Still on real estate investment, in this article, our focus will be on the strategies on how you can pull in finance for your real estate investment.
With a fast-growing economy and a rapidly urbanizing population, the Nigerian housing market has become the frontier of investment in Africa. The growth of the housing market is evident by the various financing structures now available; this goes the traditional method, creative method of financing, to buying with reference to, seller second, to lease, to venture capital financing, public funding, private developers and significant Foreign Direct Investment (FDI).
A report published by the Nigerian Development and Finance Forum states that “One of the biggest investment opportunities is evident in the housing deficit in the country, which is currently in excess of 16 million units, with an estimated requirement of about 720,000 housing units to be constructed yearly to plug this deficit. More significantly, under the new National Policy on Housing, government has set a target of delivering 1 million housing units every year.”
Investment opportunity in real estate is no more a question of deliberation; the gnawing question in the heart of most investors is how to pull in finance. It is pertinent to keep in mind that you can carve a niche for yourself in the industry either as a commercial real estate investor, residential real estate investor or as an industrial real estate investor. They all hold great potential if not equal potential.
Here are five proven ways to finance real estate investment
1. Traditional Method
You can take the traditional route by going banks, micro finance homes, and other home mortgage companies. It is indeed a great way right now to finance a real estate investment. However, because of banking policies and other reasons, traditional lenders have tightened their lending criteria. The requirements of most financial institution are really on the high side. For those that scale through the requirement, most lending scenarios require at least a 10% down payment, although there are still some banks that will approve you for less. If you are able to get approval, now is the time to lock in a great rate.
This way to finance a real estate investment really is the most traditional, safe and well-known method but there are many more ways.
2. Creative Financing
Whenever you hear someone talking about buying "on terms," they are speaking of creative financing. Creative financing refers to any method of financing besides the traditional method. Knowing these methods is essential to savvy investing because they allow you to buy properties using the much-talked-about OPM (Other People’s Money). Most people do not like to hear this, but it works.
Investors often try to use as little of their own money as possible, so it will stretch further. The first creative-financing method you’ll need to be aware of is a “seller carry back.” I learnt this myself recently.
This method is a form of owner financing in which the seller agrees to carry the note for your purchase. This will happen when you find a seller that owns his/her property free and clear. They don’t want the property anymore, but they don’t mind receiving a monthly payment on it. Most of the time, however, the seller will place a time limit for when the note must be paid in full — typically, between one and five years. This is a great way to finance a real estate investment as long as you realize you’ll need to refinance later. Remember: It's easier to qualify for a refinance loan than a purchase loan.
There are more creative ways to finance real estate.
3. Buying with Reference to
This subject-to method is a great way to finance a real estate investment quickly, though it will be a short-term solution. The name "subject-to" comes from the phrase "subject to existing financing." This means that you buy the property on the condition that the existing financing stay in place. The title is transferred, but the loan will stay in the seller's name, and the buyer will make the payments. The reason why this is a short-term fix is because sellers aren't going to be very comfortable leaving the loan in their name for an extended period of time. Savvy buyers will use this method when they don't want to come up with a down payment, knowing they can refinance in six months and get the loan put in their name. This method is commonly used when buying pre-foreclosure properties. The buyer gets into the property with little or no cash, and the seller is willing because they have to get rid of the property immediately. If you use this method to finance a real estate investment, just make sure you uphold your end and make the payments on time.
4. Seller second
Ask men recommended this option and we found it really innovative. Seller second of financing real estate investment is extremely useful and used often.
The "seller second" means that the seller provides a second mortgage. Typically, the second will be just large enough to cover most, or all, of a required down payment. For instance, if you know you're pre-qualified for a loan that will require a 20% down payment, you should make an offer contingent on the seller carrying a note for 20%. This way, you will get into the property without using any of your money and the seller gets the bulk of his equity and makes the deal. One caveat: Make sure the loan you are qualified for will allow a second mortgage to be attached to it. While most will allow this, some won’t.
Finally, if you can’t find a way to finance a real estate investment, you can do a lease option. The lease option allows you to get into the house for little to no money down, and it gives you the right to buy the property down the road — typically, in two or three years. This time period will give you ample opportunity to procure financing. Also, often you can arrange it so a portion of the monthly lease payment will go toward the balance of the home.
There are actually many more ways to finance a real estate investment creatively, but you are now acquainted with some of the most popular. Here is the bottom line: If you're determined to buy a property, you will find a way.
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