Funding Sources For Your Real Estate Investment

There are many ways to fund real estate investments, from traditional lenders like banks to more creative options. Traditional lenders include banks, credit unions, and other financial institutions offering long-term loans at lower interest rates. However, they have stricter loan terms and qualification criteria. Hard money lenders and private lenders are alternative options, with the former being business owners who provide short-term loans at higher interest rates and the latter being individuals offering flexible loan terms. Other sources of funding include retirement accounts, credit cards, crowdfunding websites, friends and family, and equity partners. Real estate investment funds and online platforms also provide opportunities for investors to access funding and diversify their portfolios.

Retirement accounts

Self-Directed IRA

A self-directed IRA (SDIRA) is a type of retirement account that gives you more control over your investments. With a SDIRA, you can invest in a broader range of assets, including real estate. You can open a SDIRA as a traditional or Roth IRA, but you'll need to do so through a custodian, which may limit your options. Additionally, SDIRAs typically have higher management fees. When investing in real estate through a SDIRA, make sure you understand the rules and regulations set by the Internal Revenue Service. Keep in mind that acquiring the necessary capital for real estate investments can take time, and there are risks involved.

Real Estate Investment Trusts (REITs)

REITs are companies that own, finance, or manage properties. You can purchase shares in a REIT and receive income from your investment. REITs tend to pay high dividends, making them attractive for retirement investments. They can provide lower volatility and steady income, but there may be a lack of liquidity, and returns can vary depending on the type of property. REITs are a good option if you want the stability of real estate without the work and risks of owning physical property.

Rental Properties

If you have sufficient funds, you can finance a piece of property and rent it out. This could be a duplex, apartment complex, or even your own home, where you rent out a room or a separate apartment within your house. Being a landlord comes with responsibilities and potential risks, such as tenants who don't pay rent or unexpected repairs. However, rental properties can provide a steady source of income and help fund your retirement.

Online real estate investment platforms allow you to invest in real estate projects through debt or equity. These platforms often require a significant amount of money to invest, and the investments tend to be illiquid. However, they can provide an opportunity to finance real estate projects without dealing with tenants or property management.

K) or Similar Retirement Accounts

Depending on the rules of your retirement account, you may be able to use a portion of its value to invest in real estate. For example, you might be able to take out a loan against your 401(k) to fund an investment property. However, not all retirement accounts allow for this type of withdrawal, so be sure to check with your provider and consult a tax professional before making any decisions.

Credit cards

If you have a good credit score, you may be able to take advantage of various benefits that credit cards offer. For example, some credit cards offer rewards or cashback on purchases, which can help offset the cost of investing. Additionally, some cards have introductory offers with low or 0% interest rates for a limited time, which can be beneficial if you plan to pay off the balance quickly.

However, it's important to remember that credit cards often have high-interest rates, typically higher than traditional loans. If you carry a balance on your card and are unable to pay it off quickly, the interest can add up fast and eat into your profits.

One strategy to consider is using a credit card with a long 0% APR (Annual Percentage Rate) period for initial purchases. This can give you some breathing room to invest and pay off the balance before the higher variable APR kicks in. Just be sure to read the fine print and understand when the 0% APR period ends and what the variable APR will be afterward.

Another option is to look for credit cards that offer rewards or cashback specifically for real estate-related purchases. Some cards may offer bonuses for spending on things like construction materials, rental properties, or other investments. These bonuses can help offset some of the costs of investing.

It's important to exercise caution when using credit cards for real estate investing. Here are a few tips to consider:

• Pay off your balance promptly: Try to pay off your credit card balance as quickly as possible to avoid accumulating high-interest debt.
• Compare cards and choose wisely: Shop around for credit cards that offer the best terms and benefits for your needs. Look for low-interest rates, favourable rewards programs, and other features that can benefit your investment strategy.
• Have a plan: Before using credit cards to fund your investments, ensure you have a clear plan for how you will use the funds and how you will pay off the balance.
• Monitor your credit score: Keep a close eye on your credit score and only use credit cards if it remains in a healthy range. A good credit score can give you more options and better terms when using credit cards for investing.
• Be mindful of fees: Credit cards often come with various fees, such as annual fees, balance transfer fees, and foreign transaction fees. Be sure to understand all the fees associated with a card before signing up.

In summary, while credit cards can be a convenient source of funding for real estate investing, they should be used wisely and with caution. They are best suited for those with good credit scores who can take advantage of rewards programs and pay off balances promptly. If used correctly, credit cards can provide a flexible and accessible funding option for real estate investors.

Crowdfunding websites

Yieldstreet

Yieldstreet is a crowdfunding platform that provides investors with access to a wide range of alternative investments, including real estate, commercial, legal, and art. The platform is only open to accredited investors, with a minimum investment requirement of $10,000. It offers a range of diversified alternative investment funds and individual projects. The fee structure is reasonable, starting at 0.00% for notes.

EquityMultiple

EquityMultiple is a commercial real estate and technology firm that offers a diverse range of private real estate investments to accredited investors. It provides a wide variety of investment offers, from short-term to income and capital appreciation, with projected rates of returns ranging from 10% and above. The minimum investment requirement typically ranges from $10,000 to $30,000, with many offers having minimums near the lower end.

RealtyMogul

RealtyMogul is a crowdfunding platform that offers both REIT funds and individual commercial real estate investments. It is accessible to both non-accredited and accredited investors, with a minimum investment requirement of $5,000 for the REIT funds and $25,000 to $35,000 for individual projects. The website is opaque and difficult to navigate, and the fees are relatively high. However, it provides investors with access to a diverse range of commercial real estate investments.

Fundrise

Fundrise is a crowdfunding platform that offers online access to a variety of real estate debt and equity investments, with a small initial investment requirement of $10. It provides investors with the opportunity to become owners through the initial public offering (IPO). The fees are transparent and reasonable, and the platform offers quarterly redemption windows. However, early liquidation is subject to penalties, and quarterly liquidity is not guaranteed.

CrowdStreet

CrowdStreet is a crowdfunding platform that partners with real estate companies to co-run and market a range of crowdfunded real estate deals. It caters to sophisticated commercial real estate investors, providing detailed commercial real estate investment documentation. The platform vets potential real estate projects, and only those that pass the strict screening process are included. It typically has a high investment minimum of $25,000, and the number of available investments may vary depending on the economic environment and market trends.

Arrived Homes

Arrived Homes is a crowdfunding platform that offers small investors access to the rental home and vacation home markets through a fractional share ownership model. Investors can invest in single properties with as little as $100 or choose to invest in a fund that includes multiple homes. It provides quarterly liquidation opportunities and true proportional real estate investment ownership through an LLC structure. However, the fees are difficult to estimate, and the projected cash flow returns are lower than current cash equivalents.

DLP Capital

DLP Capital is a private financial services and real estate investment company that caters to affluent investors and real estate managers. It offers a diverse range of opportunities through its five funds, including real estate debt and equity funds. The minimum investment requirement is high at $200,000, but the company provides transparency around the 2.0% management fee.

Private lending

Private lenders are individuals who offer large sums of money in exchange for a return on investment (ROI). They are not associated with any business or financial institution, which means they can set their own lending criteria and be more flexible with loan terms. This makes them an attractive option for real estate investors as they can often receive funding in a matter of days.

Private lenders are particularly useful for investors who need to move quickly on an investment opportunity and don't want to go through the lengthy process of getting a traditional mortgage. The approval criteria for private loans are usually less strict, and the application and underwriting process is generally less rigorous. Private lenders also tend to be more flexible about the types of properties they will provide funding for, often specialising in complex loan requests like developer financing and blanket loans.

There are several things that private lenders will consider before offering a loan. Firstly, they will look at the borrower's credit history and financial standing. While private loans are not credit score-driven, the lender may pull the borrower's credit history to ensure there are no recent bankruptcies or foreclosures. The lender will also want to see an exit strategy, which is a way for the borrower to back out of a real estate deal while minimising losses. Common exit strategies include refinancing, securing a construction loan, using income from another business venture, or selling the asset.

Private lenders also set their own parameters for the types of collateral they will lend on. For example, some lenders will only lend on residential assets, while others will lend on commercial and land assets as well. The location of the asset is also important, as many lenders focus on specific markets.

It's worth noting that most private loans are interest-only, which means the borrower will only pay the interest on a monthly basis, with the principal amount due as a lump sum at loan maturity. Private loans also tend to have shorter repayment periods than standard mortgage loans, making the monthly payments more expensive. Additionally, private loans are considered commercial loans, so the asset must be an investment property and cannot be used as a primary residence or second home.

Traditional lenders

Down Payment

Credit Score

Your credit score is an important factor in securing a loan from a traditional lender. They have strict requirements and will assess your creditworthiness based on your credit history and ability to repay the loan.

Income and Financial Information

In addition to your credit score, traditional lenders will also consider your income and financial situation. They will verify your income, review your financial records, and assess your ability to make regular loan payments.

Loan Terms and Conditions

Approval Process

The approval process with traditional lenders can be lengthy, taking weeks or even months. This is an important consideration if you need to move quickly on a property.

Relationship-Based Lending

Compliance and Regulations

In summary, traditional lenders offer a reliable and established route to funding your real estate investments. However, they come with stricter requirements and a longer approval process. If you are considering this option, ensure you meet the financial criteria and are prepared for a potentially longer wait to secure funding.

Frequently asked questions