To someone just getting started, finding funding seems nearly insurmountable. But it’s daunting to try to figure out “How am I going to get a loan for my investment property?”
I know this because I felt this way at first. Also, because I own a hard money lender and I know the tricky steps and qualifications that often come with trying to get loans for investment properties. So let’s jump in and I’ll help identify a few strategies that might be useful for you going forward.
Here are my 11 favorite ways to get loans for investment properties.
Hard Money Loan
I know…the guy who owns a hard money lending company is going to say hard money first. But it really is the most basic strategy for getting loans for investment properties. In fact, it should be the foundation of your deals going forward.
I’ve done over 500 deals in my life, and hard money has typically been how I’ve funded them. Even when I could afford it (and I teach this same thing to my well-off borrowers) I still would use hard money loans so I’m not tying up a bunch of my money. I rather use my cash on hand for other projects at the same time.
So why hard money?
Hard money lenders specialize in short-term fix & flip loans. They literally design the loans to be beneficial to investors!
A conventional lender wants you to do 15-30 year loans. They really don’t want you to pay it off after 6 months because they won’t have made much money off the interest and they took on all the risk loaning you the money. They’re reluctant to loan to hard money lenders for that reason.
Another problem with conventional loans is that they won’t give you the money for a property that’s not up to code. Many of the properties that fix & flippers are looking at are going to have issues that would disqualify them from getting a loan from a bank. Think structural issues, mold, fire damage, safety hazards, etc.
Hard money loans are ideal for loans on investment properties because they’ll give you the money even if the property isn’t in good shape…in fact, that’s exactly what the loan is for! They only care about the profit potential of the property once it’s fixed up and sold.
Also, hard money lenders charge higher interest rates so they can make lending you the money worth it. But don’t worry, the higher interest rates are factored in when calculating profit right from the start. Why would you worry about higher interest rates if you know you’re going to pocket $35k when all is said and done?
Each hard money lender has their own interest rates, down payment minimums, and borrower requirements.
From what I’ve seen it’s pretty common for a hard money lender to want to see:
- Minimum 10% down of the purchase, and perhaps the rehab as well (often costing $30k – $50k cash to close)
- At least 1-2 deals under your belt
- A credit score at least in the mid 600s
The issue is that new lenders often don’t have that kind of cash on hand and definitely don’t have the experience yet.
I noticed this problem and I designed Do Hard Money to be newbie friendly. That’s why most deals with us are done with less than $10k cash up front, and about 1 in 5 are done with less than $500 total out of pocket costs! You see more about our 100% financing loan here.
So how do you get funding from a hard money lender?
A pretty common number for them (as is our standard) is that they’ll loan up to 70% of the After Repair Value of the property.
That means if you can fix up the property and sell it for $400,000 (based on research of recently sold comparable properties in the area), then they’ll lend you up to $280,000.If you can find a property for $220,000, and then rehab it and fit all your other loan costs (such as origination) under the 280,000, then you could do the deal without even opening your wallet. (At least with The Investor's Edge—other lenders will require that 10%+ down).
Now that we’ve covered hard money loans, the rest of the strategies will typically be supplemental. For example, if you find a great deal but you need $10k cash to close that you don’t have, these following strategies will work great. Of course some of these can work as standalone funding strategies as well.
Home Equity Line of Credit
Here’s my favorite supplemental financing strategy that I always recommend alongside a hard money loan! If you’re unfamiliar, this means that you’re tapping into the equity of your home. You take out only the money you need instead of borrowing a large lump sum.
What I like about lines of credit is that you can withdraw money as new issues arise. For example, let’s say your rehab is running over budget. You don’t have to scramble around trying to find funding. You just take some more cash from your line of credit!
Home equity lines of credit are cheaper to borrow from than just an unsecured line of credit (meaning there’s no collateral). Also, since you’ll theoretically only be in the deal for 6 months, you’ll be able to pay back the money you borrowed before you’ve accrued much interest, making it a cheap source of funds!
Self-Directed 401(k)/IRA/Roth IRA
This is a lesser known strategy, but for those in the know…they KNOW. This strategy is perhaps the most powerful wealth-building tool in this list!
So, first I need to give you a quick explanation about these retirement accounts.
The 401(k) is an employer provided retirement account, while an IRA is essentially the same thing, but for individuals. A Roth IRA means that your money is taxed before it goes into the retirement account, while the others are taxed upon withdrawal. I prefer Roth IRA, but that’s not important for this conversation.
The important part is that it’s self-directed. A regular retirement account is managed by an account manager, and they decide on a pretty traditional portfolio of stocks and bonds. If it’s self-directed, you get to choose what your retirement funds are being invested in!
The beauty of the self-directed is that they allow you to invest in a wider range of assets, such as real estate, cryptocurrency, and precious metals—none of which are typically available in a traditional retirement account.
So here’s how it works:
Say that you’ve found a fix & flip deal where you need to bring $10k cash to close to make it work.
You take $10k from your self-directed retirement account (don’t worry, it’s not a personal contribution, so there’s no penalty for using the money).
Then once the deal is finished, let’s say you walk away with $40k in profit.
That money goes right back into your retirement account and you pay NO taxes on it! You don’t have to report ANY income. It’s amazing, right?
And you didn’t use any money out of pocket!
Of course, the slight downside is that it’s not quite the same as cash you can use today, but you’re building your retirement account incredibly fast, and with a Roth IRA, you can actually withdraw any contributions you made at any time—just not the earnings. You can more or less use it as a savings account, but one that you can use to flip deals for tax-free earnings.
Here’s a video I did interviewing John Bowens, one of the world’s experts on using Roth IRA’s to make this happen:
Credit Card Advance
This one is FUN!
I remember when I first heard about it…I had a buddy that had purchased a number of investment properties quickly and I asked him how he was able to do it. He said it was with getting cash advances from credit cards.
I know, I know…that either sounds illegal or expensive because it’s a credit card!
But it’s not either of those things. In fact, you can get money with 0% for 6-24 months. It’s crazy, I know.
So usually what happens is that you’ll pay an origination fee (if you’re using a broker), which is a percent of what you’re going to be advancing, but then you can use the money time and time again. This works very well to get money for things like marketing, lead generation, rehab overruns, paying contractors, and of course, cash to close.
So there are two ways that you can make this happen
- Do it yourself. You’ve certainly gotten credit card ads in the mail where they advertise 0% interest on new purchases for a certain period of time, right? Sign up for the very next one of these that comes your way. You’ll use this card for many of your costs along the way. However, you won’t be able to use your credit card for cash to close, which makes doing it yourself more limiting.
- Hire a broker. There are companies out there that specialize in getting you cash from credit cards. With this one, you’ll get personalized help and your money will be “clean,” meaning you can use it to pay the Title Company, for example. When you hire a broker, you’ll have to pay a little more, but think about it like this…don’t ask “how much do I have to pay.” Rather ask “how much am I going to make?” If you have to pay a little more, but it’s going to help you get the deal done, it’s paying for itself 100 times over.
This is a common way that a lot of people get started because they’re afraid to use their own money! With this strategy, I’m going to assume that you’re the investor without a lot of money, but you’re willing to do the work.
In that case, your business partner will put up the money for the deal, and then when you sell the deal, they’ll get their money back and then you can decide from a few different ways to split the money:
- Business partner gets a lump sum – you can arrange that they’ll get $10k back after the deal is done. This can be good or bad for you, depending what the final profit number is.
- You can arrange a percentage split – 50/50 is pretty common, although I’ve seen the person in your situation arrange a higher percent because they’re doing all the work.
- You can treat your partner like a bank and pay them interest on the money – this totally depends on your relationship with the business partner and if they’re okay being treated like a bank. It’s pretty common to offer 10%-15% on the money you borrow in this type of situation.
Picking which is right for you all depends on how much profit you think you’re going to see in the deal, and the relationship you have with your business partner, of course. I always recommend formalizing an agreement beforehand so you don’t run into any unfortunate situations.
Sure, it can be a little scary to approach a family member…but the reward might be a business partner you can trust! Unfortunately, I have seen it go wrong, so I think you should still do your best to formalize your partnership in writing.
The strategy here is going to be the same as a business partner:
You approach them as if it were a business. They have the money, you do the work. Then all that’s left is to figure out the profit split, as outlined in the previous section.
By a private lender, I’m referring to an individual with money who is interested in investing. They may do real estate investing, or perhaps they’re simply entrepreneurs who are always looking to get their money working for them. That could be in a business, or a stock, or whatever it may be.
There also are private lenders who specifically work with fix & flippers. At that point, the distinction between a private lender and a hard money lender isn’t a clear one. Typically a hard money lender is looked at as more of a banking institution, where a private lender is typically just a person.
With most private lenders, they’re going to lend the money just as a bank would. They’re going to set the rates, the timeline, the origination—basically all the costs and terms associated with the loan. Then there will be a contract signed and funds transferred. If you default, the property will then fall under the ownership of the private lender.
So, how do you find a private lender?
It’s becoming easier and easier to do it these days. You can join real estate investing groups online, or local, in-person investing clubs. You can also find them online. For example, Connected Investor helps pair up your needs with a private lender.
Now, I know I said in the intro that conventional loans aren’t really the way to go when getting a loan for an investment property. But of course, it can still be done.
First, you’re not going to want to do a fix & flip with a conventional loan—they’re not really designed for that. You’re likely going to be looking at a buy & hold situation where you’re renting out the property.
The biggest issue here is that you can’t get an FHA loan for a property you’re going to rent out. You’ll likely need 20% down on the property, and often you’ll have a slightly higher interest rate because it won’t be your primary residence. Then depending on your experience, many conventional banks will want to see that you have funds in your account to cover 6 months’ worth of the mortgage on your rental before you can secure a loan for your investment property.
That’s a TON of money up front…If you’re looking at a $400,000 property, you’ve got to start with $80k cash, plus 6 months of the mortgage. If that runs about $2,000/mo, you’ll need $92k to get into the deal.
Another option with conventional loans is more of a long play, but may require much less cash up front. You can buy a home for yourself using an FHA loan. Then once you’re there, you can add to the house in hopes of raising its value (but again, if it’s too much of a fixer-upper, you won’t even be able to get a loan for it).
You’ll definitely have to wait for the market to increase. The strategy here is to wait until you can refinance the loan into a conventional loan. Then, you can move to a new house with an FHA loan, and rent out your original home. You’ll still need 6 months’ mortgage ready to go (if the bank asks for it), but you won’t need the $80k cash as a down payment. When you refinance, you may even get some cash to use for your new property.
Now we’re going to get a little trickier, but it’s an incredibly useful strategy once you understand and implement it!
In this case, you’re going to get the seller to help you get into their own house!
Now, this only really makes sense in a few situations. Of course, the seller has to be in a position where they have the money to finance you and they’re not in a big hurry to get the money from their sale. Unfortunately, that will exclude many of the investment properties you’ll be looking at…but for the right ones, this strategy is worth exploring.
Here’s a couple of ways the deal can look:
- The seller finances your entire deal and you pay them back with interest after the fix & flip. Obviously this one requires that the seller has the ability to pay the entire purchase price of the home with cash on hand. They lend you the money as if they were a private lender, and you pay it back with interest.
- The seller finances your entire deal and you pay them back with a percentage of the profit. This one will definitely appeal to a more entrepreneurial-minded seller, provided they have the means. When it comes time to sell the property, the seller gets his full asking price in cash, and then a percent of whatever you made on the deal—perhaps 50/50
- The seller finances what you lack in funds after your hard money loan, and you pay back with interest. This one is a more common situation, as the seller might only need to lend you $10,000 to complete the loan. At the end, you pay them the money back with interest.
- The seller finances what you lack in funds after your hard money loan, and you pay them a percentage of the profit. In this case, you’ll pay them a smaller percentage of the profit because they only lent you $10k, not the entire purchase price of the house.
A seller might be willing to do this because their house is in need of repairs and they don’t want to do it themselves. They’ll be happy to lend money to facilitate the deal.
Another benefit is that these types of deals may be cheaper and quicker than other types of lending. For example, the seller might not charge you origination, just the interest on the money. And since you’re dealing directly with the seller, you can get any arrangements agreed to and the money moving fast. This is especially true if the seller owns the property free and clear. That way there doesn’t have to be any arrangements with a bank, avoiding extra steps and the host of fees that banks charge for deals.
However both parties in the transaction should hire professionals to draw up a promissory note that sets out the interest rate, schedule of payments, and the what happens should the buyer default. In this case, the money won’t actually transfer from the buyer to the seller, but rather an agreement on repaying the sum over time.
One thing that can potentially hold up deals like these is that you must sell yourself to the buyer. Very few sellers will even know that what you’re talking about is a possibility, and many will think that you’re taking advantage of them. If you can convince them, they may want to see some information like credit history, employment, cash in the bank, and talk to some of your references.
Obviously there are TONS of ways to get loans for investment properties! I wasn’t able to fully go into each one in just this article, but I hope it gives you a good enough base to have an idea of what might work for you.
Having laid out the different strategies, here’s what I would recommend:
Start out each deal by looking at hard money lending. Some people shy away because of higher interest rates, but they’re super fix & flip friendly. When you’re figuring your profitability numbers, you’ll simply take into account how much the interest costs! For example, if the interest on $200,000 is 18%, that means in 6 months you’ll be paying back $18,000 in interest charges. But if you’re going to make $50k on the deal…it’s obviously worth it, especially since you can’t really walk into a bank and get a fix & flip loan.
When figuring out how to fund the rest, it’s really going to be up to your situation and your skill level. I personally have used a Roth IRA for more than a decade, and it’s done incredible things for my net worth.
I also always highly recommend a Home Equity Line of Credit because they’re simple to get, if you have the equity, and you’ll get good rates with it.
Of course, those strategies are contingent on having equity in your home and having money in a retirement.
If you’re starting out completely from scratch with very little money to your name, there are still options:
- Find a deal that’s so good that it can qualify for a The Investor's Edge 100% financing loan
2. Business partner/family member/private lender/seller financing
3. The seller financing part of it is a bit trickier, so only take that on if you’re very confident or have some experience in real estate.
Another quick idea before I end: if you’re brand new to fix & flips and have little money, you can always partner up with someone but only expect a small cut. Like say you’ll do as much of the dirty work as you can, like paperwork or dropping things off or checking in on the property, but you only expect 10% of the profit. Just enough to get a deal under your belt and bit more capital to work with.
Excellent! I hope this has been helpful. If you’re interested in getting funding for a deal, click here and answer a few questions. We’ll see how we can help you.
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