Real estate is one of the most popular and successful investments for Americans. However, for those looking to expand their real estate portfolio, it can be extremely difficult to manage multiple investments at once. This is when you will need to explore various options for financing. Nate Armstrong is the Investor Relations Chair for Home Invest, the first online real estate investment platform that allows you to choose properties, certified renovation contractors and certified property managers. These are his tips for real estate financing options that will help you get the most returns on your investments.
Traditional conventional mortgages are home loans that are not federally guaranteed. This is the most common type of mortgages used by home buyers as they often have the lowest interest rates depending on the location of the home. However, they have higher out-of-pocket costs at their closing, often requiring 20-30% down depending on the lender. Nate Armstrong advises individuals go with this route if they have the money to pay for costs upfront or have the time to acquire the funds to pay for things like the down payment, mortgage insurance, and appraisal fees.
Nate Armstrong on Portfolio Lenders
A portfolio lender is an institution that originates mortgage loans, such as a bank, and instead of selling loans in a secondary market, they hold onto them. Often banks and other lending institutions do not advertise they as portfolio lenders, so you will have to call and ask directly, says Nate. Since the money that is being loaned belongs to the loaning institution, there are more flexible qualification standards and terms. This is a great avenue to pursue if you do not meet the strict criteria created for conventional mortgages. You can also more easily get financing in the name of your company, trust, etc approved using Portfolio Lenders.
Federal Housing Administration (FHA) Loans
The FHA is a U.S government program that insures mortgages for banks. These are only available for homeowners who are going to live at the investment property. Therefore, if you’re looking for a loan to purchase a fixer-upper property, this is not for you. However, if you purchase a home, live in one room and rent the rest out, you are still eligible for a FHA loan. These loans require little payment upfront, with as little as 3.5%. There is also a required additional payment – Private Mortgage Insurance, which protects lenders. It is necessary when upfront payments are less than 20%. Nate Armstrong explains that FHA loans are great if you want to purchase a property ASAP and do not have the time or money for upfront costs.
If you’re OK with bringing another person into the deal, an equity partnership may be the financing option for you. An equity partner is a third party individual who helps finance the property. There is no specific way that this individual can help; it can be by covering the down payment or paying additional fees. Since this isn’t a typical loan, there are no set interest rates. Furthermore, equity partners take on more risk since they might have to continuously contribute money to upkeep the property.
Both individuals in this partnership should decide on who is making the decisions on the remodeling and resale of the property, and how profits will be split up in the end. As you can probably guess, says Nate Armstrong, this partnership has the potential to go sour, so make sure your partner is someone you trust and you outline all the details of the deal and how it will work in a written agreement.