5 Best Alternatives to Home Equity Loans for Investors
Using home equity loans to purchase real estate has been a solid strategy for decades. But what if you don’t have equity to tap into? Here are some great alternatives to home equity loans available to real estate investors today.
This article will highlight lesser-known loan products that don't require home equity as collateral. We'll explain how they work, who they're suited for, and where to find them.
Let's get started!
The 5 Best Alternatives to Home Equity Loans for Investors
- Construction loan
- Crowd-funding loan
- Fix and flip loan
- Personal Loan
- 401-k loan
Note: this list isn't a ranking of how "good" each loan is -- the order is superficial. Every loan and borrower is different, so the "best" solution for you might be different for someone else.
1. Construction loan
A construction loan is for builders or developers looking to start new construction on raw land, but can also be used to fund major renovations of an existing property.
This type of loan is especially popular with real estate investors in competitive, low-inventory markets where the need for homes and sky-high housing prices offer few buying opportunities.
After all…if you can't buy it, build it.
Want to know more? Check out our in-depth article about construction loans here.
How a Construction Loan Works
A construction loan is typically a short-term (1-2 years), higher-interest loan (1-2 points higher than traditional loans) given to fund new construction.
To secure this type of loan, an investor must apply with a lender, providing financial information, project plans, and details.
Once approved for the loan, an investor can begin drawing funds while making interest-only payments. During each construction phase, a lender-appointed inspector or appraiser will review the project and authorize more funds.
Finally, once construction is complete, the construction loan can easily be converted into a mortgage.
Who is it for?
- Investors with a good credit score
- Builders, developers, or general contractors
- Investors in highly competitive areas
Are you a developer, builder, or general contractor looking to build your way into the real estate investing game? Check out WeLend's construction loans.
2. Crowd-funding loan
The JOBS Act of 2012 opened up the world of private real estate investing to anyone and everyone interested in real estate investments. This open market has given rise to crowdfunding platforms — investing portals that allow many investors to pool their money to fund a project.
Crowdfunding is a relatively new option for real estate investors but has created opportunities for both sides of the aisle — for both the lender and borrower.
For equity investors, this crowd-funding approach allows them to invest in deals previously only available to accredited investors.
For the investor needing financing, crowd-funding loans allow another path besides a home equity loan to fund a property purchase.
How a Crowd-funding Loan Works
Simple equity crowd-funding allows borrowers to secure loans from a wide pool of investors in exchange for higher interest rates (typically 10%+ higher than traditional loans), interest-only payments, and fewer restrictions.
An application is typically submitted through an online portal. Responses from these online lending portals happen quickly so a borrower might get approved or denied within a few hours.
Once approved, the funds are accessible quickly (sometimes within 1-2 days).
Who is it for?
- Tech-savvy investors who know how to research online lenders
- Investors with good-to-fair credit scores
3. Fix and Flip loan
“Fix and Flip loans” are a category of loans and the name of a loan product. This dual meaning can confuse some people, but we'll explain how to distinguish the two.
The Fix and Flip loan category contains several loan products that are used to purchase distressed properties, renovate them, and then flip houses for a profit. These types of loans include hard money loans, personal loans, lines of credit, and more.
However, a Fix and Flip loan product is a niche loan created just for real estate investors. These aren't generalist loans — they're intended to help investors close on properties quickly and with favorable terms.
Who is it for?
- Self-employed investors
- Investors without capital for down payments
- Investors who need funding fast
4. Personal Loan
Personal loans can be used for almost anything a borrower needs, including financing a real estate purchase.
While personal loans aren't an investor's "go-to" financing option, they do fund quickly, which can be the difference between a closed deal and a missed opportunity.
Another benefit of personal loans is that they make a great entry point for investors looking to wholesale real estate with no money. Wholesaling doesn’t require the investor to purchase the property, so a small personal loan can cover the minimal costs involved in a wholesale deal, like the earnest money needed to secure a purchase contract.
How a Personal Loan works
Personal loans are similar to other types of loans in that you borrow a lump sum from a bank or lending institution with set terms for the repayment period and monthly payment amounts.
This type of loan is usually unsecured, but some can be secured by a borrower's assets, i.e., their home, vehicles, or another valuable asset. They also typically have lower interest rates than home equity loans and can be easier to qualify for.
Who is it for?
- Part-time investors with a steady income
- Investors who only need a small amount of capital
- Investors in a time-crunch
5. 401-k Loan
A 401-k loan isn't technically a loan but rather a way to tap into the money in a retirement plan. These loans can be a low-hassle way to fund a real estate investment, especially for life-long professionals looking to branch into real estate investing.
How it works
This "loan" allows borrowers to loan themself money from their retirement account, pay interest to themself on that loan, and have access to $50,000 or 50% of the assets (whichever is less).
The 401-K loan is only offered by some companies, so a borrower will have to speak with their employer to determine if this is available.
Who is it for?
- Investors with a sizeable 401-k retirement account
- Part-time investors not interested in quitting their job
No equity, no problem. Real estate investors always have financing options if they want to explore options outside of home equity.
While these home equity loan alternatives we've listed are powerful tools, they're only a few tools investors can use to fuel their businesses. Construction loans, personal loans, fix and flip loans, credit lines, crowdfunding, partnerships, syndications -- the list goes on and on with creative financing.
If you need help figuring out where to start with real estate financing -- reach out to us at WeLend. Our company was built from the ground up to help investors get the funding and guidance they need to succeed.