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3 Popular Ways to Real Estate Financing

Posted by Ken Meyer on Wed, Oct 09, 2013

shutterstock 106690454While there might seem to be as many real estate financing options as there are types of properties, when you really break them down, there are really three main camps -- traditional financing, seller financing and private financing. Each of them has strengths and weaknesses, and all three of them should be a part of your toolbox as a real estate investor.

Traditional (Bank) Financing

Traditional financing is a lot like going to a warehouse store. Before you can get it, it's inconvenient. With a warehouse club, you have to buy a membership and you have to usually go out of your way to go to a store. With a traditional lender, you have to go through their lengthy application process and submit a lot of paperwork. Once you get into the warehouse club, there are great deals, but you can't always get what you want. Banks are the same. Their terms and conditions are usually favorable, but they have a very limited scope of deals on which they'll lend.

When you have a simple, cookie-cutter deal, banks are a great option. However, most banks don't have the ability to tailor their real estate financing for more creative properties. Unfortunately, those are usually the best deals.

Seller Financing

If you can get it, seller-carried real estate financing is frequently a good deal. When you have a seller that's willing to finance, you might be able to negotiate a transaction with zero down or negotiate one with interest only payments. However sellers are usually only willing to finance in one of two situations:

  1. The property is hard to sell
  2. The seller wants long term income without tax consequences

In the first case, it could be a sign that you're looking at an undesirable or overpriced property. Sellers in the latter case may offer great terms, but complicate them with prepayment penalties or long terms that might not fit your strategy.

Private Financing

When you take out a private loan, you're working with an investor like you that simply wants to make a profit. Private real estate financing might be more expensive than bank financing, but it's usually extremely flexible. This lets you use it to get into the best deals quickly so that you (and your private lender!) can earn your returns and move on to the next investment.

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