4 Types of Loans Passive Investors Must Know During the Pandemic

4 Types of Loans Passive Investors Must Know During the Pandemic

This has been a tough year for nearly every facet of the U.S. economy, but real estate at the end of 2020 is still holding its own. In fact, according to a report from Redfin released in mid-October, median home sale prices rose year-over-year by 15 percent in October 2020. That is the highest gain on record since Redfin began tracking home sales data in 2004. In the period of time starting July 6 and ending October 18, median home sales prices rose nearly 7 percent, and pending home sales climbed 32 percent year-over-year. Basically, single-family housing is hot.

Unfortunately, many real estate investors find themselves sitting on the sidelines while their markets skyrocket in value around them. This is actually not a particularly new phenomenon. When markets are heated or overheated, as most suburban and rural markets certainly are right now, it can be difficult to compete with retail buyers who are willing and able to pay more for a property in which they are going to live than an investor is usually willing or able to pay for a property that may need renovations, maintenance, and upgrades before it is rented out or sold.

In today’s pandemic economy, buyers are fighting tooth-and-nail for every available property simply because there are so very few properties available. Even though pending home sales are up along with asking and sales prices, the volume of housing inventory for sale is down because many homeowners simply do not want to move while the COVID-19 pandemic is ongoing. They fear the potential exposure they will inevitably encounter while moving and have concerns about letting buyers into their home for open houses. Even with the emergence of virtual open houses and a trend toward lightning-fast offers and sales (nearly half of all homes that went on the market during Q3 2020 were under contract within two weeks), many homeowners have elected to sit tight – even though they may be experiencing financial hardships that are preventing them from paying their mortgages!

This is a situation tailor-made for real estate investors to get involved and work their creative, win-win-win magic to help delinquent homeowners avoid eventual foreclosure while getting back into a market that seems to be impossible to enter at present. However, even if an investor is working creatively with homeowners, the investor still needs some sort of flexible, innovative financing options to get the deal moving. There are four basic options out there for real estate investors, and most investors only are aware that they can leverage one or two of them. Here are the four types of loans passive investors must know about in the pandemic economy:

1-Short-Term Hard Money Loans

A short-term hard-money loan is a good option for both new and experienced real estate investors who need funding for a short period of time in order to acquire and possibly rehab rental properties or fix-and-flip deals. The important element for short-term hard-money loans is that investors must have a good idea about how long they will need the funds; these loans can get quite pricy if you do not pay them back on the predetermined schedule. On the other hand, they are usually fast on the front end and, if an investor keeps the timeline on schedule, can be a great way to acquire properties quickly and get repairs done.

Investor Insight: Short-term hard-money loans are great if you can keep to your timeline. Consult an experienced advisor if you are not sure how long you will need the money.

2-Long-Term Loans

Many new investors do not realize that most investors with large portfolios carry at least one or two long-term mortgages (and many carry around 10) on their rental properties in addition to the mortgage on their personal home. The terms on these loans can be tough because second, third, and 10th mortgages often require higher down payments and excellent credit, but do not rule out the purchasing power that comes with long-term financing even if you do not have outstanding credit or a long credit history. You probably have more borrowing power than you think!

Investor Insight: In addition to “conventional” 30-year financing, investigate long-term financing options tailored to the needs of real estate investors. You may find you have more options than you think. Working with a boutique investment firm may provide additional options, since many investor groups have relationships with long-term lenders.

3-Fix-and-Flip Loans

Once nearly unheard-of, today the fix-and-flip loan is very nearly conventional in real estate investing circles. However, like short-term hard-money loans, fix-and-flip loans can come with some pretty hefty costs if you underestimate the amount of time you need to get a project done. Fix-and-flip loans are specialty loans designed to accommodate the needs of fix-and-flip investors planning to sell the property once renovations are completed, so they are a good loan model for both new and experienced investors. However, many fix-and-flip lenders prefer to lend only to experienced investors or to investors working with experienced contractors. This can create a hurdle for new investors. Fortunately, many of these lenders maintain relationships with investment firms and will work with newer investors if they are advised by a more experienced party.

Investor Insight: If you are having trouble getting a fix-and-flip loan because you do not have a very long track record, consider working with a more experienced partner, bringing on an experienced contractor recommended by your lender, or going through an investment firm in order to get the first deal or two done.

4-Bridge Loans

Bridge loans are another form of short-term financing that can be used for just about anything the lender will approve. Although bridge loans have higher interest rates than some other loan products, they usually come with fast funding and tend to have flexible terms. However, as with any short-term loan product, investors must be sure of their timeline when taking out a bridge loan. Costs can rise quickly if the project drags on. If you do not already have a preferred bridge lender, ask experienced investors or your investment advisor for a referral.

Investor Insight: If you cannot find a bridge lender to finance your deal, then you may need to take a second look at your numbers. There is likely something about the project that is sending up a red flag in terms of costs, timeline, or both.

Variety is the Spice of Life (and Lending)

While most real estate investors find over time that they have a preferred loan product that fits their strategies and investment styles and, furthermore, that they have one or two preferred lenders, newer investors should try to be open to using different types of loans on different types of deals. Over time, you will probably develop a strong relationship with several lenders who trust your judgment and will work with you on tough projects to get the financing you need. Early on in your investing trajectory, however, do not be afraid to leverage the relationships you do have with other investors, investment advisors, or even mentors and coaches to help you access the funding you need to get your deals done.

It’s true that you do not need very much money to get started in real estate, but you must understand how to make the most of that capital – and gain access to more – if you want to do the volume of deals necessary to build up your portfolio and create full-time, passive real estate income.