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When it comes to financing a real estate investment you really only have two options: come up with personal funds that are enough to cover the house and associated costs, or secure outside funding with a bank/private loan. If you have the necessary funds, you might think it’s a good idea to use those instead of taking out a loan. After all, why bother going to a bank or private lender when you can take care of the situation on your own? Well, we’re here to tell you that might not be the best idea, and it may be in your best interests to seek out a loan regardless of whether you have the personal funds or not. So, why would you want to use a loan to flip a house?
You won’t have to liquidate assets to cover costs
First and foremost, if you choose to fund your investment with a loan you won’t have to liquidate any of your personal assets to cover associated costs. This may seem obvious, but it becomes incredibly important when things like fees, closing costs, or your rehabilitation budget are suddenly higher than you expected them to be. If you decide to use your personal funds on the investment, you may end up in the situation where you don’t have enough cash on hand to deal with these additional costs. You might even have to turn to selling assets or refinancing a different property. If you decide to take out a loan, you’re a lot more likely to have the funds needed to cover these situations.
You won’t be limiting the chance to diversify your portfolio
If there’s one piece of advice that’s common across all types of investing, it’s this: always diversify your assets. You’ll find that this advice remains the same for owning real estate property as well. When you allocate all of your funds into one home, you’re limiting the chance to invest in multiple properties. In the world of investing that is what’s known as an opportunity cost.
Imagine you took the same funds you would use to purchase one property, split it 10 ways, and used each amount to invest in 10 different real estate properties. Now that’s some diversification that would make Warren Buffet proud. Of course, this is an exaggerated case, but the point remains: instead of keeping your cash tied to a single property, you’d be better off putting down payments on two, three, or four different projects. This way, you would be building out a much stronger investment portfolio. If you’re the type of investor who likes to hold on to properties for rental income, this means you could have multiple properties generating positive cash flow sooner.
You don’t need squeaky clean credit
One more reason people may avoid a home loan is they think their credit would exclude them from qualifying for it. This can definitely be true for personal mortgages, but it may not always be the case for real estate investing. Private money lenders don’t necessarily look at your credit scores when you apply for an investment loan. This is because they’re focused on the ARV (after repair value) of a home, and whether the property will be a good return on investment. If you’re trying to secure funding for your next investment but you think credit prevents you from obtaining a loan, you will want to look into working with hard money lenders.
RCN Capital
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Connect with us today to discuss your next fix & flip investment.