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5 Factors That Determine The Type Of Financing Available To You
In an ideal world, real estate investors, flippers, and players will be able to acquire control of any property they fancy without having to worry about where that funding is going to come from.
But as we all know, the world is not ideal… unless you have yet to outgrow your teenage years.
Even though there are various funding vehicles to finance your investment activities, the average investor seldom has access to all sources.
It not just from a lack of exposure and networking. Even if you are able to corner a private investor in a charitable mood, your experience and track record are critical factors that will determine whether you get a “Yay” or “Nay”.
And these factors are looked at by almost every financier. Unless you have a sugar daddy.
What factors are they?
It’s no coincidence that many banks offering small business loans require applicant companies to be at least 2 years in operation, and Directors have at least 2 years in directorial experience.
A rookie is overwhelmingly more risky than a veteran investor.
If you have been in this business for a short time, yet feel that you have a wealth of experience, you can make you case by listing down all your achievements in your short tenure as a real estate investor.
Banks might turn you away immediately from a lack of experience. But private funders can be convinced if they feel that you are really onto something or have a midas touch.
It goes without saying that the more assets you have, the more comfortable a lender will be in granting you a loan.
In fact, banks are known to offer huge property loans to high net-worth individuals just by a prove of assets. This is without any concern for income levels. I have seen this first hand. So it’s not just a fairy tale passed down from folklore.
Assets that hold the most weight are:
- Real estate
- Stocks (equities)
- Cash at bank
- Time deposits
- Retirement accounts
The one thing that you must be wary of when proof of assets are requested is that the lender might be eyeing to use them as collateral for the loan. They might even request you to sign a personal guarantee.
The decision of how to structure these finances depends on you.
Just bear in mind that if you are taking on financing for real estate, common practice is that the real estate becomes the collateral by default. This especially so when dealing with a bank concerning a typical mortgage.
So if your other assets are demanded as collateral, it might you are overpaying for too little.
3) Credit record
It it no longer cute not to know your credit record. A youngster might find such an obnoxious attitude negligible, but you cannot allow this to happen to you.
If you don’t know, any bank that you walk into to apply for any type of credit facility, your credit record is pulled. They then use this credit history to grade you by applying a credit score.
A bad score can mean higher interest rates or outright rejection. A good score can mean better rates and a higher loan quantum.
Conventional mortgages tend to have the lowest interest rates. It should always be your first choice if you qualify for it.
Although private financiers will not be able to get access to your credit record. They can still request it from you!
Are you going to respond by refusing to provide it?
For a lot of funders, avoidance and refusal to disclose credit records just smell fishy.
4) Income level
There are 2 areas of income that your money backers will be concerned about.
- How much are you currently making?
- How much is the project being funded going to make?
These are legitimate questions on the minds of any lender. And you shouldn’t see this an a invasion of private information when dealing with financiers.
Saying that, you have to make a snap judgment whether to reveal these details when asked for them.
If you are lending someone money for real estate investments, you’d want to know these information as well.
The ultimate concern regarding this aspect is whether you will be able to repay the mortgage, private loan, or investment returns promised.
The more debt you carry on your balance sheet, the more wary lenders are. This can be especially crippling on a credit standpoint if they are recurring debt.
You might find this hard to digest as the hallmark of any great investor is debt, gearing and leverage.
A bank will be particularly interested in the Debt-to-Income ratio. While private lenders will be particularly concerned with whether they might have to help you out with the debt in future.
It makes sense to assume that the higher your debt ratio is against your income, the more difficulty you might find in repaying the money.
If you are into the dark arts, you might want to consider using a different bank account that is solely used for servicing debts. This means that nobody will ever see them when they review your main operating account.
To sum it up, it favorable when there is a lot of experience, a wealth of assets, good credit record, high income, and low debt.
Because few people would meet all these favorable criteria, you should review your own financial status and focus on concentrating on the factors where you are strong at.