Types of Real Estate Investors

Types of Real Estate Investors

Throughout my real estate career Ive spent many dozens of hours talking with lenders and potential financiers of my offers. With all the different types of loans and capital financing products available to investors today its important to have a good understanding of the pros and cons of each one so that you can choose the most appropriate financing option for your specific needs.

Given the current credit situation the options are not only more limited than a few years ago but the definition of a good deal from a lender has also changed. When I first started looking at single family home financing I went over a couple of potential alternatives that were quite good considering the tight credit market today. so its important to not only understand the types of funding available there but also what types are most common and most easy to come with.

The purpose of this article is to define the four most common types of funding available to property investors. While there are of course more than four ways to finance real estate investments most are a derivative or combination of the four we discuss here.

Traditional funding

This type of loan is usually made through a mortgage or bank and the lender can be a major bank or quasi government institution Freddie Mac Fannie Mae etc.. The requirement to qualify for a loan is strictly based on the borrowers current financial situation credit points income assets and liabilities. If you do not have good credit reasonable income and low debt you earn a lot in relation to your monthly obligations you will probably not qualify for traditional funding.

The benefits of traditional financing are low interest rates generally low borrowing costs or credits and long loan periods generally at least 30 years. If you can qualify for traditional funding its a good choice.

Portfolio and Investor Loans

Some smaller banks will borrow their own money as opposed to getting the money from Freddie Fannie or any other major institution. These banks generally have the opportunity to make their own lending criteria and do not necessarily need to just go on the borrowers financial situation. For example a couple of the lenders I have spoken with will use a combination of the borrowers financial situation and the actual investment being undertaken.

As mentioned the major advantage of portfolio lending is that sometimes the financial requirements of the borrower can be relaxed enabling borrowers with less than stellar credit or low income to qualify for loans. Here are some other benefits:

Hard money

Hard money is so called because the loan is given more to the difficult asset in this case Real Estate than it is against the borrower. Hard money lenders are often wealthy businessmen either investors themselves or professionals like doctors and lawyers seeking a good return on their saved money.

Hard money lenders often do not care about the borrowers financial situation as long as they are convinced that the loan is used to finance a lot. If the deal is large and the borrower has experience to implement hard money lenders often lend to those with bad credit no income and even high debt. That said the worse the borrowers financial situation the better the deal must be.

Equity investments

Equity Investment is just a good name for partner. A stock investor will lend money in exchange for a certain percentage of investment and profit. One common scenario is that a stock investor will put all the money for a deal but do nothing of the work. The borrower will make 100% of the work and then at the end the lender and the borrower will share the 50 and50 profit. Sometimes the stock investor will be involved in the current deal and often the split is not 50 and50 but the equity share is the same a partner spreads money to get a share of the profits.

The biggest advantage for a shareholder is that there are no requirements that the borrower needs to meet to get the loan. If a partner chooses to invest and take generally equal or greater risk than the borrower they can do it. Often the equity investor is a friend or family member and the deal is more a partnership in both parties eyes as opposed to a lender and borrower relationship.

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