How Much Money Do You Need to Invest in Real Estate?
How Much Money Do You Need to Invest in Real Estate?
When it comes to real estate, there are a lot of things to think about. One of the most important factors is how much money you need to invest. This blog post will discuss different scenarios and how much money you need to start. As you can imagine, it varies greatly depending on your investment strategy and goals. However, we will do our best to break it down.
Understanding Real Estate Finance and Raising Capital
Before we get into how much money you need to invest, we must understand some basics of real estate finance. There are a variety of ways to finance and fund real estate investments. It’s a good idea to have a broad concept of these options to know where to begin.
Traditional Investor Mortgages and Commercial Loans
Real estate is usually bought with the help of a mortgage. A mortgage is a loan that is secured by the property. The property itself serves as collateral for the loan. Mortgages are typically long-term loans, which means they have a life span of 10 to 30 years. The interest rate on a mortgage is usually fixed, which means it will not change over the life of the loan, but variable interest loans can come at discount interest rates.
Investment mortgage loans are different from other types of mortgages because they almost always require at least 20% down, and sometimes even 25%. This is important to remember, as the cash requirement for this type of loan is significant compared to buying individual homes, which often only require 3.5% down when going through FHA.
Hard Money Loans
A hard money loan is a short-term loan that investors typically use to purchase a property. These loans are usually interest only, which means that the monthly payment goes towards the interest and does not reduce the loan’s principal. Hard money loans are typically for 12 months or less but can be extended to 24 months in some cases. These loans are typically used for flipping or wholesaling property since they are shorter term and carry higher interest rates.
Owner Financing
Owner financing is when the property owner agrees to finance their property’s purchase. This type of financing is typically used when the buyer cannot qualify for a traditional mortgage loan. The terms of an owner-financed deal are negotiable, but they typically involve a higher interest rate and a shorter loan term than a traditional mortgage.
Borrowing Funds From Family and Friends
Another option for financing a real estate investment is to borrow funds from family and friends. This can be a good option if you have a solid relationship with the people you are borrowing from and are confident in your ability to repay the loan. However, it is important to remember that this type of loan can strain relationships if not handled properly.
Real Estate Crowdfunding
Crowdfunding has become a popular way to finance all sorts of projects, including real estate investments. With crowdfunding, investors pool their money together to fund a project. There are a few different crowdfunding platforms, but the most common type for real estate investing is equity-based crowdfunding.
Portfolio Loans
A portfolio loan is a type of loan that is typically used by investors who own multiple properties. These loans are usually for larger amounts and frequently have higher interest rates than traditional mortgage loans. They are also shorter, so they need to be paid back more quickly, but they are used to finance unique and large real estate investments.
Home Equity Lines of Credit (HELOCs)
Another option for financing your real estate investment is to take out a home equity line of credit (HELOC). A HELOC is a loan that uses your home as collateral. These loans are typically used for projects that will improve the value of your homes, such as renovations or repairs. However, they can also finance other investments, such as rental properties.
Cash, IRAs, and 401ks
This is obvious, but it bears mentioning that you can always finance your real estate investments with cash or through certain retirement accounts. While this may not be the easiest option for some, it is an option for those with the liquidity to do so. We recommend talking to a financial advisor or accountant to see if this is an option for you.
Approximate Amounts of Cash Needed
Buy and Hold Rental Property
Let’s assume you are using a traditional investment loan and want to buy a property to buy and hold. This table should give you an approximate amount of cash needed based on the purchase price:
Fix and Flip Real Estate
There are more factors than just the initial purchase price when it comes to fix and flips. You will also need to factor in the cost of repairs, holding costs, and your exit strategy. With that said, here is a general idea of how much cash you will need for a fix and flip:
As you can see, the amount of money needed to invest in real estate can vary depending on your investment strategy. However, there are financing options available for all types of investors. Talk to a loan officer or financial advisor to see what option is best for you.
