An investor usually tries to get financing through a hard money lender, but the problem is it’s very difficult to find a hard money lender that would lend you 100% of your purchase and rehab.
Hard money lenders usually ask for at least 20% down payment. And even if you find one that does 100% financing, they will require you to have a lot of experience, charge you 15%-16% interest rate plus 3 or 4 points per project. And on top of that you have to split your profits 50/50 and in some cases 60/40 where the hard money lender gets 60% of the profits while you do all the work in finding the deal and rehabbing the property.
Business lines of credit offer an alternative solution to all this.
Considered as viable source of financing, a business line of credit is a tool that most real estate investors overlook.
A business line of credit is a form of unsecured credit that doesn’t require any form of collateral and can be used the same as cash. This can be very beneficial for a real estate investor.
The terms of business credit lines are usually 0% interest rate for the first 6-12 months and then 8.99%-14.99% after the introductory period. Lines range from $10K – $150K. The terms are a lot better than those offered by hard money lenders.
If the price point of the properties are $150K and below, the investor can use the whole credit line to fund the deal without any out of pocket expense to the investor. Credit lines always remain open so it can be used as many times as possible. In addition, there are no points required whenever funds are drawn from the lines.
What if the properties are worth more than $150K? A business credit line can still be used to obtain 100% financing. For example, let’s say the property being purchase is $300K and you only have a credit line of $100K. You can use a hard money lender and pay 20% down using your credit line which is about $60K. That leaves you with $40K left for rehab and closing costs.
Doing this allows the investor to leverage the credit line to buy higher priced property with 100% financing and on top of that, the investor doesn’t need to split the profits 50/50 to the hard money lender. He keeps all the profit to himself. And the great thing is, this can be replicated as many times as possible.
In the world of real estate, investors just have to be creative. Even without initial capital, there are ways to get started and be able to build a portfolio on the way to financial freedom.
Image credit: Images_of_Money on Flickr