Rob Swanson’s Real Estate Investing Blog

There are 5 specialized niches that you must become familiar with to help you succeed as a real estate investor and fund your deals. Here they are:

Traditional Financing. While this tends to generally be the cheapest money available, it is also the most difficult to get. You have to go through the application and approval process and in most cases today you will need a significant amount of money as your down payment, many times in today’s financing markets, up to 20 to 25%. This source of money is credit driven and based on your financial situation. Traditional financing is your long-term financing option, and a good choice to ‘take out’ the higher cost, shorter term money often used for quick acquisitions and rehab. The cost of traditional financing should generally be zero up to about a point origination fee and, depending on your qualifying, around 6 to 7 percent per annum.

Rehab/Bridge Lending. This form of real estate financing is easier to obtain than traditional money because of the “creative” income qualifying that can be used to get the loan. For example, most bridge lenders have the flexibility to weigh their approval more heavily on either your income or your liquid assets, depending on your situation. While they usually require some down payment, they will often times also lend repair money. It is slightly more expensive than traditional financing and is designed for a shorter term of generally around 6 months, however some programs of up to 2 or 3 years do exist. Rehab/Bridge Lending generally costs between 1 and 2 points and, depending on the lender, interest is charged around prime plus 3 or 4 percent per annum.

Hard Money. Hard money is the easier qualifying, more expensive but faster form of Rehab/Bridge Lending. Hard money is truly an ‘Asset Based’ loan where the lender is more concerned about the equity in the property than your credit score and liquid cash available to qualify. Now, that’s not to say that Hard Money lenders won’t explore your ability to repay, they probably will, but they have the flexibility to design a loan that can work on a very short term basis including no payment options and rolling costs into the pay-off. Hard Money loans are generally much more expensive and cost between 2 and 6 points with interest only payments generally between 10 and 16 percent. You don’t want to end up in a Hard Money loan long term; these loans are usually designed for up to 3 to 6 months. So, before you borrow – have a good way out – plan on using either traditional financing or private money as your long-term take out option.

Flash Cash. Flash Cash is the expensive, fast, prevent the last minute train wreck alternative. When your well laid out plan blows up in your face days, hours or minutes before closing, Flash Cash is your saving grace. These loans are generally designed on an extremely short term basis of 1 day to under 1 month. The purpose of a Flash Cash loan is to ‘bridge’ the time between when you have to close (because your seller is requiring it by contract, i.e. short sales and REO) and when your ‘real’ source of financing can actually fund (i.e. a double close or the funding options discussed above). Flash Cash generally costs between 2 and 4 points for a 1 day loan with interest charged daily at between 10 and 18 percent per annum for slightly longer periods.

Private Money. Private Money can take on a variety of personalities. There are generally 4 basic forms of private money, including: seller financing, private debt, private equity and secured loans. Private money is the only financing option where the borrower creates the terms of the loan. In all the other cases, the lenders are ‘in the business’ of lending money and they set the terms. The cost of private money can range from being extremely cheap, around 4 to 5 percent (even less on occasion) to very expensive with partners taking a big chunk of your profits. The terms are flexible and can be modified to meet the needs of both borrower and lender. The qualifying is based on trust and a good business plan rather than down payment and credit. When structure correctly, the speed of funding is unmatched. Private Money can fund your acquisition, rehab and holding costs and can be structure either on a short term basis or can be long-term financing. Stay inside the guidelines set by the SEC and you can confidently raise private money to serve your private lenders and help you make more money.

Get to know each of these 5 financing areas well and you will be light years ahead in your real estate investing business.