How to Finance a Real Estate Investment?
Real estate investment requires a high amount of capital that you might be out of your reach at that particular time. Accessing finance to buy a piece of land has never been easy because of the exposure that the lender of the loan is exposed to.
There are some other issues that are associated with real estate investing, but access to finance is the biggest challenge that every investor has in the market.
If you are an investor who knows how to play around with leverage, then the real estate business is the most ideal sector that you can use to build your investment portfolio.
For instance, if you have $20,000, you can own a property worth $100,000. That means financial institutions can advance you an 80% loan so that you can close on the real estate property. However, this case often applies to house property because the house automatically becomes collateral against the loan.
Now, in a case where you don’t have the sufficient amount required to close a land deal. What do you do and banks discourage this kind of loan?
In this article, let’s look at how to maneuver such cases so that you can get started in real estate even with little capital.
Every property in real estate has some basic facilities that matter the most and lenders consider them as well. So, when it comes to Land, understanding the land size, local zoning, and land restrictions if any is very important.
You need to determine the exact size of the piece of land with help of a registered surveyor. The surveyor should be able to establish if the property has any land restrictions that can hinder the development of your property.
Some other facilities like social amenities- roads, electricity, water, and sewer systems are some of the considerations that considerer, to avoid paying extra money after purchasing of the property.
Since buying land is different from purchasing a house, it is advisable to work with an experienced real estate company or agent that deals with lands buying and selling.
Intended purpose of Land
What is the intention of acquiring the land, is it for immediate construction or speculation purposes?
Depending on the intention of land, banks tend to demand a lower down payment if you are planning to immediately after acquisition. The reason why they demand a lesser down payment is that the timeline for development can be projected.
Their interest rate is lower as well.
If you are buying land merely for speculation purposes, then the down payment is usually 50% and the interest is high because the lender is highly exposed in terms of risk.
Undeveloped plots or land tend to have unforeseen expenditure in the future, that is why banks discourage its loans products.
Land Financing options
Below are some of the finance options that you can consider in light of problems associated with vacant land financing.
Some of the real estate companies offer seller financing whereby they allow the buyer to own a piece of land with some deposits, often 10% of the actual price.
The seller in this case acts as a bank but in a very informal manner. The title deed of the property is given after you have completed the payment.
Ensure you understand the terms of the contract to avoid entering a contract with conditions against you.
Local Banks & Credit Unions
Local banks and credits unions like SACCOs have very friendly terms towards real estate investors who are looking to buy vacant land.
These institutions have friendly interest rates.
In conclusion, real estate properties attract different interest rates and varying levels of down payment. For vacant land, the risk is often high and requires a high down payment.