When investing in [city] real estate, buyers have no shortage of options. Whether it’s a 150-unit apartment building or a duplex close to campus, the choices seemingly have no end. Further, as it relates to financing real estate, there too are multiple options available. Perhaps the most common way to finance real estate is to simply visit the bank; or, depending upon the type of property being purchased, to take out a conventional mortgage. Many real estate investors forego the financing option altogether and do an all-cash transaction. In this manner, there is no bank qualification needed, tax returns to complete and everything else that goes with getting a loan for investment real estate. But is that the right move?
Paying cash for a property is perhaps the most convenient, if there is enough cash available, but it’s not always the best move. Why? First, it’s important that you discuss making such a move with your financial planner. Real estate isn’t the most liquid of assets. When you pay cash for a property, getting your equity out of the real estate essentially means selling the home or obtaining a home equity line of credit. But still, that’s quite a bit of money to take from your personal or business account which could be used for other purposes. Instead, consider leveraging your transaction with a short-term, private money note.
Let’s say you have $500,000 available for investing and that sum is sitting in a cash account. You see several opportunities in a neighborhood and the properties are listed for $250,000 each. If you pay cash you can buy two of those homes. Yet if you make a down payment and finance the properties with a private note, you can own even more. Plus, your cash is preserved for other things. You now own multiple properties as you watch your net worth increase.
Like paying cash, private loans can close much more quickly compared to a conventional home loan. Private lenders make their lending decisions internally and can finance your purchase in a matter of days, not weeks or even months, and your cash is still sitting in your bank account. Many real estate investors have a standing loan application with a private lender and once an opportunity is identified, the funds needed to finance the deal are readily available. All that’s needed is a property address. As an investor you can certainly pay cash and there are those who prefer to do so, but for others who wish to keep as liquid as possible and have funds available for that unexpected property that hits your radar, a private loan might be your ideal option.