Are you interested in investing in real estate but not sure how to raise adequate capital?
You're not alone. The biggest challenge for most aspiring real estate investors is access to capital.
Although real estate is a relatively safe investment, it's capital-intensive. The average price of a home in the U.S. in 2023 is about $416,000. In theory, this is what you'll need to afford a rental property.
The good news is you don't need to raise the money out of pocket. There are a couple of real estate financing options that you can use to make an acquisition.
Let's dive in!
1. Traditional Mortgages
Roughly 65% of homebuyers get a mortgage - that's because mortgages are the go-to real estate financial method.
If you're looking to purchase a rental property, just approach it as you would when buying your own home. Go to your preferred lender and get pre-approved for a mortgage. This will help you determine what you can afford.
There are different types of home loans, but some might have restrictions on how you can use the property. For instance, if you buy a home with an FHA loan, you will not be able to rent it out right away as there are residency requirements you must satisfy.
As such, it's advisable to stick to conventional mortgages when you intend to purchase a rental property. There are also commercial mortgages for investors who want to buy commercial rental properties.
2. Home Equity Financing
If you're already a homeowner, your property might be an ideal source of financing. It's called homeowner's equity.
Let's say you bought a $500,000 home a decade ago. You've repaid 50% of the mortgage, and the property's value has appreciated to $600,000 over that period. In this case, did you know you have about $350,000 in home equity?
You don't have to sell the home to realize this gain. All you need to do is go in for home equity financing.
Lenders don't restrict how borrowers use these funds. You're free to use it to acquire an investment property.
3. Hard Money Lenders
Hard money loans aren't the most ideal real estate financing option, but they're suitable for investors in certain situations. These are typically short-term, high-interest loans, making them ideal for fix-and-flip investors. If you're in the business of buying homes in bad condition, patching them up, and selling them shortly after at a profit, a hard money loan will come in handy.
4. Crowdfunding for Real Estate
You want to buy a $10 million office block downtown. You know very well no bank is going to lend you such an amount. Should you give up on the dream of owning the block?
Not when there's a crowdfunding option.
This allows you to pool funds with other like-minded investors. If the crowdfunding campaign is successful, you'll raise enough money to buy the property. Anyone who contributes will have a stake in the block, and they'll receive their fair share of rental income.
Real Estate Financing: Know Your Options
Investing in real estate is capital-intensive. Thankfully, there are real estate financing solutions you can explore. From conventional mortgages to hard money loans and crowdfunding, you'll find an option that suits you.
If you're getting ready to make an investment in Las Vegas, our buyer resources will come in handy.