Investing in real estate is appealing to many individuals. Unfortunately, those that are new to the real estate market don't always know all of their options when it comes to financing a real estate purchase.
In this article, we're going to talk about commercial real estate investment options, such as mutual funds, real estate investment trusts, as well as tax lien certificates. Then we'll discuss property loans, including wrap financing and trust loans.
It is possible to participate in the real estate market without purchasing property directly. In the sections below, are several alternatives to taking out a real estate loan, and directly purchasing property.
Perhaps the easiest way to get started in this market is by purchasing shares in a real estate mutual fund. These types of funds either buy into real estate investment trusts (discussed later), or purchase shares of stock in real estate management companies and / or property builders and developers.
Real estate investment trusts, or REITs, are similar to mutual funds, since the investor is buying a share in a trust that focuses on the real estate industry. With a real estate trust, the investor has the benefits a board of directors has to offer. This includes providing professional advice on the types of properties to purchase.
Investors participating in a trust also benefit from the pooling of money, which allows for a diverse portfolio of real estate holdings. Finally, the trust provides members with professional management of the properties owned.
A tax lien gives the bearer the right to take possession of a property if the owner does not pay the outstanding taxes and interest payments due on that property. In many situations, this is a win-win investment strategy.
For example, if the property owner pays the money owed, then the certificate holder is usually entitled to a generous interest rate on the outstanding balance. If the owner does not pay all the money owed, then the certificate holder can take possession of the property.
Individuals that are interested in getting into the real estate market directly, have additional options. This includes investment property loans. Bear in mind, if a property is distressed, or the original owner cannot make enough rental income with the property to cover expenses, there may be a very good reason the property appears to be a bargain.
Under certain conditions, the properties owned do not make enough money for the original owner to cover their expenses. These owners will then find themselves in a negative cash flow situation, and may be willing to let someone else assume their loan.
The bank will likely charge a fee to process the transaction. One percentage point on the outstanding balance is typical. Assuming a loan from another individual frees up the investor's funds and allows that money to be used for maintenance or improvements to the property. Finally, by assuming a loan, investors may find themselves well into the amortization process. This means more of the monthly payments are going towards paying off the loan's principal and not interest charges.
Another way to finance a real estate investment is with wrap, or contract, financing. With this type of arrangement, the original loan stays in place, and a new loan from a financial institution or the seller is added. In some situations, an investor may have to get permission from the existing lending institution. This is usually indicated within the terms and conditions of the loan.
Wrap loans can be a winning proposition for the seller and buyer of a property. If the going interest rate is higher than the original loan or mortgage, then a half-way agreement is often reached. For example, if the existing loan is at 6%, and the going rate is 8%, the wrap loan might very well wind up at 7%.
If the seller owns the property free and clear of loans, and the property has a lot of deferred maintenance or a high vacancy rate, it may not be possible to obtain financing through a bank for certain commercial properties. In this situation, the seller can act like a bank through the creation of a trust loan.
With a trust loan, the seller can work with the buyer to create flexible payment arrangements, allowing the buyer to devote more up-front cash to address the deferred maintenance on the property.
Whenever encountering a situation where the seller also plays the role of the banker, it's important to engage the services of an attorney familiar with these types of transactions. A contract that outlines the specifics of the agreement will need to be drafted to protect everyone's interests.
Anyone that would like to run through some real estate financing scenarios can choose from several online tools we have to offer:
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