Maslow’s Hierarchy of Needs was used as a template by the New York Life Investments in 2019 to illustrate the pyramid towards financial freedom. Right in the middle of that pyramid is Accumulating Wealth, which consists of the following: building an investment portfolio, saving for retirement, and paying down debt. A lot of options are available for any investor for the first one, such as stocks, mutual funds, and real estate.
Why Invest in Real Estate?
In case you haven’t seen it on your social media platforms yet, there is this guy who asks random people driving expensive cars and houses what they do for a living. Two of the most common answers were FinTech (Financial Technology) and real estate. It just shows that investing in real estate is still one of the most reliable ways to grow your money. The next step then is to look for ways to finance your real estate project.
Real Estate Financing Options
Below is a shortlist of ways to finance your next real estate project:
- Owner Financing
- Lease
- Hard Money Lenders
- Microloans
- Equity Partnership
- Home Equity Financing
- Trade Houses
- Special Government Schemes
- SBA Loan
- REITs
Owner Financing
Unlike traditional selling where the buyer gives the seller money in exchange for something, here, the seller extends finances to their buyer. The buyer then will repay the seller later based on agreed-upon terms.
Lease
Leasing is like the usual renting, except that a higher amount of money is being paid. This is because the rent includes a premium, which ultimately accumulates to the purchase price.
Hard Money Lenders
Compared to traditional bank loans, hard money lending is offered by private groups or individuals. While the interest rates are relatively higher due to higher risks, hard money lending has its own advantages. Investors are subjected to less stringent approval procedures; an online application is possible, as evidenced at NewSilver.com, and those that are considered risky projects are more likely to be approved than in a conventional bank loan. This type of financing also makes making profit easier, as a faster approval rate will mean faster rehabbing and flipping out of the purchased property.
Microloans
Just like with hard money lending, the qualification criteria for microloans are less strict. The lower amount of money loaned makes this possible, and this type of financing targets newer businesses or startups.
Equity Partnership
If the buyer really wants to purchase a property but is short in cash, an equity partner is also a viable option. In this setup, an additional entity (the equity partner) enters the picture of purchasing and injects some cash into the transaction. The terms are to be agreed upon by the buyer and the partner.
Home Equity Financing
When you want to expand your investment portfolio, you can leverage your existing property to buy a new one. HEIL and HELOC are just some of the options being offered by banks and other financing institutions in this category.
Trade Houses
Another way of utilizing your old property is by trading it for a new one. Aside from having a new investment, capital gains that are normally part and parcel of selling a property can also be avoided.
Special Government Schemes
The USDA offers up to 0% interest mortgages to low- and moderate-income individuals to fill underpopulated areas of the country. Towns with less than 10,000 population are included in this program.
SBA Loan
The US Small Business Administration aims to provide financing to small businesses as the name implies. That said, the borrower must occupy part of the whole property being purchased. The funding usually amounts to $125,000 to $20 million, and a 10% down payment is required. Some loan products allow the borrower to buy a building, conduct building improvements, or do ground-up constructions.
REITs
REITs, or Real Estate Investment Trusts, offers many advantages to investors. One of which is liquidity, as a shareholder who wants to opt-out of business can have his cash back when someone else wants to buy his shares. Buying targeted REITs is also possible, as one can select those that build medical buildings, parks, etc. While you do not have to manage anything in those investments, the downside is that the profits are stripped off overheads before distributing to the investors.
Despite the variety of investment options such as the stock market and other technologies such as cryptocurrencies, real estate remains one of the most reliable avenues for building wealth. And while it requires a comparatively higher capital, several financing options are widely available for any investors. One only needs to consider his or her goals and put up a nice strategy to be able to repay these liabilities.