Investing With Other People’s Money, Part 2

This loan can finance duplexes, triplexes, and four- plexes, but requires owners to live in

one of the units. It also requires private mortgage insurance for loans under 20 percent

down.

Home Path Mortgages

Home Path Mortgages are offered by Fannie Mae to help investors and homeowners buy

Fannies’ foreclosed properties. Down payments can be as small as 5 percent but you must

have a credit score of 660 or better. You can also borrow up to $35,000 for renovations.

There’s no mortgage insurance requirement but you can only use a Home Path mortgage

to buy a Fannie Mae foreclosure.

Home Equity Loans and Lines of Credit

Many investors choose to tap into the equity in their own primary home to help finance

the purchase of their investment properties. Banks and other lending institutions have

many different products, such as a Home Equity Installment Loan (HEIL) or a Home

Equity Line of Credit (HELOC) that allow you to tap into the equity you’ve already got.

For example, an investor may purchase a property, but instead of going through the

normal hassle of trying to finance the investment property itself they can instead take out

a HELOC on their own home to pay for the property.

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Welcome back for part 2 of our series on

Investing with Other People’s Money-

Part 1 is right here. Let’s pick back up

with our discussion of funding options.

203K Loans

These loans allow a homeowner to

purchase a house that is in need of some

rehab work and finance necessary repairs.

Like the standard FHA loan, a 203K loan

requires a down payment of just 3.5

percent.

The collateral for a HELOC is your existing home, not your new one, so the lender is

concerned only with the value of your existing home- typically, they don’t even look at

the new property. With a HELOC, you can make cash offers on new properties and as a

result, you will have a higher chance of getting your offers accepted at a lower price.

Home equity lines and loans may also have certain tax benefits, such as the ability to

deduct the interest paid on that loan.

Owner financing can also be a good tool for selling your properties in the future as well.

Commercial Mortgages

While most of the above options focus primarily on the residential side of loans, the

world of commercial lending may also be viable option for your investing. In fact, if you

are looking to buy a property other than a one to four unit residential property, you will

need a commercial loan.

Commercial loans typically have slightly higher interest rates and fees, as well as shorter

terms and different qualifying standards. Commercial lenders are more focused on the

property than an individual’s ability to repay. They will look at your income, credit, and

other personal financial indicators only to gain a picture as to your skills financially.

What’s more important in the vast majority of cases, is the amount of revenue a property

generates. Commercial lenders can often extend a “business line of credit” to finance

flips or other investments.

“Hard Money” Loans

Owner Financing

Owners are increasingly willing to finance

some- or all- of the sale of their home.

Property owners cannot have an existing

mortgage or home equity loan on the

property. If the seller does have another loan,

and then sells the home to you – the seller’s

loan must be paid back immediately or the

seller may face foreclosure.

.

Loan is based on the value of the property.

Shorter term lengths than a mortgage (due in 6 – 36 months.)

Higher than normal interest (8-15 percent.)

High loan “points” (fees to get the loan.)

Many hard-money lenders do not require income verification.

Many hard- money lenders don’t require credit references.

Private Lenders (“Soft Money” Loans)

Typically with “private money,” the lender is not a professional lender like a hard money

lender but rather an individual looking to achieve higher returns on their cash. Often

times there is a close relationship with a private money lender ahead of time, and these

lenders are often much less “business” oriented than hard money lenders. Additionally,

private money usually has fewer fees and points, and the term length can be negotiated

more easily to serve the best interest of both parties.

Generally, private money is financed by one investor. Private lenders will lend you cash

to buy property in exchange for a specific interest rate. Their investment is secured by a

promissory note or mortgage on the property, which means if you don’t pay they can

foreclose and take the house (just like a bank, hard money, or most other loan

types). The interest rate given to a private lender is usually established up front and the

money is lent for a specified period of time, anywhere from six months to thirty years.

Short term financing that is obtained from

private businesses or individuals for the

purpose of investing in real estate (known as

“hard money” loans) has a number of forms

but several defining characteristics. These

include:

Use Debt as a Tool

In the hands of the successful investor, debt is a tool to be used to make dreams come

true faster. By never borrowing money they don’t need, by paying back loans on time

and by always having an exit strategy before borrowing money, good investors make sure

that even if a deal doesn’t work out they’ll be well-positioned for the next one.

About HomeUnion:

HomeUnion is an online real estate investment management firm, specializing in single-

family rental (SFR) properties. Based in Irvine, Calif., it provides all the services needed

for individuals to invest remotely in SFR properties. HomeUnion’s role spans the

lifecycle of the investment transaction: from locating properties; advising on the

purchase; finding renters; managing the property; and selling it when the time comes.

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