If you want to begin investing in real estate, you may find that traditional financing sources like conventional and government-backed loans don’t work for you. Where can you turn to find real estate financing? Here are five ways to invest in real estate with other people’s money.
Using your own funds
Some traditional mortgage loan programs require you to occupy any property you buy for at least one year before you can rent it out. If you’re fine with living in a property for a while and then converting it to rental property, then a traditional loan may still be workable. You may also find you can obtain real estate financing from your own pockets. If you want to become a landlord immediately by taking advantage of the equity in your current residence, you can get a home equity loan to finance the purchase of a second property. Or you can cash in other investments to procure the funds. Be aware that cashing in securities may result in a tax charge.
Using other people’s money
If you don’t want to use your money, here are five ways you can invest in real estate with assistance from third parties.
- Private lending is just what it sounds like. Also known as hard money lending, this approach lets you avoid the usual mortgage lending qualification process. Instead of going to a mortgage company, you find an individual with the cash you need who will lend it to you. Your lender could be a family member or friend, or an investor who makes these kinds of deals regularly.
To qualify, you need only the investor’s confidence in the deal. Private lenders generally make only short-term loans at interest rates higher than conventional loans. The property you buy serves as collateral. The shorter-term and higher rates mean your payments will be high. This kind of real estate financing makes the most sense when you want to purchase homes discounted from market value to fix up and flip, enabling you to pay back the private party relatively fast. If you cannot sell quickly, you can refinance with a traditional loan and pay off the private party.
- Taking on a partner is a second way to invest in real estate with other people’s money. Say, for example, you want to buy a property and flip it. With this method of real estate financing, your partner puts up the money and you put in “sweat equity” — the hard work of renovation, showing the house, getting a buyer, and closing the sale. Each of you has equity in the property, and thus each of you gets a part of the proceeds.
- Buying a property from a seller who’s willing to finance your purchase is a third way to invest in real estate with another person’s money. You’ll still need to make a down payment as well as monthly payments on the property, but you avoid some of the processes and paperwork of a traditional mortgage. This works best where the seller owns the property free and clear. If a mortgage is still on the house, the existing mortgage company will demand the seller pay off the loan in full when the sale closes.
- Real estate investment groups (REIGs) are a fourth alternative means of investing in real estate. An REIG is a group of buyers who form an investment club and put their money together to purchase property in which each has an equity stake.
- A real estate investment trust (REIT) is a step up from an investment group. In this case, you buy stock in a real estate investment company that owns a portfolio of properties. You aren’t directly purchasing specific properties. REIT shares are sold on the stock exchanges.