14 Real Estate Financing Options [Guide + FAQs]

A working knowledge of real estate financing can be important for a variety of reasons. Whether you are buying a property, considering launching a career or advancing an existing one, comprehensive knowledge of real estate financing can open the door to a range of professional opportunities in the real estate industry and beyond. 

Below, we will take a closer look at the ins and outs of real estate financing and explore some of the top real estate financing options. (For a more in-depth overview, the University of San Diego also offers several excellent courses on “Real Estate Finance” and related topics, as well as a multi-course Real Estate Finance, Investments and Development Certificate program.)

What is Real Estate Financing?

At its essence, the term “real estate finance” or “real estate financing” describes the methods and potential sources from which someone who wishes to purchase property secures the funds to do so. Though the term technically would also apply to residential purchases, in practice it is more commonly used to describe financing for real estate deals that involve investment properties.

“Lending against the cash flow generated by a property is the most traditional form of real estate finance,” according to LexisNexis. “In its simplest form, it involves a loan to a borrower which is repaid from the rental income of the borrower’s property. It is the most commonly used structure for investing in real estate.”

Traditional Real Estate Financing

Real estate financing may come into play in any number of scenarios. Investopedia describes a few of the most common scenarios as follows: “Whether you are buying and holding land for future development, flipping a property, purchasing a property for an elderly relative to live in and enjoying the appreciation when it sells, or creating a passive income stream by renting the property, purchasing an investment property is a great way to diversify your portfolio.”

In its guide to real estate financing, Fortune Builders explains some of the benefits: “Investing in real estate is never a bad idea. It offers … a slew of financial and personal benefits, such as increased cash flow, home appreciation and tax benefits. In fact, real estate investment continues to be one of the most popular vehicles in producing financial wealth.”

And while traditional real estate finance deals are often accomplished through a conventional bank loan involving four parties (buyer, seller, lender, closing agent), there are a wide range of ways to obtain funding.

How to Obtain Financing

Savvy investors already know that it is not necessary to be sitting on a big pile of capital to start reaping the benefits of real estate financing. However, doing so requires at least a basic understanding of the many available options.

It is important to recognize the pros and cons of each type of real estate financing to ensure that you select the options best suited to your specific needs and circumstances. Below we offer a quick review of some of the most common and useful methods of obtaining real estate financing.

14 Real Estate Financing Options [List + Details]

Here is a review of some of the most commonly used real estate finance options:

  • Traditional Mortgage Loan: With interest rates still at historic lows, traditional mortgage financing is still among the most popular ways to go. Investors who use this option should be aware of many factors such as credit score and down payment, etc.
  • Home Equity Loan (HELOC): Have you got equity in a property that you own? If so, you likely have the option to leverage it by obtaining a HELOC, a loan that people use for a wide range of purposes and that can also be used for a down payment.
  • FHA Loan: Backed by the Federal Housing Administration, this type of loan is common among those who lack ideal credit score status or access to enough resources to make a large down payment.
  • Conforming Loan: The name of this type of loan refers to the fact that borrowers using this option must “conform” to loan limits set by the Federal Housing Finance Agency. The current baseline conforming loan limit is $647,200 (up from $548k in 2021) and is higher in locations where the median house cost is higher.
  • 203K Loan: This Federal Housing Administration-backed is most commonly used by investors seeking to rehabilitate older or damaged properties.
  • Portfolio Loan: Many buyers and investors favor this option because the loan is kept in the portfolio of the original lender instead of being sold to the secondary mortgage market. Terms are often favorable to buyers, many of whom would rather maintain a relationship with the actual lender.
  • Lease to Buy: This is a contract between a property owner and lessor that allows the tenant to rent a property for a period of time with the option to buy it at a predetermined price, often with an agreement that a portion of the rental payments can be applied to the purchase price.
  • Cash Financing: This option is typically used by investors with access to capital, either personally or through their network, and wish to purchase property free and clear, without ongoing loan payments.
  • Hard Money Lenders: Popular among rehabbers who have less-than-perfect credit or financial history and are looking for a short-term loan to renovate a property; this form of financing comes with fees in addition to the interest on the loan.
  • Private Money Lenders: This option involves leveraging capital from private investors (typically personal or professional connections), at a specified interest rate and shorter-than-usual payback period, typically months to a year.
  • Self-Directed IRA Accounts: Owners of self-directed IRA account can use them to finance properties while still being able to defer taxes. The catch is that owners under age 60 are likely subject to a penalty for withdrawing funds early.
  • Seller Financing: Direct buyer-to-seller deals can facilitate a mutually beneficial, speedier transaction process that also enables the buyer to avoid the bank-related closing costs, while the seller typically holds the option of selling the promissory note.  
  • Peer-To-Peer Lending: So-called P2P lending enables individuals to lend and borrow money directly from each other, potentially boosting returns for the lender and reducing interest rates for the buyer.
  • VA Loan: Military veterans and spouses will want to be aware of this option available through and guaranteed by the U.S. Department of Veterans Affairs, typically offering little to no down payment, no private mortgage insurance and competitive interest rates.

Sources: Investopedia, Fortune Builders, Bigger Pockets, Millionacres

Real Estate Financing FAQs

What is real estate financing?

At the most basic level, “real estate finance” or “real estate financing” describes the methods and potential sources from which someone who wishes to purchase a residential or commercial property secures the funds to do so.

What are some of the most common ways to secure real estate financing?

Traditional bank loans of several different types, some of them government backed, are among the most common options. Other sources of real estate funding include cash financing, hard money lenders, private money lenders, self-directed IRA accounts, seller financing, peer-to-peer lending and lease to buy.

What other opportunities are there to learn more about real estate finance?

Those doing their homework about real estate financing may want to review one or more of the following resources:

Additionally, there are a number of helpful courses available for investors who wish to develop a more comprehensive understanding of the real estate finance landscape. For example, the University of San Diego offers a Real Estate Finance course focused on identifying opportunities for income properties and analyzing the types of financing and sources of capital available in today’s commercial real estate markets.