Real estate financing has become quite easy these days. Banks and credit unions offer real estate financing loans, and even cash advance loans via merchant services like Fios or AT&T Wireless.
As the internet has made it easier to find and apply for credit cards and loans via app, people are finding more ways to easily obtain funds for projects. Some of the most popular sources for real estate loan funding are loan equity buyouts, private equity investment, debt financing, and direct loan programs.
This is not true for all industries; in the hospitality industry, debt may be very important to obtaining quality equipment or construction materials.
This article will discuss how to demystify real estate financing for the hospitality and multifamily industries.
Three types of financing
While there are several types of financing available for the hospitality industry, there are also three main types. These include:
Zero Down Financing – This type of financing is typically for low to moderate income properties. Because it requires a higher amount of money to fully accommodate the property’s needs, only higher quality properties can apply for zero down financing.
Asset Revaluation Assistance (REA) – This type of financing involves having your property reevaluated for value by a qualified REA team. The difference between a dollar value and an assessment is what makes this type of financing difficult to apply for.
Refinance Loans – This type of banking covers loans that have changed from mortgage to mortgage, or from one loan term to another. Because of this, refinance loans do not have any credit score criteria or limits on total debt owed.
Hard money loans
Hard money loans are still a common way to finance real estate projects. While they are not as prevalent as they were earlier, still many projects require hard money loans today.
Like credit cards, there is a minimum amount of money required to complete a loan. When this minimum amount of cash is met, the bank will approve the loan.
Some banks will only offer hard money loans on property worth more than $1,500,000+. Thus, if you have a $200,000 condo that has been valued at $1,500,000+ you would be out of luck trying to get an easy money loan from the bank.
Instead of getting an approved credit card or hard money loan, you would apply for and receive a reverse mortgage from them which requires you to give up your current home in exchange for the new one.
Soft money loans
A hard money loan is a more permanent solution to expanding a business. This type of loan requires substantial investment from the borrower to pay off the loan.
Unless the owner has significant income flowing in from past work or assets, it can be difficult to obtain a hard money loan. This is due to the fact that lenders look for evidence of financial stability when evaluating potential borrowers.
This is not a problem for small, temporary projects that need funds quickly. For instance, a chef who needs money now to open a restaurant can get a soft money loan and secure the necessary financing in just days.
However, with more solid footing in business and personal finances, loans like this one become more common.
Equity investments
Investing money is a lot more fun when there are others around to help. You can’t just show your apartment to the world and expect success, it has to be approved by someone else before it can be used as a rental.
So, how does real estate financing work? Are there always people around to help you out with investing?
Well, let’s talk about it!
As mentioned earlier, real estate investing is all about finding places to put your money and/or projects. These projects can be single-family homes, apartments, businesses, etc. The best places for new investors are usually in the non-commercial sector such as residential construction or property management.
Debt investments
As the name suggests, debt investments can be classified as investments where you invest money but without receiving anything in return. These include trading debt for equity and flipping real estate.
In fact, these types of investments have gained popularity as a way to get your hands on some property but without the typical steps of transferring ownership or flipping.
As the name suggests, debt investments can be classified as index-track debts. These are generally low-grade debts such as credit cards or loans that you would purchase at a certain rate per credit card or loan amount per loan.
For example, if you had a $3,000 credit card with an annual fee of $30, you would expect it to take out only $1,300 in annual fees over the course of years. By applying this concept of track records on debts to real estate investing, we can help our clients get their projects off the ground and into production.
Combination of financing options
Real estate financing has become quite complex these days. Even for experienced bankers and financing experts, it can be tough to nail down all the details and options available.
For instance, a bank might offer a traditional loan with a home as the collateral, followed by cash out of the gate as payment. Alternatively, the bank could add an asset-backed security (ABS) as backing for the property, followed by another loan for more money to cover acquiring and maintaining the property as well as construction.
Another option is secured lending, where a bank borrows money from a securities firm or private lender but without taking the risk of defaulting on the debt. The bank gets protection from any default on the loans, which can be difficult with ABSs due to concerns about title stability.
As consumers continue to mix and match various financing options, being aware of what each has its own benefits.
Understanding your business plan
Once you’ve identified your target market, it’s time to figure out how to market your business. Choosing a business name, a website, and creating a marketing plan can be challenging decisions that require careful planning.
There are many rules about running a business, and some of them you will have to bend. For example, very few small businesses have lawyers or accountants to look over their paperwork.
But overall, most people find having a stationary store, an antique shop, or a craft store provides enough visibility to find customers. People also tend to trust people who say they know what they are doing so!
Having an established social media presence is also important for getting your message out into the world.
Documenting your property and assets
Once your real estate transaction is complete, you will need to document your property and assets. This can be done in many ways, both by using recorded conversations and by documenting documents during the transaction.
Using recorded conversations is the most common way to document property and assets. You can use anything from a recording device, software program, or notes to doo-doo for this.
It is extremely important to keep any recordings as they would be in an actual situation- with people talking, music playing, etc. This includes recording spouses or roommates if there is a shared system for communicating properties and assets.
Once all of these records are filed or recorded, you can easily determine if there are problems with the property or asset because of debtors or liens.
