Succeed in the real estate business by choosing a financing option that works best for your needs. On one hand, traditional options like bank loans are often the go-to for newbies because of their low interest rates and reliability. However, some experts believe hard money loans are the best for newcomers with the right knowledge. If you connect with hard money lenders for beginners who can guide you from application to selling your property for a profit, it could kickstart your investment journey on a solid note. With two great options, traditional financing, and hard money loans, what’s the best choice to fund your first property investment?
How Does Low Credit Score Limit Traditional Financing?
Be prepared for an extensive background check when you apply for traditional financing, especially if it’s your first time. Since banks are more risk-averse, they often shy away from giving money to investors that are 100% reliable. On the other hand, since they don’t know you personally, their vetting system relies heavily on your creditworthiness. As a result, borrowers with low credit scores can have a hard time getting approval.
If they don’t outrightly disqualify you for meeting their minimum credit requirements, you may face higher interest rates than other investors with a much lower score. The concept behind this policy is that since lending you money is such a high-risk venture for them, you have to compensate the bank by paying more for your loan.
Key Differences Between Traditional Financing vs Hard Money Loans
- Approval Criteria
Tidy up your credit history if you want to stand a chance at getting traditional financing. Despite banks offering lower interest rates, those terms are often available to only borrowers with a track record of borrowing responsibly. On the other hand, hard money lenders prioritize your collateral over your credit score. A lender inspection usually focuses on the property value, as well as the physical aspects of the property. Thus, hard money loans are a lifesaver for investors with a murky financial past.
- Loan Terms
Finish paying off your loans several years into the future with a bank mortgage. If you’re looking for a financing option with longer repayment periods, you should certainly consider going traditional. They often give borrowers the luxury of paying back over a 15-30 year period. In comparison, hard money lenders work on a short-term basis, often ranging from 6 months to 2 years at most. As a result, they’re more common for house flips or as bridge financing between a sale and a new purchase.
Importance of Assessing Investment Goals
- Anticipate Risks
Define your investment goals to understand what risks you should anticipate. Despite real estate being known as one of the most stable forms of investment, it is still essential for investors to prepare as it does not come without risks. For example, if your goal is to turn a quick profit, you may opt for a house-flipping strategy. You’ll have to work within a relatively short timeframe and deal with delays if contractors disappoint you. If you’re exploring real estate to build long-term wealth with a rental, then you’ll have to manage tenants and consider ongoing maintenance of your property. As a result, reevaluating your investment goals can help you anticipate and prepare for risks appropriately.
- Make Informed Decisions
Choose the most appropriate financing options for your needs based on your investment goals. For example, hard money loans would be a better option if you want to do a quick flip and turn a fast profit. On the other hand, if you’re in it for the long haul, then traditional financing with low interest rates and longer repayment periods is your best bet. Knowing your investment goals can also help you with other decision-making steps like what property type to invest in and what strategy to use.
Long-term Rental vs Short-term Property Flip
- Cash Flow
Earn a consistent stream of income by investing in long-term rentals. As a result of monthly rental payments, you can expect predictable income while holding the property. Besides, if you outsource most of the management it could be a form of passive income that earns you money while you sleep. On the other hand, income from property flips come from house sales, so you can expect a lump sum every couple months, depending on how often you do a flip.
- Risk Exposure
Bank on your property’s appreciation with long term rentals. As a property owner, you can enjoy the benefits of property appreciation over time, which could cover any losses from tenant damages or maintenance expenses you incur in the short term. In comparison, house flips involve more risk, especially if you take on a highly distressed property. You often have to make a purchase, perform cosmetic changes, and sell it off within a short period to avoid missing the right window or defaulting on your loan.
Conclusion
Hit the ground running with your first property investment by choosing the right financing option. On one hand, traditional loans prioritize having a good credit score, and their long-term repayment periods are better for investors looking to buy properties for rentals. However, hard money lenders care more about the property’s value, so they’re willing to overlook your credit score, as long as you have good collateral. With two options offering unique value, it’s essential for you to assess your investment goals when making a decision.
