Financing your investment
Jason Cohen Pittsburgh helps you find which type of lending is right for you.
HARD MONEY LENDERS
MAJOR LENDING INSTITUTIONS
LINES OF CREDIT
Many major banks make their money on the mortgage origination — i.e., creating the mortgage. After lending the money to a buyer to pay for the home, the bank quickly sells the mortgage to another institution to reduce their long-term risks.
A portfolio lender is usually a smaller local institution that will take more risks in lending. Often, buyers who are turned down by larger banks are approved for a mortgage at a portfolio lender. Portfolio lenders are willing to do so because home buying benefits their community.
As these banks lend with their own money in their own portfolios, they do not have to conform to Fannie Mae standards. Therefore, they are willing to lend on property that is not in livable condition and will give investors with multiple properties more mortgages. However, they will not have the variety of loan structures as a larger lender.
HARD MONEY LENDERS
Hard money loans offer a great opportunity for new real estate investors to break into the market. Hard money lenders lend based on the projected value of the home (the After Repaired Value), not on the value at the time of purchase. Loans are often up to 60 to 70% of the ARV, which may often cover the entirety of the purchase price. This enables first-time investors without a lot of capital to buy a property with no money down and even finance the repairs.
However, hard money loans lead to smaller profits. These loans are short-term (usually 6–12 months) and come with very high interest rates and points that accrue on the loan.
Private money is a type of hard money lending that comes from a single individual or group of wealthy individuals. Real estate is an attractive investment because the yields are often higher than stocks. Finding individuals to lend you money is difficult, so many investors start by asking people they know. At Jason Cohen Pittsburgh, we carefully craft letters to potential financiers to make them understand the profit potential of the investment.
Before it fell under the more common term "crowdfunding", this practice of soliciting the general public for capital was known as "syndicating". This is a newer practice that has been only been allowed since the JOBS Act was passed in 2012. Regulations on crowdfunding real estate are also new.
Crowdfunding offers the opportunity for investors to put in less money, so it's attractive for financiers who don't want a larger risk. Crowdfunding sites also offer built-in marketing by having existing visitors and mailing lists.
There are many real estate crowdfunding web sites. At Jason Cohen Pittsburgh, we've used Fundrise.
Major lending institutions offer the largest variety of options in loan structures. If you have no prohibitive factors in choosing what type of loan you want, you may want to look at all the options from major banks. These lenders have loans structured for specific purposes, as well as various types of mortgages.
LINES OF CREDIT
These short-term loans are useful for home improvements. Lenders generally require borrowing against a form of collateral, like a home with equity. If you already own properties, you should be able to take out a home equity line of credit.
These loans do exactly as their name implies — they serve as a bridge between buying one property and selling another. If you need capital to purchase a home prior to having sold a current investment, these loans make it possible. The major caveat is that you must sell the home within the allotted window to repay the loan.
ADJUSTABLE-RATE VS. FIXED-RATE MORTGAGES
Adjustable-rate mortgages start off with a low interest rate for a set period of years, then the rate increases. A fixed-rate mortgage has interest rates that remain the same for the duration of the loan. ARMs are often seen as riskier because of the long-term implications. However, if you are renting the property and can pay it off quickly, you can get a great deal with an ARM.