Skip to content

Smart Financing for Real Estate Investors: Short-Term and Long-Term Options in Saint Louis

    Introduction

    Real estate investing is a powerful way to build wealth, but it often requires substantial financial resources. Understanding the different financing options available can help investors make informed decisions and optimize their investment strategies. This guide provides an in-depth look at various real estate financing options, their requirements, advantages, and disadvantages, tailored for investors in the Saint Louis area and beyond.

    Section 1: Short-Term Loans for House Flipping

    House flipping has become a popular real estate investment strategy, often glamorized on TV shows like “Flip or Flop” and “Fixer Upper” on HGTV. The concept is straightforward: investors purchase properties at a lower price, renovate them to add value, and then sell them at a higher price to earn a profit. While it may seem exciting and lucrative, house flipping involves substantial risk, meticulous planning, and significant financial investment. Here are the most common short-term financing options for house flippers in Saint Louis:

    Hard Money Loans

    Definition: Hard money loans are short-term, high-interest loans provided by private lenders, secured by the property being purchased.

    Requirements:

    • Collateral: The loan is secured by the property’s value and potential profitability (After Repair Value – ARV).
    • Credit: More lenient compared to traditional loans.
    • Income: Less focus on income; the primary concern is the property’s value.

    Pros:

    • Speed: Fast approval and funding, often within days.
    • Flexibility: Terms can be tailored to individual deals.
    • Accessibility: Available to borrowers with poor credit or those needing quick funds.
    • Low Down Payments: With some lenders, if you buy the property right, down payments can be as low as $0.
    • Rehab Funding: Lenders may also provide funds for the property’s rehab costs.

    Cons:

    • Higher Interest Rates: Typical rates are around 12%.
    • Short Terms: Typically less than a year, requiring quick repayment.
    • Higher Fees: Typical origination fees are around 3% of the loan amount.

    Finding Hard Money Lenders: Hard money lenders can often be found through local real estate investment groups, networking events, or online directories. Websites such as LinkedIn, BiggerPockets, and local REIA (Real Estate Investor Association) meetings are excellent resources.

    Example: Consider a local investor in Saint Louis who used a hard money loan from FasterFunds Lending to purchase a distressed property. By leveraging the quick funding, they were able to secure the property, complete renovations in under six months, and sell it at a substantial profit.

    Private Money Loans

    Definition: Private money loans are loans from private individuals, often friends or family, rather than institutions. These loans are based on personal relationships and trust.

    Requirements:

    • Relationship-Based: Depend on personal relationships and trust.
    • Collateral: Property or other personal assets.

    Pros:

    • Flexibility: Negotiable and personalized terms.
    • Speed: Faster approval compared to traditional loans.
    • Accessibility: Suitable for those who don’t qualify for conventional loans.
    • Rehab Funding: Lenders may also provide funds for the property’s rehab costs.

    Cons:

    • Potential Strain on Relationships: Financial disagreements can affect personal relationships.
    • Varied Terms: Can vary widely and may be less favorable if not carefully negotiated.

    Finding Private Money Lenders: Private lenders can be found through personal networks, real estate investment groups, and networking events. Building a solid reputation and maintaining strong personal relationships can help attract private money lenders.

    Example: A couple from Saint Louis secured private money from a family friend to fund their first flip. With flexible terms, they managed to complete the project ahead of schedule and returned the loan with interest, paving the way for future projects.

    Borrowing from Local Banks

    Definition: Local banks and credit unions offer short-term loans specifically designed for real estate investors looking to purchase, rehab, and resell properties.

    Requirements:

    • Collateral: Typically the property being purchased.
    • Credit: Good credit score required.
    • Income: Proof of stable income.

    Pros:

    • Competitive Rates: Often lower interest rates than hard money loans.
    • Personal Service: More personalized attention and flexibility.
    • Local Expertise: Better understanding of the local real estate market.
    • Rehab Funding: Lenders may also provide funds for the property’s rehab costs.
    • LLC Financing: Ability to have the loan in the name of your LLC, providing liability protection and other benefits.

    Cons:

    • Stricter Requirements: Higher credit and income standards.
    • Approval Process: Can be slower than hard money loans but faster than conventional mortgages.
    • Higher Down Payment: Typically require a down payment of 20-25% of the purchase price.
    • Variable Rates: These loans are typically amortized over 20-25 years but require renewal every 3 years. The renewal process is usually straightforward if the borrower has been making payments on time and the property’s value has not declined significantly. However, the interest rate will adjust to the current market rate at the time of renewal.

    Finding Local Banks: Research and contact local banks and credit unions in your area. Building relationships with loan officers and demonstrating a solid business plan can improve your chances of securing a loan. Local real estate investment groups can also provide recommendations.

    Example: An investor in Saint Louis partnered with a local credit union to finance a property flip. The personalized service and competitive rates allowed for a smooth transaction and successful flip.

    Comparing Short-Term Loan Options

    Interest Rates:

    • Hard Money Loans: High, up to 12%.
    • Private Money Loans: Variable, depending on personal agreement.
    • Local Banks: Lower than hard money loans, competitive rates.

    Approval Time:

    • Hard Money Loans: Fast, often within days.
    • Private Money Loans: Fast, depending on personal relationships.
    • Local Banks: Slower, but faster than traditional mortgages.

    Flexibility:

    • Hard Money Loans: High flexibility in terms and conditions.
    • Private Money Loans: Highly flexible, negotiable terms.
    • Local Banks: Moderate flexibility, more structured terms.

    Best For:

    • Hard Money Loans: Investors needing quick funds for high-potential properties.
    • Private Money Loans: Investors with strong personal networks.
    • Local Banks: Investors with good credit, income stability, and large cash reserves.

    Section 2: Long-Term Financing for Landlords

    Building a portfolio of single-family rental properties can be a powerful strategy for generating long-term wealth. Investing in rental properties provides a steady stream of passive income, potential tax benefits, and property appreciation over time. By acquiring and managing a portfolio of rental properties, landlords can create a reliable income source that can support financial goals such as retirement, education funds, and financial independence. Moreover, real estate investments can serve as a hedge against inflation, as rental income and property values tend to increase with inflation. Diversifying a real estate portfolio with multiple properties in different locations can also mitigate risks and enhance overall returns. Here are the most common long-term financing options for landlords:

    Conventional Loans

    Definition: Conventional loans are standard long-term mortgages provided by banks and financial institutions, commonly used for purchasing residential and investment properties.

    Requirements:

    • Down Payment: Typically 20% of the property’s value.
    • Credit Score: Good credit score (usually 620 or higher).
    • Income: Stable income with documentation.
    • DTI Ratio: Less than 36%.

    Pros:

    • Lower Interest Rates: Generally lower compared to other loan types.
    • Long Terms: Typically 15 to 30 years.
    • Predictable Payments: Fixed interest rates provide consistent monthly payments.
    • Long Amortization Period: Ability to finance the property for up to a 30-year amortization period.

    Cons:

    • Strict Requirements: High credit and income standards.
    • Lengthy Approval Process: Can take weeks to months for approval and funding.
    • Personal Name Requirement: These loans need to be in the owner’s personal name, and you cannot buy properties with this kind of financing in an LLC.

    Finding Conventional Loans: These can be obtained from major banks, mortgage brokers, and online mortgage lenders. Comparing rates and terms from multiple lenders is crucial to securing the best deal.

    Example: A landlord in Saint Louis used a conventional loan to purchase a duplex. With a 20% down payment and a fixed interest rate, they were able to maintain steady cash flow from rental income.

    Local Banks and Credit Unions

    Definition: Local banks and credit unions offer long-term financing options that are often kept on the lender’s balance sheet rather than being sold on the secondary market, providing more flexible terms.

    Requirements:

    • Down Payment: Typically 20% or more.
    • Credit Score: Good credit score.
    • Income: Stable income with documentation.

    Pros:

    • Flexible Terms: More adaptable to individual needs.
    • Relationship-Based: Direct relationship with the lender.
    • LLC Financing: Ability to have the loan in the name of your LLC, providing liability protection and other benefits.

    Cons:

    • Variable Rates: These loans are typically amortized over 20-25 years but require renewal every 3 years. The renewal process is usually straightforward if the borrower has been making payments on time and the property’s value has not declined significantly. However, the interest rate will adjust to the current market rate at the time of renewal.
    • Higher Down Payment: Requires significant upfront capital.

    Finding Loans from Local Banks and Credit Unions: Smaller banks, credit unions, and specialized mortgage lenders often offer portfolio loans. Building a relationship with these lenders can provide more favorable terms and conditions.

    Example: A seasoned investor in St. Louis used loans from a local credit union to finance multiple rental properties, benefiting from flexible terms tailored to their investment strategy.

    DSCR Loans

    Definition: Debt Service Coverage Ratio (DSCR) loans focus on the property’s income-generating potential rather than the borrower’s personal financial situation.

    Requirements:

    • Income-Based: Loan approval based on the property’s ability to generate income.
    • Credit: Less emphasis on personal credit score.

    Pros:

    • Income Focus: Approval based on property income potential.
    • Flexible Credit Requirements: Suitable for borrowers with less-than-perfect credit.
    • Investment-Friendly: Designed for rental property investors.
    • LLC Financing: Ability to have the loan in the name of your LLC, providing liability protection and other benefits.
    • Long Amortization Period: Ability to finance the property for up to a 30-year amortization period.
    • Interest-Only Payments: Some DSCR lenders offer interest-only payments for up to 10 years before the amortization period starts, allowing for lower initial payments and improved cash flow.

    Cons:

    • Potentially Higher Rates: Higher interest rates compared to conventional loans.
    • Complex Process: May require extensive documentation of rental income and property management plans.

    DSCR Calculation:

    • Formula: The DSCR is calculated by dividing the property’s Net Operating Income (NOI) by its Total Debt Service (TDS).
    • Net Operating Income (NOI): This is the total income generated by the property (such as rental income) minus operating expenses (such as property management fees, maintenance, taxes, and insurance).
    • Total Debt Service (TDS): This is the total annual debt obligations, including principal and interest payments on the property’s loan.

    DSCR = Net Operating Income (NIO) / Total Debt Service (TDS)

    Typical DSCR Ratio: Most lenders look for a DSCR of at least 1.25. This means that the property generates 25% more income than is required to cover its debt obligations. A DSCR of 1.25 indicates a relatively safe margin, ensuring the property can generate sufficient income to cover the debt even if there are fluctuations in income or expenses.

    Finding DSCR Loans: These loans are often provided by specialized commercial real estate lenders. Networking with other real estate investors and attending industry conferences can help identify potential lenders.

    Example: A property manager in St. Louis secured a DSCR loan to purchase a small apartment complex, using the projected rental income to qualify for favorable terms.

    Additional Insights on DSCR Loans

    Application Process:

    • Property Evaluation: Lenders will evaluate the property’s potential to generate rental income.
    • Documentation: Extensive documentation is typically required, including rental income projections, property management plans, and detailed financial statements.

    Tips:

    • Build a Solid Business Plan: Present a comprehensive business plan that includes rental income projections, management strategies, and market analysis to improve your chances of securing a DSCR loan.
    • Network with Other Investors: Networking with other real estate investors can provide valuable insights and recommendations for finding reputable DSCR lenders.

    Risks:

    • Market Fluctuations: Changes in the rental market can impact the property’s income-generating potential.
    • Documentation Challenges: Gathering the necessary documentation and meeting the stringent requirements can be time-consuming and complex.

    Comparing Long-Term Loan Options

    Interest Rates:

    • Conventional Loans: Generally lower, with fixed rates.
    • Local Banks and Credit Unions: Variable rates that adjust during renewal periods.
    • DSCR Loans: Potentially higher rates but flexible terms.

    Approval Time:

    • Conventional Loans: Lengthy, taking weeks to months.
    • Local Banks and Credit Unions: Moderate, faster than conventional loans but requires periodic renewals.
    • DSCR Loans: Can vary, often dependent on documentation requirements.

    Flexibility:

    • Conventional Loans: Less flexible, strict terms and conditions.
    • Local Banks and Credit Unions: More flexible, with personalized terms and conditions.
    • DSCR Loans: Highly flexible, with terms tailored to the property’s income potential.

    Best For:

    • Conventional Loans: Investors with strong credit and stable income, looking for long-term stability.
    • Local Banks and Credit Unions: Investors with good credit, income stability, large cash reserves, and who prefer a relationship-based lending approach.
    • DSCR Loans: Investors focused on rental income potential, who may have less-than-perfect credit and prefer the ability to finance through an LLC.

    Section 3: The BRRRR Method (Buy, Rehab, Rent, Refinance, Repeat)

    The BRRRR method is a popular real estate investment strategy that allows investors to build a substantial rental portfolio using little or none of their own money. This strategy involves leveraging short-term financing to purchase and renovate properties, followed by refinancing into long-term mortgages to recoup invested capital. By repeating this process, investors can rapidly scale their rental portfolios and generate significant passive income. The BRRRR method is particularly attractive because it enables investors to continually recycle their initial capital, minimizing the need for additional out-of-pocket expenses. Here’s a detailed look at each step and the financing options involved:

    Buy

    The first step is to purchase a distressed or undervalued property. Investors typically use short-term financing options such as hard money loans or private money loans to quickly secure the property. The speed and flexibility of these loans make them ideal for competitive real estate markets where properties sell quickly.

    To have success with this method, investors need to buy properties at a significant discount. A common formula used is:

    Maximum Allowable Offer (MAO) = ARV × 75%  – Cost of the Repairs

    Where:

    • ARV (After Repair Value): The estimated value of the property after all repairs and renovations are completed.
    • 75%: A standard percentage used to ensure a margin for profit and expenses.
    • Repairs: The total estimated cost of repairs and renovations needed to bring the property up to its ARV.

    If you follow this formula, you should be able to get 100% financing from a hard money lender or private lender for the purchase and rehab of the project. This means that the loan amount provided will cover the entire cost of buying and renovating the property, allowing you to minimize or eliminate the need for personal funds upfront.

    Financing Options:

    • Hard Money Loans: Provide quick funding based on the property’s after-repair value (ARV).
    • Private Money Loans: Loans from individual investors, often with more flexible terms.

    Rehab

    Once the property is purchased, the next step is to renovate and improve it to increase its value. The costs associated with rehabbing the property are often included in the initial short-term loan, but additional funds may also come from personal savings or lines of credit.

    Financing Options:

    • Hard Money Loans: Often include rehab costs in the loan amount.
    • Private Money Loans: Flexible terms can include rehab funding.
    • Personal Savings or Lines of Credit: Can be used to cover additional rehab expenses.

    Rent

    After the property has been rehabilitated, it is then rented out to tenants. This step generates a steady stream of rental income, which is crucial for the next phase of the BRRRR method. Finding reliable tenants and managing the property effectively are key to ensuring consistent cash flow.

    Refinance

    With the property now generating rental income and its value significantly increased due to the renovations, the investor can refinance the short-term loan into a long-term mortgage. This step is where the transition from short-term to long-term financing occurs. The goal is to secure a mortgage with favorable terms that allow the investor to pay off the initial high-interest loan and possibly recoup some of the invested capital.

    When refinancing, the lender will send out a real estate appraiser to determine the current market value of the property. Based on this appraisal, the lender will typically loan up to 80% of the appraised value. This new loan, which is secured at a lower interest rate and longer term, replaces the initial short-term loan.

    Example Calculation:

    • Appraised Value (Post-Renovation): $200,000
    • Loan-to-Value (LTV) Ratio: 80%
    • New Loan Amount: $200,000 x 80% = $160,000

    If the investor followed the suggested formula for purchasing the property (ARV * 75% minus repairs), they should be able to get most, if not all, of their money back through this refinancing process. The new loan amount should cover the original purchase price and the cost of repairs, allowing the investor to recoup their initial investment and use those funds to acquire another property.

    Financing Options:

    • Conventional Loans: Used to refinance into a long-term mortgage with lower interest rates.
    • Local Banks and Credit Unions: Offer portfolio loans that can be more flexible.
    • DSCR Loans: Based on the property’s income-generating potential, suitable for rental properties.

    Repeat

    The final step is to repeat the process. The investor uses the equity and capital recouped from the refinance to purchase another distressed property, and the cycle begins anew. This method allows for rapid scaling of a rental property portfolio, leveraging both short-term and long-term financing to maximize growth and returns.

    Advantages of the BRRRR Method

    • Rapid Portfolio Growth: Allows investors to quickly acquire and rehab multiple properties.
    • Equity Building: Significant equity is built through property improvements and refinancing.
    • Income Generation: Rental properties provide steady cash flow.
    • Leveraging Financing: Combines the benefits of short-term and long-term financing.
    • Minimal Initial Capital: Ability to build a portfolio with little to no personal funds through strategic refinancing.

    Risks and Considerations

    • Market Risk: Changes in the real estate market can impact property values and rental demand.
    • Renovation Challenges: Unexpected rehab costs and delays can affect profitability.
    • Financing Risks: The ability to refinance on favorable terms is crucial; failure to do so can lead to financial strain.
    • Tenant Management: Effective property management is essential to ensure consistent rental income.
    • Cash Flow Analysis: It is critical to run the numbers to ensure that after the property is rented and refinanced, it remains cash flow positive. This means that the rental income should exceed the total expenses, including the new mortgage payment, property taxes, insurance, maintenance, and any other operational costs. A positive cash flow ensures the property is financially sustainable and profitable in the long term.

    Conclusion

    The BRRRR method is a powerful strategy for real estate investors looking to build a substantial rental portfolio. By leveraging both short-term and long-term financing, investors can maximize their returns and scale their investments rapidly. However, success with the BRRRR method requires careful planning, diligent property management, and a thorough understanding of the financing options available at each step.

    Final Thoughts

    Real estate investing done right has the power to change your life for the better. There are many steps to becoming an expert investor, including understanding the power of financing. Whether you’re a house flipper looking for short-term loans to capitalize on quick turnarounds, a landlord seeking stable long-term financing to build a rental portfolio, or an investor employing the BRRRR method to maximize growth with minimal initial capital, choosing the right financial strategy can make all the difference. By leveraging hard money loans, private money, and local bank financing for immediate needs, and transitioning to conventional, local bank, or DSCR loans for long-term stability, investors in the Saint Louis area and beyond can effectively navigate the complexities of real estate investment. Careful planning, diligent management, and a deep understanding of each financing option will empower you to build a successful and profitable real estate portfolio.

    Rachel Mendoza
    Author: Rachel Mendoza