It’s been said that a perfect investment property requires the perfect financing solution. So if you find yourself great terms with your loan provider you can go ahead and purchase your investment property so you can start earning income on these while on the other hand continuing to pay low rates and favorable terms that your loan provider has granted.
However, anytime an individual borrows money in the real estate industry, there is that inherent benefit and disadvantage when it wants to take advantage of this perfect atmosphere. It rests on the “potential property income and a borrower’s credit worthiness” and this is true in whichever way you want to bring it to, either to a traditional institution like banks or an alternative solution like a private financier. The potential for making money is great. What the borrower needs to do then is to consider all the costs and factor them into the deal and cover them with a nice profit to justify their risks.
Bank loan guidelines allow a lower risk of default for a borrower so they can offer the lowest mortgage rates and extend long term loan on the market. When you loan in the bank, some other requirements that you need to comply with are a rigid down payment, income verifications and a good credit standing. It also involves a lengthy approval process which might defuse an adverse effect on the deal of the property owner.
It is different with private financiers because they also have interest on property investment unlike banks which are merely interested in monetary interest rates since there are not into the real estate trade. With private lenders however, a lender must show the property’s income potential and not so much on the borrower’s credit worthiness. The focus of private lenders is the property itself and this is the reason why sometimes borrowers need to cross-collateralize depending on the loan-to-value ration in order to obtain the full loan that he needs. Loans traditionally come with higher interest rates, a high return on investment is usually expected, and most private loans are short term. The reason that private lending thrives despite the high interest rates and short term is because there are no lending requirements aside from the agreeing with the terms of the loan. The benefits of borrowing from a private lender is that you can get your money quickly and the qualification is not so difficult and not so long and they have lower fees compared to bank loans.
Another way to get financing is through transaction function which is a specialty lending niche that is becoming popular in the fix and flip industry. So what the fix and flip investor will do is to invest in cheap real estate and using the poor property condition, rehabilitate the property to reach its highest potential market value. The fees for this type of loan are really high and they loan itself is short term.
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