How To?

A Complete Guide To Real Estate Financing

Corporate Finance

Today in India, a lot of people are still unaware of the perks of real estate investment. Using real estate as an investment strategy has a lot of potential. Amongst investors, it continues to be a popular strategy to grow wealth. But for beginners looking to get into real estate financing, learning a little about the different aspects can be helpful. There are different options for real estate financing. They have their pros and cons that everyone should know about. So, read on to learn more about real estate financing and its importance.

What is real estate financing?

Real estate financing involves several methods used by investors to secure funds for their forthcoming deals. Investors usually secure their capital from an outside source to buy and renovate a property.

Real estate investment options

A common misconception about real estate investing is that you need a lot of initial money to get going. However, that is not true. Buying real estate isn’t an inexpensive affair. The truth is that there are many different financing options available to fund your investment. As an investor, the method you choose to fund your investment will determine the financial outcome. There are different financing options available. Though all these real estate financing options are equally created, they give different outcomes for everyone.

Here are some of the possible financing options available in India.

  1. Conventional bank loansConventional bank loans are one of the most preferred real estate financing options amongst investors. Banks offer a certain amount of loan to the borrower, and it needs to be repaid in EMIs. The bank usually offers about 60 to 90% of the total valuation of the property as the principal amount. The rest of the money has to be paid as down payment.

    The biggest advantage of conventional loans is that they have a long repayment tenure of 20 to 25 years. So, you can pay monthly EMIs for a long period of time. Over this period of time, the value of the property keeps increasing. Thus, the borrower ends up incurring gains. These bank loans also have low interest rates and minimal processing fees.
  2. Mortgage loansWhile a conventional bank loan is not secured by a collateral, mortgage loans are. Instead of paying for a property with cash, real estate investors can apply for a mortgage. They can use the mortgage to obtain funds from the bank and use it to purchase the property. The mortgage will act as a security in case the borrower fails to pay back the loan. There are different types of mortgages and you can inquire with your bank about the details.
  3. Hard money loanHard money loans are ideal for investors who don’t have a good enough credit score to borrow from a bank. These are loans given out by private lenders for a short period of time. One of the biggest advantages of these loans is that they are solely backed by the value of the property. Hence, in a way, you are not personally liable for loan repayment.

    In case you want to secure long-term financing but need emergency cash, hard money loans can be useful to get immediate funding.
  4. Real Estate Investment Trusts (REITs)REITs are companies that allow investors to invest in big, income-producing real estate. Investors can invest in REITs by buying shares via a broker. REITs operate and own real estate across a range of sectors. They are publicly traded on the stock exchange. The individual investors have potential to gain from the dividends. Thus, REITs are a way of real estate investing without actually having to buy a property yourself.
  5. OtherOther than banks, mutual funds and REITs, investors can also arrange capital through credit unions, finance companies, pension funds etc.

Importance of real estate financing

Here are some reasons why you should consider real estate financing.

  1. Prime real estate will never lose its demand. Thus, it is a much safer investment option compared to some other volatile options.
  2. According to experts, the real estate industry is currently booming. With profits doubling every year, this is the perfect time to invest in real estate