Are you interested in investing in real estate, but wondering how to get the cash you need to get started?
Don’t worry; you’re not alone. Many potential real estate investors worry about this very issue, and may not have the savings set aside to fund their new venture. However, there are several potential sources for funding your real estate investment business.
Not to be confused with its “soft” cousin, hard money loans come from a private source such as an individual investor or a private fund. Because these loans skip over corporate funding procedures altogether, they tend to have looser standards. This makes a private loan faster, and it may let you fund a project that doesn’t fit the standards of a regular bank. Hard money is a common choice among real estate investors.
On the flip side, you can often expect to pay a steep interest rate for hard money, and to deliver a large down payment or personal collateral. Your loan terms will only be about one to two years. These loans are not an easy fix, so be certain you’re going to be able to repay quickly.
Microloans are just what they sound like - tiny loans designed to accommodate small businesses. These are aimed at startups or very young businesses, helping them to get the ball rolling and expand their reach in a competitive market. Depending on where you apply, requirements for your credit score may not be as tough as a regular bank loan. The loan limits are generally lower than what a bank would offer you, but this small-sum borrowing may be reassuring for anyone worried about paying back a huge loan.
Microloans may not suit every borrower. While they can reach $50,000, you’re far more likely to get something around $13,000. Plan your overhead carefully. Interest is usually higher than a regular bank loan.
Real estate crowdfunding allows you to invest in real estate projects by buying shares in a specific project. Gone are the days when a real estate investment required deep pockets to have a chance at success. The 2012 JOBS Act made investing open to modest incomes, allowing small investors to share an interest in big projects. With the growth of online crowdfunding, you can find, research, and pick out projects to invest in. Shares start as low as $1,000. You don’t need to find and renovate your own properties. You do have to wait to collect your share of the profits or rent until the project is finished.
Crowdfunding is a riskier approach. A failed project puts losses on the heads of the investors. You have less control than managing your own fix-and-flip. Depending on the deal structure, your returns may take longer than flipping a home would.
SBA loans let the federal government guarantee your payment to a bank lending to a new business. This increased level of security enables the bank to take a greater risk on the borrower, in hopes of helping a new company take root. You can usually borrow up to $2,000,000, and repay over an extended period. Paying a lower down payment and avoiding balloon payments helps you keep cash on hand when things are tight. Terms can depend on your situation.
The catch to an SBA loan is that the security comes at a high cost. You can’t use the funds to invest directly in properties; the best they can do for real estate is to fund a brokerage or property management business. Fees are high, and you need to have a solid credit score and high profits on your tax returns to be considered. The application is a lengthy one, and you’ll need to have some personal assets pledged as collateral.
With a Rollover as Business Startup (ROBS), you can transfer your retirement savings into your startup. You get to use your own money to fuel your new business, without taxes or early withdrawal penalties. There’s no loan to pay back, since the funds are yours already. If the business fails, your personal credit and other assets aren’t impacted. This may be the best route for someone who is uneasy with the idea of debt.
A ROBS carries risks, and should not be entered into lightly. You’re limited to what’s in your retirement account, which may not be as much as a loan. The business is only as sound as your plans, and if it fails, you could lose your retirement security. You cannot use a ROBS to fund a real estate investment; like SBA loans, it must be used to fund a new business.
These are a few of the basic options you have to fund your real estate investment business. Each option has its potential traps. Before choosing any one of them, do your homework thoroughly.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
