Why Real Estate Financing Is More Important Than Ever
Categories: Blog Posts
Great deals are starting to pop up… But here’s how real estate financing could affect them.
Lenders used to fill your “money bucket” 90% or more for a project.
The current market, however, is giving us 80% at best.
What else is the current market giving us? Great deals. The type of deals real estate investors wait years to find.
You’ll need to organize financing so you can close on these deals… You need to fill your money bucket. Here are the basics.
What’s Your Bucket for Real Estate Financing?
Your money bucket is empty at the start of a project. Its size is determined by the costs. For successful investments, you need to fill up the bucket with money.
The financial term for filling the bucket is a “capital stack.” It’s when an investor stacks one loan on top of another until an entire project is funded to 100%. Let’s go over how to put your capital stack, or “money bucket” together.
How Big Is Your Bucket?
If we’re just starting a deal, then our money bucket is empty. Firstly, we need to know: how big is it? AKA, what costs do we need to cover?
There are four main costs in real estate investing:
- Purchase price
- Carry costs
- Interest payments and other miscellaneous
How Much Does Current Real Estate Financing Fill Your Money Bucket?
We need to see if we can fill our money bucket, so we start looking for other buckets of money to throw in. We begin with the loan from our primary lender.
In a typical market, a real estate investment lender (like hard money) would pay 75% of the ARV of the property. That 75% would cover 90% of the purchase price and 100% of the rehab costs.
With tightened money, however, the underwriting guidelines for this bucket have changed. Almost universally, you’ll see these same lenders only offering 70% of the ARV. This adds up to 80% on the purchase and 100% on the rehab. You’re getting less financing for real estate projects, so you’ll have to bring in more money out-of-pocket for this deal.
That’s not an insignificant amount of money, either. Down payments now, in early 2023, are sometimes double what they were six months ago.
You need gap funding to fill your money bucket. Get these great deals that won’t wait!
Want to build your capital stack? Download our free resource on money buckets.
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