Financing for Real Estate Investors

Whether you are planning on buying a rental property, fixing up a foreclosure to flip, or building an Accessory Dwelling Unit (ADU), financing of these real estate investment properties can often be a challenge. However, there are a variety of financing options to develop a lucrative real estate portfolio, with some investors will combine a variety of these options.

Here are the top 10 financing methods to purchase a real estate investment in Hawaii.

#1 Cash

Around 25% of all United States investors use cash to purchase a real estate investment. Cash provides a quick and easy way to buy a property.

Sometime a seller will even offer the property at a lower price for a cash offer. Even if you can’t buy the property with only cash, if you put a larger percentage down on a mortgage, you might be paying less in interest payments, making your investment more profitable.

#2 Delayed Financing

This is a strategy where an investor purchases a property for cash but then takes out a loan on the new property to receive cash back. An investor could use this cash to do repairs or a complete remodel to generate a profit when flipping and selling.

#3 Mortgage

When you purchased your first home as your residence, you might have used a traditional mortgage. But a traditional mortgage can also be used to finance investment properties. The same qualifications apply as if you were purchasing a residential property: a good credit score, a down payment, cash for closing costs, documentation of income, and more.

#4 Hard Money Loans

These loans are not backed by the credit scores of a borrower. Rather, they are backed by the value of the property, so an investor can qualify for a loan for an investment property more easily. Therefore, hard money loans typically have a lower loan-to-value ratio than traditional loans, shorter term lengths (due in 6-36 months) and a higher interest rate (8-15 percent). An investor might use a hard money loan for a short-term rehab or while trying to secure a longer-term loan

#5 Portfolio Loan

A portfolio loan comes directly from a local financial institution, so they do not have to follow strict lending regulations. Therefore the qualifications are often more flexible than conventional loans. A portfolio loan has different debt, income, and credit requirements than traditional mortgage lenders.

#6 Private Money Loans

Perhaps a family member or friend believes in the potential to turn a profit from flipping a house or to generate a cash flow from rental properties. Then they might give you a private loan to purchase your dream real estate investment property. A private money loan typically has an informal agreement and attractive rates and terms of repayment.

#7 203K Loan

A 203K Rehab Mortgage Loan can help an investor make minor changes or remodel a home. This might be used for home rehab construction costs on a fixer-upper flip house. A 203K loan could also be used to make repairs on a rental property – at a low interest rate. A loan officer or broker could speak to you more about the 203K Loan option.

#8 Self-Directed IRA

If you are a retirement saver and have some of your money stowed away in a self-directed IRA, you might know that you can invest this money in a variety of ways – stocks, bonds, mutual funds, CDs, ETFs, metals, notes – and even real estate.

Using a Self-Directed IRA to purchase real estate investment properties offers potential tax benefits. For example, a real estate investor could buy, sell, flip, and buy another property with the IRA funds – and do these transactions tax free. There are several rules regulating a self-directed IRA, so consult a tax advisor.

#9 Self-Directed Solo 401(k)

Like a self-directed IRA, a self-directed 401(k) also allows you to allocate your retirement funds into a real estate investment and make gains virtually tax free. But it also has strict IRS-regulated rules and conditions, so consult your tax advisor for real estate investment options.

#10 Partnerships

Sometimes an investment is more profitable with someone else – especially if you trust that person as a business partner. When it is difficult to secure a loan or a private lender, an equity partner may often be a solution. Partnerships can be structured in many different ways, from using a partner for a percentage of the down payment to using a partner’s cash to finance the entire property.

A partnership is regulated by an operating agreement, where the equity partner may have a passive or active role. Typically a partner would receive a return on their investment (ROI) that includes cash flow, appreciation, and even profit when the property sells. Equity partners do not usually have an interest payment, but instead they rely on a receiving a percentage of the property’s income.

Since there are a number of financing options for your Hawaii real estate purchase, the reality is you do not need a lot of money to invest in estate. The variety of financial strategies makes investing in real estate possible for the savvy, ambitious real estate investor.