The real estate space is the one business where an investor heavily leverages his credit, his assets and his reputation to fund his business. Millions are made with OPM (other peoples money)by savvy investors. The credit market is so robust and mature in this space that it often gets overwhelming especially if you are new to the game. So to help understand the different credit facilities better I have listed a few of them below along with their most defining characteristics.
- This is usually given by private banks against your real estate asset
- They will usually fund upto 80% of the transaction value provided that the value is within the appraisal limits.
- Comes in Floating or Fixed upto 30 years
- The interest rates are linked to the published fed rates and generally are around 5% per annum
FHA, VA or USDA
- They are government backed loans.
- They require a smaller down payment which can go as low as 5%
- An additional mortgage insurance is required (PMI)
- The rates are similar to conventional loans
- Can get them upto a period of 30 years
- There are additional requirements for a home to qualify for a FHA loan.
- This usually gotten through private individuals who have good knowledge of the real estate industry. Though this category of lenders is becoming more formal and institutionalized.
- Expect to pay about 10% per annum on the amount borrowed.
- You can get funding anywhere from 70% of the ARV of the asset to over a 100% to even cover constructions cost
- There are usually opening and closing fees/ points (which is a percentage of the loaned amount) associated with it
- The terms of this type of lending vary greatly on the kind of relationship the lender and the borrower have.