If you’re a business owner or real estate investor, scouting for that perfect funding avenue for your upcoming property procurement can feel like finding a needle in a haystack.Trapped in a traditional finance maze? Bank loans, with their rigid approval hoops and lethargic fund disbursal, may not always serve your best interests.
Fear not! A plethora of vibrant, alternative financing paths are out there, awaiting discovery, tailoring each to unique real estate ventures and borrower scenarios.This article shines a spotlight on the kaleidoscope of financial routes at the disposal for corporations venturing into real estate acquisitions.
Bank Loans and Traditional Mortgages
The most common way to finance real estate is through traditional bank loans or mortgages. In this type of funding setup, lending institutions provide borrowers with funds based on their creditworthiness and income stability.
John Pribble, CEO of DFW Hardmoney says, “Generally, banks require a down payment ranging from 10% to 25% of the property’s purchase price before extending additional funding.”
Besides meeting these financial criteria, borrowers also need excellent credit scores and proof of stable income sources required by banks during underwriting processes.
While bank loans are usually more affordable over time due to lower interest rates than other financing methods like hard money loans (explained below), the stringent requirements and extended approval timelines may create barriers for certain types of businesses or transactions.
Hard Money Loans
If your company cant qualify for a traditional bank loan or you need quick access to funds for a time-sensitive investment opportunity, consider seeking a hard money loan from a specialized lender, among other commercial loan options.
A hard money loan is a short-term, asset-based financing solution that focuses primarily on the property’s value rather than the borrower’s creditworthiness or earnings history.
As a result, hard money loans can close faster and require less financial documentation from borrowers.John Pribble, CEO of DFW Hard Money, says “Hard money lenders are more flexible and open to creative deal structuring compared to traditional banks.
We assess each real estate transaction based on its potential return on investment (ROI) and collateral value instead of simply looking at a borrower’s financial background.” These loans are ideal for fix-and-flips, land acquisition, development projects, or bridge financing between long-term loans.
Private Money Loans
Sometimes referred to as “friends-and-family” financing or “relationship lending,” private money loans come from individual investors looking to lend their personal funds in exchange for an interest return.
These non-institutional lenders may be friends, family members, colleagues, or accredited investors seeking higher returns than what they might earn on traditional investments like stocks and bonds.
The advantage of private money lending is that it offers flexibility in loan terms and repayment schedules while also allowing you to maintain control over your real estate acquisition process without involving external third parties.
However, borrowing from personal contacts may come with added interpersonal risks if the deal goes awry or repayment timelines are met.
Joint Ventures and Equity Partnerships
If you want to invest in real estate but don’t have sufficient funds, consider forming joint ventures or equity partnerships with other investors.
In a joint venture, two or more parties contribute capital and resources toward purchasing and managing an investment property.
Equity partners, on the other hand, may provide full or partial cash infusion for property acquisition in exchange for ownership stakes established in the form of limited liability companies (LLC) or limited partnerships (LP).
In both situations, it’s essential to draft a clear agreement outlining each party’s roles and responsibilities, profit-sharing arrangements, and decision-making processes to avoid future misunderstandings.
Real-Life Example
A recent instance of such collaboration involves Robert & Co., a commercial real estate firm focused on value-add investments that partnered with a family office investor to acquire and reposition under-utilized mid-rise buildings.
By pooling their expertise and financial resources through an equity partnership structure, both partners significantly enhanced returns for each project they acquired together.
Crowdfunding Platforms
Crowdfunding platforms like Fundrise or RealtyMogul are online portals connecting investors with real estate ventures seeking funding.
These platforms allow accredited investors the opportunity to invest small amounts of money into large-scale commercial properties by pooling funds together from multiple contributors.
Investors can select specific investments based on their preferences or desired outcomes. However, these platforms may be less flexible than direct lending sources since investors must adhere to predefined project guidelines.
Additionally, crowdfunding investments often come with limitations regarding potential exits due to commitments made during fundraising stages.
To Conclude
Numerous finance options exist for companies buying real estate, with the best choice depending on property type, deal structure, potential returns, and personal finances. Expert advice and research can help identify the best financing solution, potentially making acquisitions smoother and maximizing profits.
