5 Ways to Finance Your Real Estate Business
- September 27, 2021
- 5 min read
- 133 reads
When you’re new to real estate investing, one of the challenges is to secure the required capital.
For a new investor, understanding how to finance a real estate transaction is as important as finding one; the lack of real estate financing hampers many new investors in today’s market, simply because they are not aware of the options.
Real estate financing refers to the funds needed for an pending deal. Investors will secure capital from a specific lender or source, to purchase a property. Like traditional financing, real estate finance has specific terms and requirements that must be clearly understood.
Luckily, regardless of your current financial situation, there are a few options that can help you find the best real estate finance.
We’ve listed five of the best ways below.
1. Private Lenders
Private lenders are often a popular real estate funding option among real estate investors.
These investments are not funded by a bank, but from a group or private individual.
As these loans don’t need to go undergo complicated approvals, they often come with lower eligibility requirements which means they may also be easier to obtain.
In addition, private lenders are often more willing to invest in riskier projects.
However, investors are able to repay the loan before having to sign an intermittent contract.
When it comes to commercial real estate finance, private lenders for business startup loans often have higher interest rates and may also require larger down payments or personal security. Private loans usually have shorter repayment terms than those offered by traditional loans – on average only one or two years.
2. SBA Loans
Small Business Association (SBA) loans offer a repayment guarantee to banks that wish to lend money to new entrepreneurs. The guarantee from the SBA makes banks more willing to take risks.
While the affordability of the loan will depend on the investor, an SBA loan for real estate typically has higher borrowing limits, up to $ 2,000,000.
The longer repayment terms and protection against balloon payments are attractive features for borrowers and can help to stabilize their cash flows.
Note: SBA loans cannot be used to invest in real estate, but can be used to start a real estate business such as a brokerage fund or a property management fund.
Unfortunately, the security of SBA real estate loans comes at a price.
In addition to being subject to high fees, investors must be creditworthy and able to show significant returns on their tax returns to qualify.
The application process for an SBA loan for real estate investment is also lengthy and requires the borrower to provide personal assets as collateral.
Real estate investing used to be reserved only for people with a lot of money. However, after the Labor Act of 2012 was passed, investors who want to diversify their portfolios found it much easier to accomplish with real estate crowdfunding.
Instead of having to personally search for properties to renovate, investors can browse real estate crowdfunding platforms to find a suitable project to invest in.
Investors can then choose to finance a property stake at a low cost – which can even be less than $ 1,000.
They can then pay the rent or collect some of the profits after the project is completed.
With this in mind, crowdfunding projects do come with an increased risk.
Compared to a traditional fix-and-flip model, investors don’t have a lot of control when it comes to the outcome of a project.
Also, keep in mind the return on these types of investments may take longer, depending on its structure.
Should the project fail, it is the investor who will take the loss – not the builders.
Microloans are usually aimed at newer companies or start-ups that need capital to grow further. As the name suggests, these loans are smaller than those typically offered with traditional bank financing.
Lower balances mean that microloan programs are less stringent in terms of eligibility requirements such as a credit score, which can be comforting for those interested in borrowing in excess of their funds.
Note: The interest rates on microloans are usually higher than those offered in standard loan programs.
However, microloans may not be suitable for everyone.
Although microloans can often go up to $ 50,000, the average loan is around $13,000, so it’s important to evaluate your overhead appropriately.
If you don’t want to apply for a loan, you can choose to go with rollover for business startup (ROBS) providers.
With this type of funding, business owners can withdraw available funds from their retirement accounts and it won’t trigger a payout or incur a tax penalty.
Note: As with SBA loans, you cannot invest in real estate with ROBS.
Since it’s their own money, there is no debt repayment, allowing them to invest it all in growing the business. In addition, should the business fail, it won’t adversely affect their assets or creditworthiness.
As an investor, before committing to ROBS, make sure you consider the risks.
Keep in mind that they can only withdraw the money that is available in their existing accounts, so they may have less available funds than with a loan.
Accordingly, if an investor chooses to invest all of his pension funds in the business and the business does not succeed, he may be left without a proper retirement.