This article provides a summary of the different kinds of loans used by California real estate investors. It gives you a starting point for additional research, while exposing you to some of the different financing options that can be used for purchasing investment properties in California.
Types of Loans for Buying California Investment Properties
While real estate investors in California have many financing options to choose from, most of them use one of the five types of loans mentioned below. Popular options include hard money and private money loans, along with the debt service coverage ratio (DSCR) loans. So let’s talk about what they are and how they work.
1. Conventional mortgage loans
Some real estate investors use traditional or conventional mortgage loans to finance their investment properties. But there are certain pros and cons to consider when choosing this option.
On the upside, conventional mortgage loans typically offer the lowest interest rates among all financing options. This means investors can save money over the life of the loan. Additionally, conventional mortgages offer longer repayment terms, which allows you to spread the payments over a longer period to reduce their size.
On the downside, conventional mortgage loans tend to require more documentation and take longer to process. The qualification criteria can also be stricter, when compared to some of the other financing options below. Because of this, some real estate investors in California shy away from conventional mortgage financing.
2. Hard money loans
Hard money loans are a type of short-term loan often used for fix-and-flip properties. They typically have higher interest rates and fees than conventional loans, but they can be a good option for investors who need quick access to cash for purchasing properties.
Hard money loans are called “hard” because they are typically secured by a hard asset, such as real estate. They’re often issued by private lenders or investors, rather than traditional banks or financial institutions. The qualification process and loan amount will depend on the value of the collateral property, rather than the creditworthiness of the individual borrower.
3. Private money loans
Private money loans are made by individuals or groups of investors, rather than banks or other traditional lenders. They can be a good option for investors who have difficulty qualifying for a conventional loan, or who need a loan for a property that is not considered to be a good investment by traditional lenders.
Private money loans typically have higher interest rates and shorter terms than traditional loans (a common theme among alternative financing options). This is because private money lenders are taking on more risk, as they are not backed by the government or a financial institution.
4. Home equity loans
Home equity loans are secured by the equity in your primary residence. They can be used to finance a variety of expenses, including the purchase of an investment property. Borrowers can often obtain up to 85% of their home equity (which is the value of the property minus the amount owed on the mortgage).
Home equity loans typically have lower interest rates than credit cards and personal loans, but they can have high closing costs. They can be a good option for investors who have a lot of equity in their primary residence and need to borrow a large amount of money.
5. Debt service coverage ratio (DSCR) loans
Debt service coverage ratio (DSCR) loans are a type of commercial real estate loan that is based on the cash flow generated by the property. To qualify for this type of financing, the borrower must be able to demonstrate that the net operating income (NOI) of the property will cover the loan payments, with a margin of safety.
California real estate investors use DSCR loans because they provide a way to finance income-generating properties. They tend to require a lot less documentation when compared to a conventional mortgage, and typically offer a much faster closing timeline as well.
Differences Between Private and Hard Money
As mentioned above, private and hard money loans are popular financing options among real estate investors in California. But they’re also commonly confused. Here are the key differences between these two types of real estate investment loans:
Private money loans are typically provided by individuals or small investment firms who lend their own money to borrowers. These loans can have more flexible terms than traditional loans and can be used for a variety of purposes, including real estate investing. Private money lenders may be more willing to work with borrowers with poor credit or unique financial situations.
Hard money loans, on the other hand, are typically provided by private investors or companies that specialize in providing short-term financing for real estate investments. Hard money loans are secured by the property itself and typically have higher interest rates and fees than traditional loans. They are often used by investors who need quick access to cash or who have poor credit.
A hard money loan uses the “hard” asset of the actual real estate, whereas a private money loan analyzes both the property and the borrower’s financial strength. So while they do share certain similarities, they also have some important distinctions.
Ready to Explore Your Financing Options?
The truth is, there is no single type of loan that works best for all real estate investors in California. Investment property purchases can involve a lot of different variables. So you have to choose the right type of loan for your particular financing goals and income situation.
Bridgepoint Funding works with real estate investors and borrowers all across the state of California. As a mortgage broker with a diverse group of partners, we can offer most of the financing options explained in this article.
Please contact our staff if you have financing questions or would like to apply for a loan!
