Real estate investing almost always requires an initial upfront investment, but capital can be difficult to obtain in a competitive market. It is crucial that you have access to multiple forms of financing to keep your real estate investing business afloat, even through troubling financial situations. The market downturn of 2008 affected the entire real estate market, but it most severely affected those investors who had a single source of funding. By diversifying your funding sources, you can reduce your risk and increase your success as an investor.
Financing Options
There is no one-size-fits-all approach to finding a real estate lender. The offer of a lifetime could easily come from a source you wouldn’t have expected. The optimal source for capital is relative to your exit strategy, as discussed in this article. Depending on your exit strategy, you may need to look for short-term or long-term finance options. In any type of investment, you should always see a lender as another member of your real estate team.
Choosing a lender requires time and patience since this person will be lending you a significant sum of money. Lenders will assess whether your investment strategies and previous successes are a good fit for their portfolio, and you should also take the time to vet them. Good lenders seek to mitigate both your risk and theirs by avoiding risky transactions, so you should always choose someone whose judgment you trust.
For more advice on vetting lenders, see our article on assembling a winning real estate team.
Funding with Confidence
Knowing that you can successfully fund a deal is the key to successfully negotiating a deal. If you aren’t confident that you can see a deal through to completion, you are less likely to bid competitively. Your subconscious mind can convince you to make the wrong moves out of fear that you won’t be able to finance a property, even if your conscious mind knows that funding shouldn’t be a problem.
Things to Consider
When choosing between lenders, consider whether each one has the capacity to fund your projects. All lenders have limitations, so it is important to work with someone who has the capital to fund you on a regular basis. On the other hand, you also want to work with lenders who value your business. A large firm with nearly unlimited capital may not place as high of a value on your business as a small or medium-sized firm that works closely with each business.
Another important thing to consider is your time frame for turning a profit. Whether you are planning to flip a property that is already in great condition in a matter of days or to rehab a badly damaged house over the span of months, the amount of time it will take you to generate a profit has a significant impact on your lending options. Lenders often treat rental properties differently than simple flips, so be prepared to explain your exit strategy thoroughly.
Closing also plays a role in your relationship with real estate lenders. Hard money lenders offer the fastest exchange, but they tend to charge the highest rates as well. It may pay off to wait a little longer to close in order to secure a loan at a lower interest rate, but some transactions may warrant immediate funding and be worth the additional cost.
You will need to compare interests within and across loan types. For example, hard money lenders are known for having higher rates, but your lenders should still be competitive with other hard money lenders. Never trust lenders who shy away from giving you the interest rate upfront. Reliable lenders are honest about their terms and rates as well as the amount of funding they actually have. Larger companies can handle a large number of deals at once, but a smaller lending company may have enough to fund your particular project while offering a higher level of customer service.
Securing financing is one of the most difficult aspects of successful real estate investing, but it is also one of the most important. By taking the time to access your cash flow needs thoroughly, you will be able to vet lenders and communicate the needs of your business more efficiently. The lending relationship is essential to effective investing and you should view potential lenders as additions to your real estate team. By using the same standards to assess their compatibility with your business, you can settle on one or more lenders that understand your vision and are able to help you succeed.
