What is Alternative Financing?
In the past, real estate entrepreneurs have typically relied on loans from banks in order to finance their real estate and flipping projects. While this option has suited some, it can be limiting for other entrepreneurs with projects that banks may view as undesirable. However there is no need to despair: new, alternative financing solutions have become available to real estate entrepreneurs seeking funding in Massachusetts.
Alternative financing includes options like hard money loans, private money loans, crowdfunding and more. With these new possibilities, entrepreneurs can really find the best fit for their project. Let’s dive deeper into how to alternatively finance fixing and flipping in Massachusetts:
The Trouble With Banks
Bank loans, and even home equity loans have been used to fund investment properties in the past, mostly due to lower interest rates. Sounds great right?
Real estate entrepreneurs will find a different reality. The loan approval process can be slow and costly to go through, with banks picking apart every detail of the entrepreneur’s financial history. These consideration times can even be drawn out for so long that it could cost the entrepreneur the opportunity to close the deal! The reason for this is regulation; loan applications are subject to strict scrutiny , which means that most banks are more likely to reject loan applications based on details like credit history, other debt burden and prior real estate experience.
Hard Money Loans
Hard money loans, big in the early 2000s, are regaining popularity as an option for real estate entrepreneurs in the present. Loans from hard money lenders offer many benefits such as faster approval times, the ability to grant loans to borrowers with bad credit and the need for little seed money from the entrepreneur.
With hard money loans, the loan funds are collected from private investors, which also means there are less strict requirements prior to getting approved, and more flexibility in things like repayment times. Hard money lenders like New Silver are also able to fund multiple projects at once, so entrepreneurs can pursue more than one property at a time.
Private Loans
Private loans are loans given by an individual such as a family member, friend or person in a personal network. Hard money loans and private money loans are sometimes referred to interchangeably, but the difference is that private money loans are granted using the lender’s personal funds, while hard money loans are more similar to hedge funds and lend from a pool of funds provided by a group of private investors.
Private loans can be more flexible in terms and rates, but finding a private lender willing to provide funding for a flipping project is a task in itself due to the risk associated.
Crowdfunding
Crowdfunding is a groundbreaking real estate financing option, particularly with younger entrepreneurs. The internet has contributed to this growing trend, enabling the public to fund nearly anything through a variety of crowdfunding platforms that are easily accessible.
These funds come in the form of smaller scale investments from private investors, but due to there being numerous smaller amounts, the interest rates can be higher than other funding options. There is of course, also no guarantee that a project will be 100% funded at all, not to mention within a shorter time frame. This method is also more dependent on location, as local state rules and laws will apply. In Massachusetts, crowdfunding is an approved funding method.
There are many options available to real estate entrepreneurs looking for alternative financing in Massachusetts. Beyond the traditional bank loan, entrepreneurs can find financing from hard money lenders, private lenders like friends and family or, depending on local state laws, even try crowdfunding. It’s up to the real estate entrepreneur to choose the best suited option for their project. Speak to New Silver today and find out if we’re a good fit for your next project!