Real estate financing gives investors several benefits in the form of tax benefits, cash flow, home appreciation, and so on.
It has always been considered a robust investment option and dominates the preferences of investors. While many sectors are still grappling to deal with the aftereffects of the COVID-19 pandemic, real estate has continued to prove a profitable investment.
It is essential to have a strategic approach in mind when dealing with real estate investments since they can come with a steep upfront price tag. There are many options available for investors to finance real estate investments. Essentially, real estate financing encapsulates several financial methods investors use to secure their independent capital investments. We will be discussing a few of these in the following paragraphs.
There is always the option to pay the full price of the property upfront with cash. This, of course, would depend on whether the required resources are available. There are quite a few pros to paying with cash, the most obvious being that it removes any financing questions or doubts that the seller may have. Moreover, sellers often advertise cash offers which come with discounts for buyers. Moreover, paying cash also saves money in terms of interest payments, which come with most other types of financing options.
Real Estate Investment Trusts (REIT)
These refer to securities linked to real estate which are traded on the stock exchange after being listed. These are considered good investment options with lucrative returns. REITs allow investments in grade A commercial realty, which offers an addition to the investment portfolio. These also offer liquidity to investors as an Alternate Funding Mechanism, which is why they are also considered stable investments. These are one of the most popular forms of commercial property financing.
Fractional Real Estate Investment
This signifies combined ownership of a single asset by several investors. Due to high ticket sizes, investors can sign up on the platform and invest in any of the current opportunities that are listed. This opens up newer investment options in fractions of premium commercial properties, which increase the options of earning a monthly rental income. Since it also offers investment opportunities across multiple locations and properties, diversification reduces the associated portfolio risks.
These are usually bridge loans which provide funds until the property can be sold or a more secure financing stream can be procured. Since these rely on the hard asset (the property), they are called hard loans. The good thing about these loans is that they get approved in as little as a week. However, the interest rates can be much higher than traditional mortgages.
This is the most common form of financing, where a financial institution lends money to the borrower based on credit history and their ability to pay off the loan in the future. Investment property loans are usually higher than residential mortgages, banks offer lower interest rates than private lenders. Depending on the amount of cash available for a down payment, financing through a bank can maximize the potential profit. However, banks have a longer approval process and very strict lending profiles than private lenders.
The Bottom Line
It is a common misconception that one needs to have a lot of money to start investing in real estate. The key to smart investing lies in understanding the various options available for financing the property. Understanding the financial aspect is very crucial since how a deal is funded will have a bearing on its outcome. Every financing approach has its own set of pros and cons and it depends on the type of property as well as the situation.
Being tech-savvy can also help investors in the case of real estate. Understanding the newest technological developments in the field of rent collection can make communication between the landlord and tenants easy to follow. An easy example of this is how landlord software helps in managing the property more effectively. Using technology in the right way saves time, money and effort, which can be used to focus on other parts of the property.
Ultimately, buying or holding property will depend on how much cash is available upfront and how risk-averse the investor is. The financing opportunities mentioned here will help investors maximize their money as quickly as possible.