1. Pooled Funds from Private Investors
Private funds from friends, family, and acquaintances are the ultimate goal for many real estate investors.
But it takes trust, and trust takes a track record of success. Don’t expect your investment property financing to start out this way.
If you’ve been around the proverbial block a few times, and have established credibility with your friends and family, consider raising some private funds from them for your next real estate investment project.
One perk of this approach? You can often combine it with other forms of financing, such as a rental property mortgage from an online lender.
Here’s how Shawn Breyer of Breyer Home Buyers uses private funds:
“We use partners to put together small commercial multifamily deals and then we buy them out.
“I’m the one who sources the deals, performs due diligence, finds and manages contractors, and sets up and manages property managers. The partners that I bring in are other real estate investors and business owners that I’ve met through networking. We set up the terms on the deal and if they want in, we provide them with an annual rate of return over a specific payback period.
“Normally, we are able to rehab, rent, and refinance the properties within a year, so our velocity of money is high. We are able to keep their money working for them while we snowball our portfolio.”
2. Local Banks (“Portfolio Lenders”)
Whether you’re looking for commercial or residential investment property loans, local community banks – who keep loans on their own portfolios – can make great financing partners.
Nick Evans of CinchSell gets his long-term rental property financing from local banks. “Money can be easy to find if you’re bankable. Now, that also means paying taxes; you need to report your income, so you can provide tax returns to lenders.
“You can’t tell lenders you make X, and then have a tax return that says you make X minus all your ‘expenses’.”
By all means, take advantage of tax deductions for landlords. But don’t abuse them or misreport them to the IRS – even if they don’t catch you, it will make it that much harder to procure a rental property loan.
3. Conventional Rental Property Mortgage Lenders
Conventional mortgage lenders were around 50 years ago, and they’ll be around 50 years from now.
While conventional mortgage lenders usually aren’t the best option for flips, they can be great for your first one, maybe two rental property loans. Why only one or two? Because conventional lenders operate within tight credit guidelines.
First, they almost always report to the credit bureaus. That means your conventional rental property mortgage will appear on your credit report.
Which is fine for one or two mortgages. But most conventional lenders won’t lend to you if you have more than a couple mortgages appearing on your credit report.
The good news about conventional rental property mortgages is that they tend to be less expensive than other financing options. Lower interest rate, lower points and closing costs, the works.
Still, they come with other headaches beyond credit reporting. “The amount of paperwork and documentation required can be intense and painful,” explains Nichole Stohler of Gateway Private Equity Group. “The tradeoff is that we’ve been able to lock in historically-low fixed interest rates for 30 years.”
Think of them as training wheel rental property loans. Great to get started, but then you’ll want to move on.