Many first-time property investors believe they need to have a lot of money or resources to get started in their new business ventures. Fortunately, that is not the case.
Others believe that getting started is both difficult and challenging because there is only one method of securing additional funds, i.e. to tap into conventional bank financing or mortgage.
In reality, there are numerous ways and means of obtaining financing. Here are some options to consider:
Development Finance. Created for businesses that need short-term funds, loans made through Development Financing are meant to pay off development costs, whether for the purchase of land and/or construction of projects. This is a form of property finance used by developer-investors and contractors and intended to be repaid to the lenders within a short period of three to five years.
Bridge Financing. Utilized by many new property buyers and investors, this form of financing is aimed at providing businesses with a ‘bridge’ to address their funding gap over a limited period, e.g. money is needed to start the project but the loan to fund such is still awaiting mortgage approval. Because of its intended usage, it is also referred to as “gap financing” or “interim financing.”
Seller’s Financing. Direct buyer-to-seller financing can facilitate short-term lending, especially for investors with no or limited track record of loan approval, lack the necessary credentials to borrow sufficient funds, or in the midst of growing their businesses.
As an example, a condominium buyer who may have difficulty getting a bank loan due to documentary concerns or irregular sources of funds from overseas remittances can seek in-house financing from a property developer. With this type of financing, the seller provides quasi-bank lending services.
Lease, with Option to Buy. Also known as “rent-to-own” or “lease-to-buy,” this allows new and or undecided buyers some time to make a decision and source their financing before buying the property. In most cases, a contract is entered by and between the property owner and his lessee that allows the latter to lease the property for a period of time, with the option to buy it at a predetermined amount and period, and apply part or all of the rents to the property’s purchase price.
Private Money Lending. Funds may be sourced from family, relatives, friends, or acquaintances who are willing to lend, in exchange for a pre-determined interest rate and at an agreed payback period. Usually premised on a good relationship between parties, this form of financing is less formal but can be a sizeable source of capital.
Peer-To-Peer (P2P) Lending. With access to the digital world, this new form of financing enables property buyers to crowdsource and tap funds directly from multiple lenders, thereby reducing the huge amount needed to be lent by a particular financier.
Investment Partners. Investment partners are another source of funding. Made popular during the software development boom, seasoned investors lend to newbies, by way of equity investments in exchange for a percentage of profits. In addition, would-be partners may also provide time, guidance and expertise, and other resources needed to help grow the business.
Turnkey Funding. This type of financing makes it easy for investors to buy existing properties with minimal cash-outs, and take advantage of using the rents to cover the balance. In this setup, investors who buy rental properties use their lease incomes to pay for the property’s monthly loan amortization.
“PasaLo” Financing. For investors on the lookout for bargains, buying the “rights” or taking over existing mortgages allows new buyers to gain a hold on the property at the original purchase price, and thereafter continue with the long amortization payment schedules. This option is available for pre-foreclosure properties where distressed buyers are more concerned about recovering their initial investment while allowing new buyers to get in quickly and take over the remaining payments needed.
Which one should you choose?
There is no right or wrong financing option. Neither are the above sources mutually exclusive. Understand why you are investing. Weigh the pros and cons of each alternative. Find out which option, or combination of options, is right for your needs.
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References include: “5 types of property finance” (fundingoptions.com); “14 Real Estate Financing Options” (pce.sandiego.edu); “A Guide To Real Estate Financing” by Paul Esajian (fortunebuilders.com); “Tips for Financing Your First Investment Property” (renterswarehousecom).
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Henry L. Yap is an architect, environmental planner, former real estate practitioner, and senior lecturer. He is one of the Undersecretaries of the Department of Human Settlements and Urban Development.
