What is Transactional Funding in Real Estate Investing?
In this article, we'll explore what transactional funding is and how it works so you can decide if you should consider using this type of financing strategy when buying and selling properties on your own.
Transactional funding is a real estate investing term that refers to the use of private money lenders to fund deals. It's an alternative to traditional bank loans and can be used in conjunction with them, too. Transactional funding allows you as a wholesaler or investor to get the cash needed for your deals right away before they close escrow. This makes it easier for you to buy and sell more properties by freeing up cash that would otherwise be tied up while waiting on traditional bank loans.
What is transactional funding?
Transactional funding is a type of real estate loan that allows you to buy and sell real estate using the same funding source. The borrower typically has to pay back the full amount at the end of a specified period, making it shorter-term than other types of real estate loans.
You can use transactional funding if you need money quickly but don't want to sell your current home or take on any long-term debt—like an investment property mortgage—in order to get it.
What is required for a real estate wholesaler to get transactional funding?
When looking for a lender for your real estate transactions, there are several things to keep in mind. First, you'll want to make sure the lender is reliable and has good customer service. You'll also want to negotiate the terms of the loan with your chosen lender. Some lenders will only offer a specific amount of money; others may be willing to work with you on what they can offer based on your needs and situation.
Finally, it's important that you research all of your options before making any final decisions about financing arrangements or loans with any particular institution.
What's the difference between traditional and hard money loans?
The main difference between traditional financing and hard money is how they’re structured. Traditional loans are more expensive because they come with higher interest rates, fees, and closing costs. Hard money loans are typically less expensive because they have lower interest rates and fewer fees. The main advantage of a traditional loan is that it can be used on any type of property across the country, but your credit score must be above a certain threshold to qualify (e.g., 620).
Hard money lenders don’t require you to have great credit or show proof of income like conventional lenders do; if you have enough equity in your property then you should be able to get approved for a hard money loan.* Both types of financing options allow investors to purchase real estate investments without having cash upfront—they simply need enough equity in their property or other collateral to secure the loan.*
The biggest difference between these two types of loans is where they can be used: traditional mortgages will only allow you to buy single-family homes worth $424k-$921k depending on where you live; whereas hard money can be used for any property type (including commercial properties), regardless of its size or value.*
How does the cost of transactional funding compare to traditional loans and private funding?
If you’re looking to borrow money for a real estate deal, transactional funding is usually cheaper than traditional loans. Why? Because with transactional funding you don’t have to pay interest on the loan, and the lender doesn’t get paid any interest either.
On the other hand, private investors often charge higher interest rates than banks because they can make more money that way. So if you choose to raise private funds instead of using transactional funding, expect your mortgage payment and investment costs to be higher than if you went with traditional financing options instead.
What are the tax implications for a real estate wholesaler using transactional funding?
For real estate wholesalers, the tax implications for using transactional funding are simple. If you hold on to the property that you purchase with a hard money lender and then sell it at a profit, you will owe capital gains taxes. However, if the house that you purchase with a private lender goes into foreclosure without being sold or refinanced out of trouble before it goes into foreclosure, then the IRS considers this as an “ordinary loss” and it is not subject to capital gains taxes.
For real estate investors who have purchased properties with transactional loans from other individuals or companies and use them as rental properties or flip them for profit (or both), they will be responsible for paying federal income tax on their profits but only if they sell those properties within one year after buying them. Any money made from selling these homes after one year has passed since purchasing them is considered long-term capital gain income by Uncle Sam—and if this happens during tax season in April 2020 or later during 2021 or 2022 (when people file their 2021 returns), there will also be state-level income tax owed on those profits too!
Transactional funding for real estate investors is not well known, but it can make all the difference in your bottom line.
Transactional funding is an alternative to traditional financing. Instead of going through the full loan process and applying for a loan with a bank, you can simply secure funding directly from the lender. This is often done through a hard money lender who offers this service.
It's also known as bridge funding or pre-funding, which refers to how it's used in real estate investing:
Transactional investors usually use transactional financing when they're buying properties, renovating them (by adding improvements), and reselling them for a profit before closing on the sale.
Transactional funding is a great way for real estate investors to get access to capital when they need it most. With transactional funding, you can have your money in as little as 24 hours and get started on your next deal right away. Transactional funding offers fast turn times and quick processing that make it an ideal solution for investors who want to move quickly on deals without having to wait weeks or months just because they don't have traditional financing available.