Financing Basics for First-Time Real Estate Investors

Becoming a first-time real estate investor can be a daunting task. The most difficult obstacle to overcome is often financing. With the right financing in place, however, investing can be much easier than you think. Here are four basics you need to know before you get started.

Conventional Loans

If you have a great credit score, a low debt-to-income ratio (DTI), and plenty of money to put down, you can simply go to your favorite bank and apply for a conventional loan. Your bank can be an investment property lender if you have all the right qualifications. As a first-time real estate investor, however, you probably lack at least one of the three.

FHA Loans

Federal Housing Administration (FHA) loans are government-backed home loans that require the property to be owner-occupied. While that may sound like an immediate "no" to you, think again. Many newbie investors use an FHA loan to purchase a duplex, triplex, or fourplex. Commonly called 'house hacking,' they live in one unit while renting the others out, which is perfectly allowable with an FHA loan.

It is important to note that this method does not work for multi-family units with more than four units. A multiplex with five units or more is considered a commercial property and will require a commercial loan with a different type of investment property lender.

Investment Property Loans

There are plenty of mortgage companies that work exclusively with real estate investors. While some only underwrite 'fix and flips' with a term of only a few months, other investment property lenders are happy to underwrite 'buy and hold' properties that will be used as both long- and short-term rentals. Your job as a newbie is to find the right investment property lender for you and your strategy.

Hard Money Loans

While this type of loan is not for the faint of heart, it is an oft-used solution for real estate investors. A hard money loan is a short-term loan (think months, not years) that is secured by real estate. The loans are funded by private individuals or companies, not by traditional lenders such as banks or credit unions.

The biggest advantage of a hard money loan is that you can get funding fast, regardless of the home's condition. The biggest disadvantage is that you will likely pay a higher interest rate and have a shorter term than you would with a conventional loan.

As you can see, a variety of financing options are available to first-time real estate investors. It is important to remember that, while all have pros and cons, the fees charged by banks and other investment property lending companies are simply the cost of doing business. Simply factor the fees into your exit strategy to have an accurate picture.

To learn more, contact an investment property lender such as Prosperity Lending  - David Maier.