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5 Most Common Ways To Raise Money For Property Investments
Mortgages are usually the only avenue a new property investors can think about when asked about raising the money for financing a purchase. Almost every property transaction will include some kind of third party funding. Because let’s face it. How many people can afford to pay for a million dollar apartment in cash from a personal account? Even the rich takes up mortgages to leverage on real estate purchases. So you must be filthy rich to buy in cash.
The small time investor might take up a second mortgage to buy a second property. But once you hit that third and forth apartment, you will start seeing others avenues of financing that you have never thought about. Paths will open up most likely because you are now actively seeking funding options or other people noticed what you are doing and directs you to where the paths are.
Here are 5 of the most common ways to get financing
1) Lenders that include banks and financial institutions. As mentioned above, this is the most common way. And a lot of people actually think that it is the only way. Lenders want to make money. But they are risk adverse by nature. So unless you have a strong personal income or have extensive liquid assets, you will more likely get a small loan quantum on your third property onwards.
When you were buying your second property, professionals may think that you are just someone who is just investing rather than a property investor. The former is just someone with parked funds trying to make better use of them. While the latter is someone trying to make money from properties. The bottom line is that once you hit your third property, you are viewed as more serious investor.
In some cases, when a bank views you as a fully fledged property player, you could be subject to a different set of credit criteria. A set that is more lax than the general home buyer. But getting into that profile is not easy. It takes time and a good track record.
Being shunned by the banks could be the motivator for you to find other sources of financing.
2) Partners. Some people stay away from having partners in investments. But let’s put it this way: if you have an opportunity to make $1,000 passive rental each month or make nothing, which would you choose? Accepting a partnership could be the could be that ticket to the $1,000 per month.
You will want to split 50/50 so that both of you have equal commitment into it. But at this stage, you might not have a lot of money on hand which is why you are looking for a partner in the first place. So expect to be the one doing all the running while your partner just put up most of the money. Remember to lay out everything in black and white if there is a complex agreement.
If your partner is a company, you have to consider going into the agreement as an individual or company as well. You won’t want to get into a legal agreement where you are the sole person with unlimited liability. Corporate partners especially those that manage investment funds can have mountains of cash waiting for someone like you to come along with an opportunity. If you somehow managed to maneuver an exclusive agreement to buy a desirable property, companies may even be the one looking for you to partner with.
3) Friends and family. Your loved ones can be easy access to money. But teaming up with them can make you complacent. Some part of you will feel that you can fail and get away with it. For these type of financing, you can choose to either pay an interest of give your family members part of the profits. Teaming up with kins often produce too much expectation or too little.
A sugar daddy may even give you the money interest free without expecting you to pay. You will then be able to achieve the highest level of investment known to mankind – free money for nothing! This does not do any good for you as an independent person or investor.
4) Private lenders. Sometimes the only people who are willing to finance a high risk deal are the private lenders. They can do so because they are usually only answerable to private individual shareholders. Unlike public banks who has to answer the public stakeholders. This will also mean that they are more flexible with terms and conditions. But alas, you can expect to pay a premium for finance charges. You can try to strike a profit sharing deal with them. But unless your opportunity is really as tempting as Ben’s & Jerry’s ice-cream, their only involvement is mot likely to give you a private loan.
5) Sellers. You are reading this right. A lot of times, sellers are investors themselves and have their own reasons in wanting to let it go. It could be that they need cash for other investments or find that it is the right time to sell. When sellers want to let go, they may be willing to help you out if you let them know how genuine your situation is. But if you are to indeed take up a an offer from the seller to finance the deal, you have to be ready to compromise. This form of creative financing is actually common in other countries with a mature real estate market. Creative seller financing can even be broken down into many different forms and structures. If the seller is an expert property investor who wants to let go, he might just give you the financing solution on a platter.
Take a step back
Investing in properties can be addictive especially when you start collecting cheques from existing properties grinning from ear to ear. But be mindful of where you limit is. Over leveraging at levels you can hardly sustain is dangerous. Just 1 default payment from you can trigger a whole chain of events leading to financial disaster. Before taking up more leverage from third parties, take a step back and assess your situation with a clear mind.