3 Ways To Finance Your Deals

Money makes the world go ‘round, amIright?

At least, money is something you need to achieve your real estate investing goals and to build your business throughout the years.

Hey investor, Matt Andrews here, and today I want to talk about 3 ways to fund your real estate deals: conventional financing, hard money, and private lenders.

Keep in mind that there’s not a single “right” way to fund every property deal. In fact, you will probably use all 3 of these financing methods at one point or another.

The key is to understand which option is best for your unique situation and property type. Once you have the know-how, you can make smarter business decisions and increase your profits dramatically.

So let’s get right into it, shall we?

1. Conventional Financing

This is the same type of financing that people use when buying a regular home – it’s pretty straightforward. It involves going to a bank or traditional mortgage lender and getting a home loan.

Sometimes conventional home loans work well for investors, but sometimes they don’t. It depends on the property and the timing.

Conventional financing is tough for many investors right now – because you may be able to finance 1 or 2 properties, but banks typically don’t want to lend much more than that to investors.

So if you’re doing a lot of property deals, this financing method probably won’t be the ideal route for you. But don’t discredit it completely – especially if your REI business is brand new or your goal is to invest in only a few properties at a time.

2. Hard Money

This option could be considered the total opposite of conventional funding. Hard money is for people who really know what they’re doing when it comes to real estate investing, because it involves a very high interest rate.

Hard money lenders are simply people in the business of lending money. You can find lists of hard money lenders online, through your local real estate club or by asking for referrals from fellow investors.

money When it comes to this financing method, remember that hard money is usually asset-based. If you have some money to put into a project, a hard money lender is less likely to care about your background (although some will ask to pull your credit history).

Hard money is a great option for investors who are doing short projects – buying, fixing and flipping a property within 6-12 months.

Since this is a high interest option, you really have to know your numbers if you use hard money.

I’ve had brand new investors ask me if I could recommend a good hard money lender. But I always say... 99% of the time, this is NOT a good option for beginner investors who are working on their first few property deals – because it leaves very little room for error.

If your hard money loan goes 2-3 months longer than originally expected, those fees will eat you alive and kill your profit. And it can make a winning deal into a losing deal faster than you can say “What the…?”

3. Private Lenders

This is one of my favorite options, because it’s more of a “thinking outside the box” type of funding.

A private lender is typically not a real estate expert, but they have money they want to invest in real estate – in exchange for a large return.

Oftentimes, you will have ongoing professional relationships with your private lenders – and they might be accountants, attorneys, recently retired individuals, people with IRAs or small business owners – to name a few.

Since private lenders often don’t have real estate knowledge but they’d like to benefit from investing in this area, they seek out REI experts (such as yourself!) to partner with.

Teaming up with a private lender is also ideal for you, because your interest rate can be negotiated (unlike conventional financing or hard money financing). Score!

If you’re good at finding a lender and matching them with property deals, you can negotiate the rate and terms pretty easily. And it’s all dependent on the quality of the relationships you have with your private lenders.

Many of the most successful investors I know are able to work well with private lenders and can use these relationships to their advantage. It also benefits the private lenders to partner with a skilled investor, because they get more returns than they would with an inexperienced or untrustworthy investor (or on their own, for that matter).

So Which Will It Be?

To recap briefly, conventional financing, hard money and private lenders are the 3 main ways you can fund your deals.

Each has its distinct pros and cons – it’s up to you to decide which method best fits your business size, skill level, deal and overall professional goals.

Say Something

Which type of financing do you like to use? Tell us why in the comments below.

Consider the Conventional. Are you a brand new investor or still in the beginning phase of your business? Consider a conventional loan to start with. It’s a relatively low-risk funding option, and it will help you get your business off to a positive start.

Go for Hard and Fast. If you are more experienced and feel confident in your investing abilities, consider a hard money loan for projects that are quick flips. As long as you are certain you can pay off the loan in the allotted time frame, this could be a winning option for you.

Cultivate Private Lender Relationships. You can never have too many “financial friends.” Use referrals and online ads to find and team up with private lenders who are seeking your investing expertise. The resulting property deals will be win-win situations for you both.