It is no secret that real estate investing is one of the greatest avenues to build long term wealth for yourself, your family, and future generations. The challenge that most investors face, especially inexperienced investors, is raising the capital needed for their investments. What this article will do is highlight several available options that you can use to fund your real estate investments.
The most obvious source of capital for investors is their own personal assets, but in the case of new investors, or investors with limited personal resources, the next best option is other people's money (OPM). Whether you believe in leveraging your personal assets (cash, savings, lines of credit) or other people's assets, you will need to know where the money is coming from and how you can access it.
For Fix & Flippers, liquid capital is essential to purchase projects with cash. Cash is King when it comes to real estate investing. When we first started, our capital was not liquid, which made it challenging to acquire properties and close in less than 30 days. As cash buyers, your capital needs to be available almost immediately for the transaction to close on time, sometimes in as little as 7 days. Most of our cash was diversified into different asset classes like, stocks, bonds, retirement accounts, checking, savings, life insurance, and so on. Instead of liquidating our personal assets to start buying real estate for investment purposes, we decided to leverage OPM and pay a fair return back to our investors, while making a tidy profit.
The first and most expensive type of OPM is hard money. Hard money is institutional funding that is approved for fix & flippers to buy and renovate homes. Your traditional bank will not finance these types of transactions in most cases. Hard money has both positives and negatives, but it is the easiest source of capital if you need to quickly close on a deal. Let's start with the positives:
Now onto the negatives:
Hard money has pros and cons, just like all lending options. But if you have a great deal, it is worth paying the higher costs for the money. For example, if your purchase price is $250,000 and your renovation costs are $120,000, but the ARV is $599,000, hard money is a great option because there is plenty of equity available in the deal to cover the high interest and fees.
Lines of credit are a great way to fund your real estate transactions. There are many different lines of credit that real estate investors can access in order to fund their deals. Credit lines often have low interest and reasonable terms, which can save you money throughout the project by eliminating fees and high interest costs associated with hard money. Lines of credit may still require some fees to open the line, but the interest rates are generally lower than hard money.
Lines of credit include:
Retirement accounts are a great source of capital for real estate investing. The 2 main types of retirement accounts that allow for real estate investing are Self Directed IRA's and Solo 401k's. Many investors choose their retirement account to invest in real estate because of the ease of use and the flexibility the account offers. Not only can you invest in real estate, but you can also invest in precious metals, notes, tax liens, cryptocurrencies, private equity investments, crowdfunded real estate investments, etc.
Private Money is a loan given to a real estate investor from a private individual, and that money is secured with a hard asset. Private money investors are secured with a first or second lien position on a property, and they are an excellent source for real estate investors to fund their deals. At JSJ, we use private money on more than 90% of our transactions. There are several key elements to private money that make it so beneficial to us as real estate investors.