Updated: Aug 17, 2022
Once you have good deals on hand, your next challenge can be financing your deals. Even someone who started with $1M in cash will eventually exhaust the cash and need other ways.
An important tip before we dive deep: There is no shame in pausing and saving some more cash and continue financing your deals with your cash. On the contrary, leveraging is a risky game that can backfire. You should always sleep well at night without worrying that you will not have anything to eat or a roof on your head to finance your leverage.
Option 1 - Finance your real estate deal with conventional financing
For the regular financing advice, you don't need this article, so this is why I will aggregate all of the conventional financing options to the first point. Conventional financing includes your cash and a conventional mortgage. You can have up to 10 regular mortgages, and then you have an issue with standard banks. Even though ten mortgages sound like a lot right now, if you have a sound system of finding deals and managing them, ten mortgages can be too little.
Pros: Straightforward to finance, terms are competitive.
Cons: It is finite and relatively fast can stop, need the house to be solid and rentable.
Option 2 - Finance your real estate deal with hard money lenders (HML)
Financing your real estate deal through hard money lenders (HML) is another relatively accessible, straightforward option to finance your deals fast. An HML is in the business of selling money for ROI. HML can be an investor just like you, that instead of dealing with tenants, leaky roofs, insurances, she wants to enjoy a steady cash flow, and that's it. You can treat them like a bank with a less good interest rate. Always remember, as long as there's enough meat on the bone, it doesn't matter how much the other side earns. In many cases, investors take HML as a bridge loan until the property is good enough for the bank and then refinance to a conventional loan.
Pros: Accessible, another set of eyes looking at the deal, can work with unrentable houses.
Cons: Terms and rates are inferior to conventional mortgages.
Option 3 - Finance your real estate deal with portfolio lenders
Once you have gathered enough properties under your LLC, you can finance all of the houses together through a portfolio lender. These portfolio lenders require a minimum loan amount and that your properties will be held under an LLC. Portfolio loans are usually not sold in a secondary market, which increases the risk on the lender and therefore increases the rates and the overall rates.
Pros: Easier to get approval for a loan, flexible, negotiable terms, investors friendly.
Cons: Terms and rates are inferior to conventional mortgages
Option 4 - Finance your real estate deal by partnering
Another way to finance your deal is to partner with another investor. Not all investors were born equal, and every investor can bring a different set of skills for the deal. For example, every deal requires finding it, negotiating the price, renovating, placing tenants, and more. While some investors have time, others are short in it. Suppose you can bring your time to the deal. In that case, you can find a partner that will bring the majority of the cash. Eventually, thanks to your sweat equity, you will become 50-50 partners.
Pros: Easy to scale, don't require too much cash, to begin with, split the work and the risk.
Cons: Rely on others and need to report to your partner.
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