One of the largest and earliest challenges investors face in the real estate investment market involves money. Namely, how is an investor expected to pay tens, hundreds, or millions of dollars for an investment property? In most cases, investors turn to private lenders to fund their fix and flip, new build, or long-term investment projects.
While it may appear private loans are for beginners or cash-strapped investors, experienced and savvy investors with the money to fund their own projects understand that financing is a vehicle for unlocking enhanced business opportunities, higher profits, and better credit scores.
Below, we’ll discuss the rationale behind using financing from private lenders to fund investment projects for real estate cash investors. We’ll break down its advantages compared to the disadvantages of cash investment.
Let’s get started:
Below, we’ll discuss the rationale behind using financing from private lenders to fund investment projects for real estate cash investors. We’ll break down its advantages compared to the disadvantages of cash investment.
Let’s get started:
Why Cash Investors Should Finance Through Private Lenders
Before we dive into the benefits of financing, let’s discuss why private lenders are the best lending partners for any investor developing an investment plan.
Whether you flip homes, build, or invest in long-term rentals, speed, flexibility, and accessibility are essential to real estate investment success. Traditional mortgage lenders, like banks and credit unions, are highly regulated by the government and private institutions like Fannie Mae and Freddie Mac. This oversight along with strict guidelines and requirements make securing a loan for an investment property difficult and slow.
Consumer loans come with long approval processes, countless rules, bureaucratic headaches, and, in most cases, a substantial downpayment.
On the contrary, business purpose loans through private lenders are free of governmental and institutional oversight, giving them the freedom and flexibility to tailor financing options that meet the needs of real estate investors.
These loans include:
Whether you flip homes, build, or invest in long-term rentals, speed, flexibility, and accessibility are essential to real estate investment success. Traditional mortgage lenders, like banks and credit unions, are highly regulated by the government and private institutions like Fannie Mae and Freddie Mac. This oversight along with strict guidelines and requirements make securing a loan for an investment property difficult and slow.
Consumer loans come with long approval processes, countless rules, bureaucratic headaches, and, in most cases, a substantial downpayment.
On the contrary, business purpose loans through private lenders are free of governmental and institutional oversight, giving them the freedom and flexibility to tailor financing options that meet the needs of real estate investors.
These loans include:
- Flexible terms;
- Fast approval times;
- No pre-payment penalties;
- Little to no downpayment;
- And, eligibility for lower credit borrowers.
Most importantly, where traditional lenders say “no,” private lenders can say “yes.” This is because rather than dwelling on credit scores and downpayments, private lenders focus heavily on the property cash flow–considering things like a property’s Loan-to-Value (LTV), Loan-to-Cost (LTC), and After-Repair-Value (ARV). Many private lenders will issue loans of up to 70% LTV or more of a property’s ARV!
Metric | Description |
LTV | Compares loan amount to property’s current market value |
LTC | Compares loan amount to the estimated total project costs. |
ARV | Projects the value of the property post-renovation. |
For example, if a property appraises for $400,000 ARV, a private lender can qualify you for a $280,000 loan ($400,000 ARV x 70% LTV = $280,000). This gives cash investors an avenue to purchase, renovate, and sell or rent a property with little to no out of pocket expenses.
The Benefits of Financing for Real Estate Cash Investors
Now that we know why business investment loans through private lenders are a great financing avenue for investors, it’s time to reveal the benefits that make financing the best strategy for cash investors looking for real estate investment opportunities:
1. Enhanced Business Opportunities
When cash investors pour all their money into one, or even a few, real estate deals, they lose the ability to acquire other properties and expand their portfolio. With a business loan through private lenders, real estate cash investors unlock the agility and liquidity to scale exponentially.
For example, say you have $200,000 saved for investment projects. While paying with cash will help you avoid the interest amounts, you will only be able to afford to purchase a property for $200,000 after taxes and purchasing fees. In today’s market, $200,000 might be enough to get you a single-family residence (SFR).
However, with a fix and flip loan through a private lender, you can receive a 70% LTV loan for $200,000 for a property with a $285,000 ARV. If after a property analysis, you determine the costs to purchase, renovate, and sell the property are under $200,000, you can purchase the property with zero money down. While you are responsible for the interest payments on the loan, private lenders often waive prepayment penalties on bridge loans. So, as soon as your flip is complete, you can pay off the entirety of the loan and avoid the majority of interest costs.
Best of all, you still have $200,000 of liquidity while you work to flip your investment. This gives you the flexibility, resources, and financing to take on multiple projects at once.
For example, say you have $200,000 saved for investment projects. While paying with cash will help you avoid the interest amounts, you will only be able to afford to purchase a property for $200,000 after taxes and purchasing fees. In today’s market, $200,000 might be enough to get you a single-family residence (SFR).
However, with a fix and flip loan through a private lender, you can receive a 70% LTV loan for $200,000 for a property with a $285,000 ARV. If after a property analysis, you determine the costs to purchase, renovate, and sell the property are under $200,000, you can purchase the property with zero money down. While you are responsible for the interest payments on the loan, private lenders often waive prepayment penalties on bridge loans. So, as soon as your flip is complete, you can pay off the entirety of the loan and avoid the majority of interest costs.
Best of all, you still have $200,000 of liquidity while you work to flip your investment. This gives you the flexibility, resources, and financing to take on multiple projects at once.
Increased ROI
By using financing to take on more opportunities, cash home investors are able to scale their portfolios and businesses faster. More properties mean more returns, which equates to higher profits. That is why financing is not only a smart play for cash buyer investors who operate in the home-flipping or new build markets, but also for long-term rental investors.
By purchasing rental properties with long-term business purpose loans, you maintain the liquidity to take on larger single- or multi-unit projects. Additionally, financing gives you the money on hand to update and enhance your properties (increasing the rental costs) or redesign unit floorplans to add accessory dwelling units (ADUs) (creating more revenue streams).
By purchasing rental properties with long-term business purpose loans, you maintain the liquidity to take on larger single- or multi-unit projects. Additionally, financing gives you the money on hand to update and enhance your properties (increasing the rental costs) or redesign unit floorplans to add accessory dwelling units (ADUs) (creating more revenue streams).
Improved Credit Score
While credit scores aren’t emphasized in single fix and flip or ground-up business loans through private lenders, long-term financing and larger build or flip portfolios with multiple loans may require a credit score of at least 660. So, while cash investors can avoid funding early on, eventually, to scale into a successful rental investment business, investors will need a capital backer.
By opting into financing, real estate cash investors create avenues to improve their credit scores and ensure future business success. With flexible terms and no prepayment penalties, private lenders simplify loan payments, allowing immediate repayment or deferred principal payments.
By taking on and paying off these loans, cash investors can improve their credit score and gain two major benefits moving forward:
By opting into financing, real estate cash investors create avenues to improve their credit scores and ensure future business success. With flexible terms and no prepayment penalties, private lenders simplify loan payments, allowing immediate repayment or deferred principal payments.
By taking on and paying off these loans, cash investors can improve their credit score and gain two major benefits moving forward:
- Access to larger loans: In the eyes of lenders, the better your credit score, the larger the loan they can offer. For savvy fix and flip, new build, or rental investors looking to expand their portfolios, a good credit score can give you access to multi-million dollar financing options.
- Better rates: A good credit score gives investors leverage during negotiations and often equates to better loan interest rates. The lower the rate, the higher the ROI potential for investors.
Private Financing: Turning Cash Investors into Investment Pros
For real estate cash investors, the benefits and opportunities gained from leveraging financing throughout their investment endeavors are too great to ignore. Private lenders like Finance of America Commercial (FACo) make attaining and utilizing flexible financing simple.
FACo offers the most reliable short- and long-term financing options on the market, including:
FACo offers the most reliable short- and long-term financing options on the market, including:
- Construction Loans
- Fix and Flip Loans
- Stabilized Bridge Loans
- Single Rental Loans & Rental Portfolios
Our team of industry experts provides investors of any experience level with the flexibility, speed, and accessibility needed to outpace the competition and capitalize on the latest and greatest real estate investment opportunities.
If you’re a cash investor looking to make the most of your money and grow your investment portfolio, reach out to a FACo professional today. CLICK HERE to schedule a FREE consultation.
If you’re a cash investor looking to make the most of your money and grow your investment portfolio, reach out to a FACo professional today. CLICK HERE to schedule a FREE consultation.
