Real Estate Financing Strategies Flashcards
7 cards from real Real Estate Investing practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Real Estate Financing Strategies flashcards as text
What is a wraparound mortgage?
Answer: A new mortgage that encompasses an existing mortgage, with the seller collecting payments and continuing to pay the original loan
In a wraparound mortgage, the seller creates a new, larger mortgage at a higher interest rate that 'wraps around' the existing underlying loan, keeping the spread as profit.
Which financing strategy allows an investor to use funds from a self-directed IRA to purchase real estate?
Answer: Self-directed IRA real estate investing
A self-directed IRA can hold real estate as an asset, allowing investors to grow rental income and appreciation tax-deferred or tax-free within the account.
What is the purpose of a 1031 exchange in real estate?
Answer: To defer capital gains taxes by reinvesting sale proceeds into a like-kind property
A 1031 exchange (named after IRS Code Section 1031) lets investors defer capital gains taxes when they sell a property and reinvest the proceeds into a like-kind property.
In a 1031 exchange, what is the deadline to identify a replacement property after selling the relinquished property?
Answer: 45 days
IRS rules require investors to identify potential replacement properties within 45 days of closing on the relinquished property.
What is a portfolio loan and who typically offers them?
Answer: A non-conforming loan kept on the lender's own books rather than sold to Fannie Mae or Freddie Mac, typically offered by community banks or credit unions
Portfolio lenders keep loans in-house rather than selling them on the secondary market, giving them flexibility to underwrite non-standard deals.
What is an adjustable-rate mortgage (ARM) and what risk does it pose to real estate investors?
Answer: A mortgage with an interest rate that changes periodically after an initial fixed period, posing the risk of higher payments if rates rise
ARMs offer a lower initial rate but can increase significantly after the fixed period ends, potentially making cash flow negative if rents don't keep pace.
What is 'private money lending' in real estate investing?
Answer: Borrowing from individual private investors rather than banks or institutional hard money lenders
Private money lenders are individuals (often friends, family, or wealthy contacts) who lend personal capital to real estate investors, typically with flexible, negotiated terms.