The world of traditional real estate financing involves highly regulated financial entities like banks and credit unions. While these institutions are an excellent source of funds for the one-time buyer of a single family home, the real estate investor must often search for alternative real estate financing options.
There are several alternative financing routes available to an investor. Each has its advantages and drawbacks.
Here are four of the best:
Family Members & Friends
The easiest people to ask for money but the hardest to convince.
The real problem with most of these types of deals are that they are done on a handshake. Neither party really knows the terms other than that the loan will eventually be paid back at some time in the future. They work well for both parties if there are no complications. Still, more than one relationship has been ruined by a loan between relatives or friends.
Deals between real estate investors and their unassociated business contacts are usually conducted through a contract and have solid and legitimate terms. The problems arise when there is an emergency for one of the investors and they would like to recoup their investment. While the terms are usually detailed, many investors in deals of this type still feel that they can have access to their funds at any time. Again, this type of deal can create significant “bad blood” between friends and associates.
Real estate financing with experienced investors or “angels” suffer none of the drawbacks of the previous two examples. These seasoned investors understand the rules of the game but they will also make you pay a hefty premium to play with their money. These deals are best left to quick flips or any other short term loan arrangement.
Private Money Loans
By far, the best route for an alternative type of real estate financing is the use of private or “hard money” lenders. These investors are also experienced but they recognize that their investment deals are backed by hard assets, are less subject to default, and therefore, do not need to charge exorbitant interest rates.
In addition, these investors control their own money and can invest in any deal without the need to consult with a regulatory or oversight board. In short, for the most versatility, ease of access, security and overall convenience, private money loans are the best option for non-traditional real estate financing.