When it comes to raising money for real estate investments in Pennsylvania, there are two main categories of financing – debt and equity financing.
While equity and debt financing may seem like similar approaches for reaching the same goals, there are pros and cons to each.
If you’re looking to raise capital for your real estate business, then take a moment to learn more about the advantages and disadvantages of each type of financing.
Find out what kind of money you should be raising for your real estate ventures.
The Pros and Cons of Debt Financing
Debt financing includes a variety of financing options. You could seek bank financing, private money, or hard money.
Bank financing has the advantage of stability. When you obtain a loan from a bank, you know that the funds will come through. This isn’t always the case with private investors.
Another benefit of bank financing is that you’ll typically get better interest rates than with other forms of debt financing. At the same time, banks are less flexible when it comes to down payments. They’re less likely to take on risk.
Private money investors provide another financing option. Again, there are pros and cons to this solution.
You often need to work hard to find suitable private investors. Also, they tend to be more hands-on than other lenders.
Other issues include the fact that they might not know the real estate market. They are simply investors looking to make money. They could also have limited funds, which means you might not be able to use them for future investments.
Hard money lenders provide a suitable median between bank financing and private investors. Like private investors, you might end up with higher interest rates, as they’re willing to assume a higher risk than a bank.
With hard money loans, you also have a scalable option that can help you continue to grow your real estate business.
To summarize, the main advantage of debt financing is that you don’t need to rely on existing cash and equity. But the down side is you’re also taking on more debt.
The Pros and Cons of Equity Financing
Equity financing typically refers to equity partnerships or equity loans. You’re essentially selling the equity that you’ve got in one property to obtain a loan for a new property.
With equity financing, you’re typically using existing properties to help fund your future investments. This ties your potential profit to the value of both properties.
Another form of equity financing is selling the equity on the future investment. This is also known as bringing on an equity partner. With an equity partnership, your partners receive a portion of proceeds from the sale or income on the property based on their equity shares.
The benefit of equity financing is that you might not need a down payment to purchase your next property. It allows you to keep on expanding your real estate holdings, without taking more money upfront out of your pocket.
Which Type of Financing is Right for You?
Choosing the best type of financing depends on a variety of factors. You’ve got to think about how much capital you’ve got available, how much equity you’ve got, and the cost of the property that you’re considering purchasing.
Other factors include the interest rates and points on the various types of loans and financing options.
In some cases, you might find that the best option involves a combination of financing. For example, you might use the equity from an existing property to cover the down payment needed for a hard money loan.
Each option has its own pros and cons. Debt financing requires you take on additional debt, and more risk, while equity financing can tie your properties together.
Evaluate these advantages and disadvantages before you move forward with a loan or financing option. Consider all options before coming to a final decision.
If you decide to seek a hard money loan in the state of Pennsylvania, then work with a lender that understands local real estate. At Legacy Capital, you can work with experienced lenders to come up with a solution that meets your needs.