So you have the perfect plan: you’ve identified the best property on the market, determined a high potential for profit, and established your team to help get you started. Congrats! You’re off to a great start. What you need now is a source of real estate funding.
Remember, for the most part: no money = no deal.
There is no shortage of options to consider when evaluating different sources of financing for real estate investments.
If you are a new real estate investor or one who has completed many deals, having a clear understanding of your options for real estate funding can only benefit you in future transactions. Knowing which funding options work best will increase your profit potential in any type of deal: whether it be a fix and flip property or a buy and hold investment.
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Funding Option #1: Private Money Loans
Private money loans are often the first source that real estate entrepreneurs turn to for funding their investments, but this turn may be misguided. Most private loans come directly from a friend or family member– someone in your immediate circle. While these loans might seem like the easiest route to secure funding for your purchase and rehab costs, these providers come with their own potential concerns: they may not understand the intricacies of real estate investments, and are not bound by any sort of set company policies. Often times these lenders lack adequate knowledge to recognize a bad deal, even though they are assuming much of the risk. The personal nature of your relationship puts more than just financial risk at stake.
Private lenders’ interest rates vary. The private lender creates rates at his own discretion. That is to say, a friend may give you exceptionally low interest rates, or another may try to charge as much as possible. Loans from hard money lenders in Maryland are often secured by a promissory note or mortgage on the property. In simple terms: if you don’t pay, they take your investment away from you. For some private lenders, foreclosing and taking ownership of the property is a more profitable business model for them, so be sure to do your research before deciding who you do business with.
Funding Option #2: Partnerships
Some real estate investors may form a legal partnership with a fellow investor. These types of arrangements take the form of what is known as an equity partnership . Unlike private funding, there is no promissory note or lien on the property. In this type of agreement, when one partner fails or succeeds, so does the other.
In a partnership, you are not responsible for making interest payments to your financing partner. Instead, they receive a piece of the deal’s profit.
Partnerships do not come without their issues, though. First: finding a partner that is both trustworthy and financially successful enough to fund a real estate investment may be difficult. Also, think twice before partnering up with a real estate investing partner who has no knowledge of, or interest in learning the industry unless you’re prepared to be responsible for the entirety of the execution.
To be on the same page, it is important that both you and your partner are aware of all possible risks and rewards associated with taking on an investment property. One way to help make this happen is to create a formal operating agreement that states all of the risks, responsibilities, and compensation structures for everyone involved.