Finance for any real estate transaction can be complex. This is especially true of a land purchase.

Because of some of the unique considerations and risks involved with a land investment, financing can be more difficult than other commercial real estate transactions. Therefore, it is important to fully understand all financing options before making any land purchases.

The following are some of the most popular ways to get financing for land investment:

• Institutional lenders

• Seller financing.

• SBA 504 loans

• The farm credit system

• Home equity loan

• Retirement accounts

Institutional Lenders

Local credit unions and community banks tend to be more inclined to lend to land investors than institutional investors. Crediful CEO Chane Steiner notes that banks view land loans as riskier than traditional loans. This can make it difficult to complete the loan process, especially if your credit score isn't perfect. Steiner points out that creditworthiness is a key consideration for most banks. Your financial affairs should be in order before you attempt to improve your chances. Steiner advises that strong financial statements should be prepared with assets that are greater than liabilities. This statement should include robust cash balances and other assets such as stocks and bonds.

Steiner adds, "On the liability side, there should be limited liabilities such as credit card debt or mortgage debt and any loan obligations."

Seller Financing

Owner-financing is one of the most popular ways of financing a land investment. This is an arrangement between the seller and buyer. Clever is a company that matches buyers and real estate agents. This means that the seller will agree to make payments to you for a specified time to pay the purchase price. It typically doesn't mean that banks or other lenders are involved in the transaction. However, there are some important points to remember when considering this type of financing.

First, sellers (or owners) typically require a higher upfront down payment. Additionally, you might see shorter payment terms and higher interest rates. For example, you might be required to repay the loan in five years instead of 20 years for a mortgage.

Seller financing may be an option for investors who are having difficulty financing their projects through traditional financing options. However, it is important to have your lawyer review all paperwork and agreements.

SBA 504 Loans

For those looking to invest in land, the federal government has loan and grant programs. The SBA 504 loan is one of the most popular. The U.S. Small Business Administration guarantees it. A 504 loan can be used to purchase fixed assets. These are tangible assets that can be used for long-term purposes, such as land, machinery, and property.SBA loans are for small businesses and come with a unique structure:

• 50% of the loan proceeds come from a participating lender.

• 40% of the funds come from local community development programs.

• 10% is a down payment (which can sometimes be up to 15%).

SBA 504 loans have low fixed interest rates and can be used to purchase land for between 20 and 25 years. SBA 504 loans are available from many local credit unions. You can check with your credit union to see if you are eligible, the available loan amount, and any associated fees.

Farm Credit System

The Farm Credit System is another option for financing land within the federal government. It is managed by the Farm Credit Bureau, The independent agency that offers, among other services, loans for agricultural real estate. This type of lender has many years of experience lending land investors and can offer guidance, especially for those who are new to the process.

However, it is important to remember that land down payments is often quite high. Raw land can be considered riskier when it comes to financing. Therefore, the down payment could be as high as 20% to 50%.

The Farm Service Agency offers programs that can help lower down the down payment for first-time or younger investors.

Home Equity Loan

You can also finance your current home. A home equity loan is basically a second mortgage that is based on your equity. There are two types of home equity loans. The standard home equity loan, which is a fixed-rate loan, will give you a lump sum upfront, and you'll pay it back over a specified term at a fixed interest rate.

Another option is the Home Equity Line of Credit. A lender would approve you borrowing a maximum amount as a line credit, not a lump sum. The credit can be accessed at any time and for any amount, provided it does not exceed the maximum limit. This is very similar to a credit card.

A HELOC allows you to only pay interest on the amount borrowed. The money borrowed will be repaid in full. This is usually done in fixed monthly payments spread over a period of time.

These loans come with risks. For example, your home may be at risk if you are unable to meet the repayment terms.

Retirement Accounts

Some investors use their retirement savings to fund a land purchase. However, the Internal Revenue Service (IRS) has many rules and regulations regarding the use of retirement funds to purchase real estate. Although plan administrators may allow you to borrow against your retirement account, there are restrictions. You can borrow up to 50% of your savings, or $50,000, depending on which is lower. However, you will be subject to taxes and penalties if you fail to pay the loan on time.

The Employee Retirement Income Security Act (744) also allows you to borrow from a self-directed IRA. There are some important points to be aware of when considering this option. First, property purchased through an IRA cannot be lived in or managed by you. It must be transferred to a third-party custodian. The property cannot be mortgaged, and all income earned goes back into your IRA.

You should consult with tax and retirement professionals if you are considering this route. They can discuss any tax implications and long-term effects.

Explore Your Options

Steiner recommends that you shop around for financing options to finance land investments. It is crucial to get the best financing terms possible, including the interest rate and the term. Also, make sure to thoroughly research the financing details before making any decisions. Finally, prepare a plan and talk to experts in tax, retirement, and loan financing who will help you make the best financial decision.