HOW TO LAND THE BEST LOANS FOR YOUR DEALS

Finding the Best Financing for Investment Property

There is a lot of money out there, and there are a lot of people and institutions who want to put that money to work generating more money. Success in real estate investment and maximizing the profit potential of each deal means obtaining the optimal loan for your property and project. So how do investors make sure they find the best loan for real estate investment?

What’s So Important About Finding the Right Loan?

Finding the right money for real estate investment makes all the difference in successfully executing your plan for any specific property and in determining how much your net profit will be.

Not every loan or line of credit you land is going to be at the very lowest market rates or come with your personal dream terms. But finding the right money for real estate investment makes all the difference in successfully executing your plan for the property and in determining how much your net profit will be. It’s also critical to know that a loan exists for your strategy even before making an offer. Knowing the available loan programs helps you swiftly navigate the entire process, from deal search through negotiations, offer, and closing. Having baseline knowledge of your funding sources can give you a serious speed, efficiency, and profit edge over competitors for quality deals in your market.

How to Match Loans and Lenders to Your Needs

Each real estate investment loan or line of credit should take you closer to your individual deal goals and your big-picture vision. Factors to keep in mind when loan shopping include:

•Protecting your credit score for further deals

•Protecting credit bandwidth for future deals

•Sustainability: lenders who help build a lasting foundation for your business

•Maintaining enough liquidity, equity, and time to exit

•Obtaining enough money and credit to get the deal finished

•Securing deep-enough margins to maintain profitability over the long term

•Speed and ease of funding

•Reliability of closing on time

•Trustworthiness of the lender

•Exit costs

•Having the ability to use the entity you want to finance under

•Ensuring the right lender and loan match for the property type, location, and strategy

Financing a Real Estate Investment Using Different Real Estate Strategies

Real Estate Wholesaling

Real estate wholesalers typically seek out equity-based loans and transactional “quick turn” lenders that can provide funding for the very short term. The wholesaler’s goal (when not doing a simple contract assignment) is to close on the acquisition and immediately resell the property. Transactional lenders understand the dynamics of wholesaling and the disrepair that wholesale properties are often in. In addition, savvy wholesalers who are assigning contracts have connections with lenders that they can refer for their wholesale buyers.

Buy and Hold Real Estate Investing

There are two approaches to financing buy and hold income properties. One is purchasing existing rentals, and the other is rehabbing a distressed property and then leasing it out. Investment properties in need of substantial work or that require additional funds to make repairs may require a rehab loan followed by a longer-term loan. On the other hand, properties ready for long-term, permanent financing may benefit from more conventional financing or blanket mortgages from the initial acquisition.

Fix and Flip Deals

Fix and flip deals will often require rehab loans that include funding for acquisition, holding, and improvements. Most traditional lenders aren’t interested in funding these types of short-term loans, so investors are wise to seek out asset-based lenders and hard money lenders who offer equity-based loans.

New Construction Financing

There are two main types of loans for new construction properties. Investor financing for real estate includes “end loans” for those acquiring completed units complete with a Certificate of Occupancy from the developer. Construction loans are for financing the actual building of units. There are also “one-time close” construction-to-permanent loans, which automatically roll over into fixed-rate financing once building is complete and the collateral exists to secure the loan.

Commercial Real Estate Loans

Commercial mortgage loans have traditionally been used for financing five-plus-unit multifamily properties, industrial property, office buildings, and retail real estate. However, since 2008, more commercial lenders are loaning on residential homes for investment purposes. These lenders and loans often suit those financing property for “business” purposes and want to finance properties under the names of limited liability companies (LLCs), corporations, and trusts. It’s important for real estate investors to know that traditional lenders will not lend on properties held in an LLC or other entity.

Land Loans for Development

Many banks and other lenders make land loans. They can range from loans for individual lots to large blanket loans for raw land that may be subdivided. Loan-to-value ratios (LTVs) are typically significantly lower than for improved properties. Some lenders have provisions requiring borrowers to begin building within a certain time frame, refinance, or pay off their loans.

Business Loans

Real estate investors can also use general business loans to fund deals. The application and approval process is very different from an asset-based loan. The loan is not based on collateral but instead is based on experience and potential earnings as well as other factors. The lender will want you and your partner(s) to demonstrate good character, have experience and good personal and/or business credit history, along with the capacity to repay the loan.

Comparing Loans for Your Real Estate Deals

It is important to get the hang of apples-to-apples comparisons for loan shopping. You can compare oranges too. But you need to understand the difference. The best way to compare real estate loans is with the Lending Estimate provided by lenders. This document shows all the costs, loan features, and true annual percentage rate (APR) or cost of borrowing. Use this to compare different quotes side by side. Don’t just look at the bottom-line figures; make sure each feature line item is the same for an apples-to-apples comparison.

Quick Tips for Quickly Homing in on the Best Loan Programs

1.Know that it doesn’t always just take one loan or type of funding.

2.Reread and get to know Lending Estimate forms.

3.Watch out for prepayment penalties, adjustable rates, and balloons that lenders fix into your exit strategy.

4.Make sure your lender likes loaning in your area, on your property type.

5.Create spreadsheets or keep track of loan parameters, so you can instantly match potential deals with the right lenders and enjoy a stress-free closing.

6.Know the terms. When buying real estate, it’s “location, location, location.” When financing real estate, it’s all about the terms, terms, terms. Know which terms affect your bottom line and how. You may get a great rate, but if the loan is called due ahead of your exit timeline, it’s not the right loan.

The bottom line? Know your lender, know their loans, and more important, know which terms are most important for your property, project, and exit strategy.

TAKEAWAYS

What are the main criteria you will use to match lenders to your investment needs?