There are always plenty of options when it comes to the world of real estate investing. There are almost limitless ways in which investing can transpire. However, prior to making an offer, there is one thing that needs to happen. The first thing you need to do is to have your real estate financing in place. You have to decide how much to put down as a down payment. You also have to determine whether or not to use your own cash or to use private money funding. All of these options are viable, but not all of them are the best option for every deal. There are several financing options for a reason. Each property and scenario is different. To maximize profitability, you need to know which financing options are best for you.
Financing represents the starting point for any new deal. How you decide to finance your deal will directly impact cash flow, profitability and your portfolio. In some cases, such as lender financing, your options are rather limited. However, in others, you have the ability to finance some, all or none of the transaction. What you want out of your business, and the property specifically, will determine what you want to do. If you are looking at the property as a short term hold, you may be willing to put more money in knowing that you will get it out quickly. If you think the property will take six months, it may be too long to tie your cash up and you will want to put less money down. Before you can proceed with any options, you need to know your goals and have a plan for your business.
While getting a bank loan is much more difficult than in the past, it is still a viable financing option. This is the option that will allow you to get into the property for a minimal amount, while still having ownership. Most investment loan programs require anywhere between 20-25% down, depending on the credit score and the number of units in the property. It should go without saying, but the more you put down, the lower your mortgage payment will be. The smaller the loan size, the less the payment would change if you put more money down. Before you determine how much you want to put down, you should play around with a mortgage calculator and see just how much the payment changes with the change in loan amount. If you are looking at the property as a long term hold, you may want to consider putting more money down and giving yourself instant equity. If the property is a quick flip, you may want to preserve your cash for the rehab work if another property comes along in the short term. Let the numbers tell you what is best.
If you have your own cash to purchase the property free and clear, you have a whole new set of options. This is certainly a good problem to have, but it doesn’t mean you have to or should use all of it. If you own the property outright, you can eliminate any loan repayment and see a tremendous increase in the monthly cash flow. You will also have 100% equity in a property, which will give you the option of refinancing or taking a line of credit at any point in the future. On the other hand, you may have used most or all of your cash for any subsequent deals. There are limitations as to how quickly you can take cash out and you may not be able to use the updated value for 90 days or more. You will also be limited to 70-75% of the value when taking cash out of an investment property. If your plan is to buy more properties, you may be better served putting half of the money down and financing the rest. If your goal is to hold the property long term and use it as a retirement vehicle, you are would want to pay the whole thing off and bank the monthly cash flow until you have enough saved to purchase future properties. Again, your goals and current situation will dictate a lot of what you should do.
Another option is to utilize private money to fund your deals. You have much less risk, but your reward is minimized as well. You will be on the clock to get the property sold to reduce your interest payments. Depending on the rate and fees, you stand to make a lot less than you would if you have alternative financing. The plus side is that you are using little or none of your own money and are still netting a profit without using personal capital. If you can do this a few times a year, you will build a nest egg to either fund your deals with cash or use the money as a down payment for a bigger property. While you may not use private money on every deal, you should have the option in place in the event the right deal comes along.
Using the right financing can make the difference between having money to buy an additional property every year or being saddled with a mortgage you don’t want to have. If you are on the fence at which option is best for you, ask a mortgage broker or talk to a fellow investor you trust. Having cash to use is nice, but you need know how to best make it work for you.
