate investors. These loans are usually short-term in nature and will come with higher closing costs and/or interest rates but the upside is that the underwriting criteria is more flexible than standard bank loans. As such, these loans help investors to close quickly, start to cash flow on the property and then refinance later.
- Creative Financing
Another option is what is known as ‘seller financing’. This is when the seller acts as the bank, either providing the collateral or the financing needed to close the sale. While seller financing is not as common as the other options mentioned here, it can be a great way to structure a transaction especially when there are issues holding back the sale.