Despite the global health pandemic, the real estate market is quite healthy. And with rates low (and probably low for a few years to come), now might not be a bad time to purchase a property. There are numerous ways to finance a real estate investment. Each has its pros and cons that must be carefully weighed before purchase. Here is an overview of the options you have available.
Pure cash
Your first option is no financing at all – just give a pure cash offer. This is helpful in competitive bidding. Since financing can fall through at the worst of times, sellers find all-cash offers attractive. Some are willing to even give a discount to all-cash buyers.
Some houses are in such a state of disrepair that banks won’t lend money to buy them. This is where cash comes in quite handy. You’ll have less competition because very few people would have the assets necessary to make a deal.
The big drawback to all cash is that it limits your gains. The ability to use leverage is a big reason what makes real estate a great investment. For example, rates are around 3% now. Let’s say your return is 10%. If you have a mortgage, you are borrowing at 3% and making 10%. With cash, you’re limited at 10%.
Private investor
They are more flexible than conventional lenders. The interest rate is higher but they can move much quicker. You’ll have to find them at real estate meetings.
Hard money loans
This is typically used by those pursuing a fix-and-flip strategy. Flippers take them out until the house can be sold or traditional financing is obtained. Lenders can move quite rapidly – sometimes in as little as a week. The interest rate is very high. If you can’t complete the renovations on time you might end up with nothing.
Conventional mortgages
This is by far the most popular option. They have a stringent lending profile and the approval process is very long, sometimes taking as much as a month. But the interest rates are typically the lowest.
For those in the military, there are no downpayment mortgages available from the veteran’s association.
Consider “house hacking” – living in a unit while renting out other units. This might be a small hassle but it can pay off in the long run.
There are more than one ways to skin a cat. And there are multiple options available to you to finance a house. Consider your options carefully.