4 Alternative Ways To Finance A Real Estate Investment
In 2013, the Consumer Financial Protection Bureau drew up new lending criteria for home mortgages, which has left some people looking for alternatives to finance their dream home. Borrowers who no longer qualify for traditional loans are not the only ones who may need access to alternative sources of real estate financing. Property developers and real estate investors also frequently need non-traditional forms of lending. Here we will examine four alternatives to obtaining a traditional bank loan.
1. Seller Financing
Seller financing is where all or part of the purchase price is borrowed from the current owner of that property. In order for seller financing to take place, the buyer and seller will need to agree to the terms of the loan. This will include the length of the loan, the interest rate and the amount of monthly payments. The property will act as security for the loan. This transaction will be kept on public record in order to protect both the buyer and the seller.
There are a number of benefits to seller financing for both the buyer and seller. The seller may be able to sell a property that they would otherwise have difficulty selling, and may do so for a better price. They are protected from default by the security of the property, and they will generally be receiving a return above what they would get with a traditional fixed income investment. For the buyer it is an opportunity to access financing when a standard bank loan is not available.
2. Private Money Loan
A private money loan, sometimes known as a hard money loan, is a loan from a private individual or small group. Generally, private money loans are only made on a short term basis. Private money loans are commonly used for financing a rehab, renovating, or selling the property to another investor.
Because hard money loans are generally considered to be more risky, they attract a higher rate of interest than a traditional loan. Hard money loans are usually short term, so the lender will want to see a plan in place as to how the loan will be repaid. This may include selling the property or refinancing before the term of the loan is up.
3. Rent to Own
Rent-to-own is an arrangement where the renter is given the right to rent a property with the option to purchase the property at the end of the term. The monthly payments will typically be higher than the prevailing market rate. The surplus amount will be put towards a down payment on the house. This excess amount is usually forfeited if the buyer chooses not to purchase the property. This can be a good option when a buyer may not be ready to purchase the property outright, but believes they will be able to in the future.
4. Using Your Whole Life Policy
If you have a whole life insurance policy, you may have yet another avenue for financing your real estate investment. A whole life insurance policy increases in value as it earns dividends and interest over its term. You can borrow against the cash value of this policy in order to finance your real estate investment.
Before using a whole life policy to invest in real estate, it is important to consider all of the implications. This includes looking at whether taking out a loan will have any effect on your policy's death benefit, and in particular whether taking out a loan may cause your policy to lapse.
Before using any of these non-traditional forms of financing, it is important to understand all of the potential risks that are involved. However, in some circumstances these alternative forms of financing are the best way of financing a real estate investment.
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