Real Estate Investing Basics

The Comprehensive Guide for Financing Your Very First Real Estate Deal

Expertise: Real Estate Investing Basics, Personal Development, Business Management, Personal Finance
47 Articles Written
finance-first-deal

Are you someone who wants to buy investment property, but you just can’t figure out how to finance your first buy? If so, this article is written for you.  

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What follows are seven different ways to finance your first property. Before that, I’ll also share ideas to make sure this first purchase fits into your overall wealth building strategy so that you don’t waste time going down the wrong paths.

To begin, you should know that every successful investor began right where you are. Just like the longest journey always begins with the first step, enormous real estate wealth begins with your first deal.

I remember very well being a 23-year-old standing at the edge of my new venture into real estate, asking questions like:

  • “How am I going to do this?”  
  • “How will I raise the money for my deals?”
  • “Will the lessons I’ve learned actually work for me?”

It’s normal to have apprehension and self-doubt before starting something important. But the anecdote for this ailment is a big spoonful of knowledge and another big spoonful of action.

I’m going to give you my best in the knowledge department right here, and you’ll have to do your part by taking action on what you learn.

Is that a fair deal?

Now, let’s move on to financing your first real estate investment!

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Strategy Before Details: The 5 Wealth Building Stages

Jumping into borrowing a lot of money against real estate before you understand the bigger picture is sort of like taking off in an airplane without knowing how to land. You may successfully get off the ground, but good luck trying to find your destination and land in one piece!

Here’s the big picture of wealth building as I see it.

The wealth you will build from real estate will allow you to have more freedom, more flexibility, and more time to do what really matters. You can call this financial independence, retirement, freedom, or whatever you want. It’s the peak of the mountain on your wealth building journey.

To reach this financial peak, you have to build a large net worth (a.k.a. equity) so that you can eventually live off of the income from your investments and never have to trade hours for dollars again.

But before you reach that final stage, there are other milestones you’ll pass as you climb the financial mountain. These intermediate stages are important because they determine your overall real estate strategy, which includes how to finance your deals.

Related: Real Estate Financing: The 4 Best Ways Savvy Investors Fund Deals

Here are 5 stages you’ll pass during your climb:

  1. Survival is the milestone when you’re earning some money and getting your bills paid. It’s also the place where you’re digging yourself back out of financial holes you dug in the past.
  2. Stability is like Dave Ramsey’s first three baby steps. You pay off personal debts, you have cash reserves in the bank, and you build job skills that are in demand and command a better income in the marketplace.
  3. Saver is the stage where you realize the importance of your savings rate and put it into practice. Building wealth is actually simple, but it’s not easy. You need to maximize your income, simultaneously decrease your spending, and set aside a lot of money. Below average wealth builders save 0-10% of their income, but above average wealth builders save 25%, 50%, and even 75% of what they bring in. The faster you want to reach financial independence, the more you need to save.
  4. Growth stage is where most of us think of investing. It’s taking your $50,000 nest egg and turning it into $1,000,000. The key is to maximize compounding by reinvesting earnings, buying good assets, and maintaining discipline.
  5. Income stage is when you already have a large chunk of equity and you’re ready to enjoy the fruits of your wealth-building labor. The objective here is to turn equity into regular income that gives you time, freedom, and flexibility.

Which of the 5 wealth building stages above best describe you? Are you in survival, stability, saving, growth, or income modes?

Don’t beat yourself up wherever you are. Everyone has to climb the same mountain, and the fact that you’re doing it now is all that matters.

Once you know your stage, it will help you begin focusing on a real estate investment strategy.  

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Choose a Strategy Before Your Financing

Your real estate investment strategy and your financing are closely connected. You’ll be in trouble if you just walk into a bank and say, “I want a loan so I can buy investment real estate.”

A strategy is your decision about which part of the real estate universe will best help accomplish your financial goals right now. You can invest in fix and flips, house hacks, mobile homes, commercial buildings, private notes, and much more. But you can’t do them all at the same time on your first deal.

So, a strategy is about focus. It will help you get the right financing on your first deal.  

If you’re working on wealth stages #1 or #2—survival or stability—keep in mind that you need a job or a side business more than you need investing. Investing takes your cash, and you need to put more cash in your pocket right now.  

I wrote in more depth about 7 ways (other than wholesaling) to make money in real estate as a newbie. Most of these don’t actually include you borrowing the money because other people will buy your deals, but you’ll learn a lot about financing in the process.

If you’re working on wealth stage #3, saver, it can make sense to begin purchasing and financing investments. Real estate is a great forced savings plan. Many people say it’s bad that real estate is illiquid or hard to sell. I say it’s GOOD. You’re forced to leave it there and not spend it!

If you’re in this stage, a great place to start is with house hacking or live-in flips. You have to live somewhere, so why not multi-task and make your investment a savings tool? Owner-occupant financing programs like FHA or VA, which I’ll explain more later, allow you to get into properties with less down payment.

You could also get into house flipping and rental properties at this stage, but because you lack sufficient savings, you’ll need to leverage the down payment and reserve money of partners or private investors. This is exactly what I did early on.

Related: Newbies: You Should Focus on Your First Deal And Nothing Else. Here’s Why.

If you’re working on stage #4, growth, you should have the credit, income, and capital to jump into real estate investing in earnest. You could focus on the strategy of fixing and flipping houses, renting small residential properties, buying high cash flow rentals like mobile homes, or moving into one of the many other smaller niches of real estate investing.

In the section below, I’ll share some basic ideas below for how to finance your real estate with any of these strategies.

For stage #5 investors, the goal is typically not to leverage up but to deleverage. At this stage, income is a higher priority than maximum growth. You may still choose to have some financing, but I’m guessing if you’re in this stage you’ve already figured out most of the ideas I’m sharing here.

So, you’ve got your stage in mind, right? You have a basic idea of your strategy, and you’re ready to get started.

Now let’s begin unpacking the different possibilities to finance your first investment property.

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7 Types of Financing for Your First Investment Property

Below are seven solid types of financing for your first investment property. For each financing type, I will tell you:

  • What it is
  • The good
  • The bad
  • Who can use it (i.e. owner occupied, non-owner occupied, 1-4 units, or any property)
  • Possible investment strategies with this financing type (i.e. house hacking, live-in flips, rentals, etc.)
  • Where to find this financing
  • Further reading for you to learn even more

If one or more of these financing types sound interesting to you, I recommend making it the primary focus of your education and your follow-up questions in the BiggerPockets Forums. That focus will help you become more competent and confident as you work on your first deal.

Here are 7 possible types of potential financing for your first investment property.

1. FHA (Federal Housing Administration) Loans

What it is: These federally subsidized loans generally have lower down payment requirements (3.5% as of 2016) and easier qualifying standards than other loans. They also have low, fixed interest rates for 30 years.

The Good: Easier to qualify, attractive terms.

The Bad: Fees can be higher than other programs, the closing process is not fast — typically limited to one deal at a time, major fixer properties won’t qualify.

Who can use it: Owner-occupied only.

Investment strategy: Good for house hacking or live-in flips, 1-4 units only.

Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders.

Further reading: Check out this article on buying a duplex with an FHA loan to learn more details about this program.

wholesale-contract

2. VA (Veterans Administration) Loans

What it is: These are also federally subsidized loans only for U.S. military veterans. The terms of these loans are usually the same or even better than FHA, including a 0% down payment.

The Good: Easier to qualify, attractive terms, multiple loans are possible.

The Bad: Like FHA, closing process is not fast, and while multiple loans are possible, there is a limit based upon your maximum entitlement; major fixer properties won’t qualify.

Who can use it: Owner-occupied only.

Investment strategy: Good for house hacking or live-in flips, 1-4 units only.

Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders.

Further reading: For more details on VA loans and using them to buy investment properties, read VA Loan: The Real Estate Investor’s Guide to Eligibility and Funding.

Related: Confessions of an Ex-Banker: How to Get Your Next Loan Approved, Guaranteed.

3. Conforming Loans

What it is: Conforming means the loan conforms to the rules and guidelines of mortgage giants Fannie Mae and Freddie Mac. While the requirements are a little more stringent than FHA or VA, conforming mortgages are still a great mortgage product for investments. Although 20% down or more is the standard for non-owner occupied loans, programs do exist for 5-10% down payments on owner-occupied loans if you hunt around.

The good: Attractive terms with low interest over 15-30 years, faster qualifying than FHA/VA.

The bad: Larger down payment than FHA or VA, limited to 4-10 loans; major fixer properties won’t qualify.

Who can use it: Owner-occupied OR non-owner occupied. Non-owner occupied typically requires more money down, higher interest rates, and other more stringent requirements.

Investment strategy: House hacking, live-in flips, rental real estate; 1-4 units only.

Where to find it: Mortgage departments at banks, mortgage brokers, credit unions, large mortgage lenders.

Further reading: Read this BiggerPockets article to learn more about qualifying for a conforming loan. Also, check out the Eligibility Matrix (8/30/16 version) put out by Fannie Mae to describe their requirements for borrowers.

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4. Portfolio Loans

What it is: Portfolio loans are kept by the bank or lending institution that made the loan, unlike conforming loans which are sold to Fannie Mae, Freddie Mac, or other mortgage investors. This means the requirements and loan terms vary depending upon which lender you use. This was how I financed my very first deal, which was a fix and flip property.

The good: More flexibility, potentially larger number of loans than conforming, possible to get loans on fixer-uppers and commercial.

The bad: Terms are not typically as good as FHA, VA, or conforming loans, you may have balloons in 3-7 years and/or adjustable interest rates, credit and down payment requirements more strict than FHA or VA.

Who can use it: Owner-occupied or non-owner occupied; 1-4 units, multi-units, commercial.

Investment strategy: House hacking, live-in flips, rentals, fix-and-flips.

Where to find it: Banks (especially local ones), savings and loans, credit unions.

Further reading: Brandon Turner wrote a good article about how portfolio loans transformed his business. There are also many threads on the BP forums.

5. Hard Money Loans

What it is: These loans are asset-based loans, meaning the primary concern of the lender is the property serving as collateral. The individuals or small groups that make these loans are in the business of lending, so they can usually move fast, which makes them attractive for purchasing investment deals.

The good: Fixer-uppers are OK, technically no limit to number of deals, can often borrow all or part of repair costs.

The bad: High interest rates and other costs, may not loan to brand new investor who has no experience with real estate, typically short-term loans.

Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial, land.

Investment strategy: Fix-and-flip, rental property (for purchase, will need to refinance).

Where to find it: BiggerPockets has a hard money lender directory. You can also usually find several lenders at your local real estate investor association.

Further reading: BP founder Joshua Dorkin wrote a good overview of hard money loans and BP Podcast #9 was about the subject. This article gives “8 Things the Experts Won’t Tell You About Hard Money.

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Related: How I Find Private Money Lenders to 100% Fund My Deals (& How You Can, Too)

6. Private Money Loans

What it is: Private money lenders are individuals or their self-directed IRA accounts who make loans against real estate. Unlike hard money lenders, these individuals aren’t usually in the business of lending.

The good: More flexibility and faster closings than bank mortgages, potentially lower interest rates and costs than hard money lenders, potentially longer length of terms, and often lending relationships that last for years or decades.

The bad: You can’t walk into a bank and ask for private money. It’s usually a result of relationships with other local investors built over time. Because these investors aren’t in the business, there is usually a limit to the number of loans based upon their available funds.

Who can use it: Non-owner occupied; 1-4 units, multi-units, commercial.

Investment strategy: Fix and flip, rental property.

Where to find it: Networking online (like BP Forums or Marketplace) or at local real estate associations or business meetups.

Further reading: This area of financing is my expertise. I wrote about multiple sources of private money and my first BP podcast interview discussed how I got started with creative financing. You can also check out this private money guide from Ankit Duggal.

7. Seller Financing

What it is: Seller financing means the seller of a property accepts all or part of the purchase price in monthly installments. Unlike a bank, the terms are completely negotiable. The final result is just what works best for both you (the buyer) and the seller.

The good: Typically great interest rate and terms, small down payment is possible, no credit or formal approval process.

The bad: Requires negotiating skills and knowledge of real estate finance and contracts, not every seller has enough equity to seller finance and many with equity want cash (at least initially), you will need to fund your own repair costs.

Who can use it: Owner-occupied or non-owner occupied; any type of real estate.

Investment strategy: Best for rental property or house hacks; also works occasionally for fix and flips or live-in flips.

Where to find it: Direct mail campaigns and other ways to generate leads directly from potential sellers; also possible through knowledgeable real estate brokers.

Further reading: I wrote “Your Guide to Uncovering the Best Seller Financing Deals,” and Brandon Turner wrote the “Definitive Guide to Using Seller Financing to Buy Real Estate.”

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The Next Step is the Most Important Step

In this article, you’ve learned about identifying your wealth building stage, focusing on a real estate strategy, and then choosing a financing source for your first deal.

If you look at all of this information together, it could be overwhelming as a new investor. But the next step for you is not to learn everything. You don’t need to understand every single real estate strategy or financing source. You don’t need to worry about how you’ll do your second or third deals or how you’ll become a millionaire.

You just need to understand one strategy and one financing source and then go do it. The next step in your real estate journey is the most important.

Remember how I started this article? I said I’d share some information, and you’d take action.

It’s that time for the action. The real learning happens when you try to apply what you’ve learned.

Have fun and best of luck!

[Editor’s Note: We are republishing this article to help out newbies who have started reading our blog more recently.]

What financing source seems to be the best fit for you? What is your wealth building stage and real estate strategy? Is there anything I can help you with as you take action towards financing your first investment property?

I look forward to hearing from you in the comments below.

Chad Carson is an entrepreneur, writer, and teacher who used real estate investing to reach financial independence before the age of 37. He wrote an Amazon bestselling book
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    Corey Ricks from Darby, Pennsylvania
    Replied over 2 years ago
    Chad, thanks for posting this article. Your guide serves as an essential road map for the newbie getting their feet wet in real estate.
    Adam Horowitz Lender from Fort Lauderdale, FL
    Replied about 2 years ago
    Chad, I wanted to hear your thoughts on a new source of funding. A hybrid model that could be for your stage 3, 4 or 5 folks. Investors looking to fix and flip, wholesalers or birddogs that want to start investing in their own properties, people that want to buy or hold are some of the strategies this funding will work for. The long and short of the funding is $150k to $200k funding without collateral or income verification….only based on credit score. The funding starts out as lines of credit from the big banks you know and love, Chase, Citi, Bank of America, etc…but is converted into cash without fees…advantages are the quick turnaround for funding, 18 months of zero interest, and a way into investing for people that want to get started. Disadvantage is clear, after the 18 months, interest skyrockets..so investors need a strategy to payoff the balance before the 18 months…payoff from the flip, payoff from a HELOC and let the renter pay the HELOC.
    David Boley
    Replied almost 2 years ago
    Exactly what I needed right now! Thanks for re-posting.
    Nicholas Wilson Rental Property Investor from Philadelphia, PA
    Replied almost 2 years ago
    Chad, I found this article VERY helpful! My wife told me yesterday, “If you want to pursue another property, do the research, find a way and let’s discuss it “ (love her for that). This article gave me direction on what I need to do and look for so I can go back to my wife with a clear understanding and plan! I am transitioning from Stage 1 to Stage 2. We are closing on a triplex we purchased in Wilmington, DE that will allow us to house hack and lower our monthly expenses (stage 1). Now, I am looking for multi-unit properties that can serve as a tool to buy down personal debt (stage 2). We have found a few prospective properties that meet our niche (smal multi-unit rental properties that cash flow above $800) but are looking for the best way to finance since we just used an FHA loan. After reading your article, I think I am most interested in private money lending. I’ll be using the resources you provided to look into it more!
    Chad Carson Investor from Clemson, SC
    Replied 11 months ago
    Glad it was helpful, Nicholas! Your wife is a wise persona indeed if she recommends you do your research first. Good luck with that next deal and private financing. It’s been a great source of funds for me.
    Scott Rose from Kaneohe, HI
    Replied over 1 year ago
    Chad, Timeless article – glad it is still available. I got a lot out of how you broke down the stages – it pushed me to identify where I actually am instead of where I “think” I am. Definitely in Stage 1, but I’ve only just begun the education.
    Eric Carr Real Estate Broker from Los Angeles, CA
    Replied about 1 year ago
    I love the open ended style. There are no one-ways, but several based on how others have and of course, the rules to the game
    Kathryn Rose
    Replied 11 months ago
    Thanks for the article! I’m getting ready to purchase my first “real” property after doing 2 live in Mobile-home flips and using the cash from the sale to move into stick-built housing. This will be my first financed purchase and I’m having some confusion about the best way to start. I hope to employ the BRRRR strategy if possible. With FHA, can you cash-out refinance if you improve the value after you move in? What about the 203k option and cash-out refinancing? I’m really hoping to find a small multi family to house-hack for the first couple of years, but don’t want to wait that long before acquiring the next property. Thanks!!
    Chad Carson Investor from Clemson, SC
    Replied 11 months ago
    Thanks for reading Kathryn! I’m pretty sure you can do a BRRRR to refinance out your FHA loan. There may be some seasoning requirements, but just ask your mortgage lender. I know the 203k loan is a good option for properties that need remodeling, but I haven’t used it personally. Typically on a BRRRR deal you start out with cash, private financing, or some type of short-term financing. Then you refinance with the FHA or conventional long-term mortgage. You can do the purchase and the refinance with FHA or conventional, but you’d probably need a 203k or other remodel loan. And it’s be a lot more hassle up front. good luck!
    Reese Hanson
    Replied 8 months ago
    Hi I'm trying to put a little portfolio ( I guess you'd call it!) together and I'm trying to start with a Single Family, three bedroom one bath home in my area. I've done the math and with two rooms rented I'd pay for the house and land in three years. The market also where I'm at ia pretty decent, no hoodlums or trouble at night or anything like that.
    Reese Hanson
    Replied 8 months ago
    I'm not able to finish college ( I've currently got 1 year to go for a Bachelor's) and since about 2015 I've been on SSI/disability for an incident that occurred, but I wanted to ask the GENERAL people is Real Estate a good way to go? The houses in my area are going for really cheap and the area doesn't have any crime or bad things happening at all. I have told everyone I know that I wanted to have a place to my name, like actually my name! After doing the numbers I'd be able to pay off the house and property in 3years time with the 2 rooms rented,5years with a 1 roommate ,9 years with just myself. Can someone that's done this type of investment talk to me please? Give me pointers/ advise?
    Alfred Johnson from Rocky Mount, NC
    Replied 7 months ago
    Chad, many thanks for an article one can truly use as a newbie investor. While my credit rating isn't fair as of this writing, I'm looking to try a live in flip this year or the first quarter in 2020 as I look to see more clearly. I suspect I will need to go through a good broker here in North Carolina to find financing for a first time property buyer or FHA loan from my understanding of your informative article. Just wanted to thank you and wish you much continued success.
    Altin Maho from Clearwater, FL
    Replied 2 months ago
    as always very concise comprehensive and very clear on your articles Chad. thank you very much and hope you get the best in your life
    Adaora Nwogbo New to Real Estate from Arlington, TX
    Replied 8 days ago
    Thanks for the article. This was very helpful for a new investor to use as a point of focus.