What are Real Estate Loans for Investors?
One of the most profitable ways to invest and make an incredible income is with investing in real estate. It is the process of purchasing property either rehabbing, or to rent out, or to gain money from appreciation in the value of the property. Investing in real estate is not like investing in a car. A car depreciates in value, but most real estate appreciates in value.
People who are successful at flipping homes, for example, can especially profit from real estate investments. These are people who typically buy property, fix it up, and then sell it for a higher value. It is a classic example of the benefits of real estate investment.
Can some people buy real estate without a loan? Yes. However, the one thing about real estate is that it is expensive, and the average person is not in a position to purchase real estate without a loan. Therefore, often, to get into real estate investment, you need a real estate loan. What are real estate loans for investors, and what are some of the types?
Hard Money Loans
There are short term loans, and there are long term loans. A short term loan allows you to borrow money for a short period. Depending on the loan, they can have a period of anywhere from two weeks to three years. They are easier to get but are often more expensive in the long-run than long-term loans.
A long term loan is the opposite of a short term loan. They are harder to get, meaning there are more requirements, but they last longer and have lower interest rates. A 30-year mortgage with a 10 percent interest rate, is an example of a long term loan.
A hard money loan is a short-term loan, from one to three years, that is common in the world of real estate loans. It is a kind of loan that is not offered by traditional lenders, such as banks. Therefore, it would not be like a mortgage provided by a bank. With this kind of loan, the value of the property is collateral, not the creditworthiness of the person seeking the loan. They occur with residential and commercial properties.
There a number of pros with hard money loans. For example, borrowers can receive funds faster than with traditional loans from traditional borrowers. In some cases, funds can be received the same week the borrower applied for the loan. This is because less paperwork is required for a hard money loan. Also, the repayment schedule for a hard money loan can be less stringent. In other words, instead of losing the loan for missing a payment, for example, the lender may apply higher financial penalties that the borrower has to accept.
However, a major con of this kind of loan is that they typically have a higher interest rate. A 30-year fixed mortgage, for example, with a 10 percent interest rate has a low interest rate that doesn’t change. With a hard money loan, the interest rate may not change, but the rate will likely be higher than 10 percent. Also, if borrowers default and are unable to pay back their loans, lenders can take their homes away. A hard money loan, therefore, is not much of a risk for a lender because the lender will get their money back one way or another.
What are the typical reasons to seek hard money real estate loans for investors? If a person is in need of emergency funding, this kind of loan may be a solution. If a person has poor credit and is unable to get a traditional loan, a hard money loan could give the person the funding he or she needs without all of the paperwork that would normally prevent them from getting such a loan. Some people seek these kinds of loans to keep their homes out of foreclosure, for example. Another example is seeking short-term cash for flipping a home. The borrower can take the hard money loan, get the property, fix it up, sell it, and then pay back the loan – all in a short period of time.
Private Money for Hard Money Loans
Hard money loans are based on the cost of the property. With PMI or private money investing, it is the source of the funds that are given to hard money borrowers. With hard money loans, they are not traditional loans with money that comes from a bank, for example, as stated above. These are loans with money that comes from private money investors. Therefore, without private money investors, you would not have hard money loans.
Private money investors are typically small mortgage brokers involved in commercial real estate lending. A PMI can be an individual, a group, a company or a set of funds that pool private money. So for examples, a wealthy individual could be the source of hard money loans, or, an investment company could be the source of hard money loans.
Being a private money investor is attractive because real estate can be a good investment. An investor can receive monthly income from real estate investing, and it can become more lucrative than typical investing such as money market funds. With hard money loans, as mentioned above, the investor will likely get their investment one way or another.
To receive funds from a PMI, a borrower would approach a PMI and seek funds. The information a PMI would need would include the value of the borrower’s property, how much money is needed, etc. If the borrower defaults, the private mortgage investor gets their investment by taking the borrower’s equity in the property.
Fix and Flip Loans
Loans known as “Fix and Flip” are loans that house flippers seek. What is a house flipper? It is a person who buys homes, fixes them up or leaves them as is, and then sells them for a profit. Flipping homes has become a major money maker in the 21st-century. For a house to qualify as a flipped house, the time between when the house was purchased by a flipper and when the house is sold must occur in a short period of time – typically from a few months to a year.
Fix and Flip loans give real estate buyers finances to buy a home to flip for a higher price. They are provided for not only single family homes but also multifamily homes. These are short-term loans that last anywhere from one year to three years. Sometimes they’re called hard money loans, and sometimes they are special loans under their own category known as fix and flip loans.
Fix and flip loans are typically not just used to purchase a property; it’s also used to fix a property for reselling and to cover things like property taxes, homeowner’s insurance, etc., until the property is resold. A person who gets involved in flipping houses must understand all that is involved in the process to be successful.
Getting a fix and flip loan offers a number of pros if your goal of flipping a house goes exactly as plan. You could make a sizable profit with every house you flip. Let’s say you buy a home for $50,000 and it cost you $40,000 to fix it up. Then you sell it for $150,000, you’ve made a $50,000 profit. There’s also less competition buying a home for flipping. That’s because in most cases, these are homes that need a lot of work. Most home buyers are not interested in buying a home that they consider to be a headache. Nor do they want to put the time and the finances into a home that they consider to be a headache.
The cons with getting a fix and flip loan is, for example, when you go about trying to rehab and sell a property the wrong way and don’t cover all of the costs. The goal is to make money and not lose money. People who don’t do house flipping properly can lose a substantial amount of money.
Business Lines of Credit
Other types of real estate loans for investors include what is known as lines of credit. These are different from hard money loans or fix and flip loans. It is a line of credit to invest in real estate. You’re familiar with credit cards. For example, you have a credit card with a $10,000 amount. You can use that credit card for up to $10,000, not including the monthly interest that you have to pay. How lines of credit works is you have access to a certain amount of money and you only pay interest on the amount of money you use. With real estate lines of credit, the amount of money you have access to is often much higher than a credit card with much less interest rates.
One of the pros of a real estate line of credit is that you can draw from the fund multiple times for whatever real estate uses you need. Another pro of real estate lines of credit is that the fees for this kind of credit are typically lower than for a hard money loan, for example. Still another pro is that this kind of loan can be used not only for short-term investing, but also long-term investing. Also, a real estate credit line doesn’t require collateral or other financial statements.
Some of the cons that could occur with real estate lines of credit is that you must have a good personal credit report and a good credit rating. Another is that there may be restrictions on the use of funds.
All kinds of real estate investors can benefit from real estate lines of credit. A fix and flip investor, for example, can get one of these loans, flip a house, gain the money, and then pay off the loan.
Stated Income Loans
In 2008, there was the housing market crash. Stated income loans were popular before this happened. The Dodd-Frank Act of 2010, heavily regulated housing real estate loans that lessened the popularity of stated income loans.
A stated income loan is a mortgage, but unlike other mortgages, the borrower’s income is not verified. In other words, the borrower doesn’t have to show their pay stubs, bank account, income tax returns or other financial documents. They simply need to state their income, and that statement is taken at face value. A stated income loan has lower rates and fees than a hard money loan. Those are the pros.
The cons of this kind of loan is that there is often a large down payment required. Closing costs are typically higher than traditional mortgages, etc.
These kinds of loans were popular, for example, for people who want to flip non-occupied properties. It is illegal for this kind of loan to be given for a property that is occupied.
The examples of real estate loans for investors in this article, which include hard money, fix and flip loans, and stated income loans, are all various ways to achieve your goal with real estate investing. However, to do it right, it’s important that you work with a professional company that understands all of these various kinds of loans and who offers the best rates. Neal Business Funding offers a wide variety of customized financing solutions for real estate investments.
For hard money loans, Neal Business Funding offers competitive rates, fast approval, minimal paperwork, etc. They are good loans for those who need financing immediately and for a short time. For fix and flip loans, solutions are offered for property flipping projects. Neal Business Funding can offer an LTV up to 75 percent for these projects with low interest rates on lows from 12 to 24 months. For stated income commercial real estate loans, they can be used to buy a property, finance a renovation, etc., and they are good for people with a poor credit history. Neal Business Funding provides fixed rates and funding for up to 75 percent with a 12 month to a 25-year term,and more. Lines of credit loans are also offered.