All Terms Of Creative Financing Are Negotiable
Banks give you a rate and term sheet. Take it or leave it.
Instead, with creative financing I sit across the table from a real person and just discuss what each of us needs. It were both happy, we do the deal.
Consider just a few of many examples of flexible terms with creative financing:
- The lowest interest rates I have ever received came from motivated sellers, not from banks.
Private lenders regularly let us accrue interest on fix-flip houses.
We have negotiated no interest and no payments for months or even years on seller financing.
- We have done numerous no-money-down deals.
How To Choose The Best Investment Property Financing Option
Every investor must choose the investment property financing options that fit best for them. But how can you know whats right? Juggling dozens of considerations can make this decision feel stressful.
To be sure that you pick a financing choice that fits with your strategy, needs, and profit margins, connect with conventional mortgage and hard money lenders to understand your options. What should you expect? What loan programs might suit your project? Understanding which financing is available to you could be the difference between you owning a rental or being stuck in analysis paralysis.
Here’s Howfrom Buying Rental Property To Reits And More
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.
While a traditional mortgage generally requires a 20% to 25% down payment, in some cases a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.
Creative Financing Techniques For Savvy Real Estate Investors
Todays investors should be equipped with not one but several financing options before approaching a deal. Going straight to a traditional lender for a mortgage may seem simple, but this approach will not always guarantee the best loan terms. In many cases, finding the best financing will require investors to get a little creative. That being said, there are so many unique ways to finance real estate it can be hard to fully understand whats out there. The following creative financing options are a great place to start:
Borrow Against Your 401
Have a 401 through your job?
While you cant use it to invest in real estate, you can borrow against it. As a general rule, you can borrow up to 50% of your 401 balance, up to a maximum of $50,000.
You can use that loan for a down payment on a rental property, or for renovation costs on a flip or BRRRR deal. Or, for that matter, for anything else, such as a direct mail campaign.
These loans typically come with low interest rates, since theyre secured by your 401 account with a low loan-to-value ratio .
Downsides: If you screw up, you risk your nest egg. Nuff said.
Beyond the risk to your financial future, 401 loans do charge interest and come with fees. Also, not all 401 administrators allow loans, so you may not have the option even if you have a hearty 401 balance.
What short-term fix-and-flip loan options are available nowadays?
How about long-term rental property loans?
We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.
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Top 10 Creative Financing Techniques
Sometimes a loan from your bank isn’t going to meet your needs. Below are ten techniques to get your creative financing wheels turning!
Interest-only loans If you are an investor looking to purchase, rehab, and sell a property quickly, an interest-only loan may make sense. This financing allows you to make small payments at the beginning of the loan, leaving more money for renovations. When you sell the property for a profit, you can pay off the loan in full, having paid only a small amount of interest.
Seller carry-back Also known as owner-financing, the seller of the property agrees to finance the property outright. They transfer the title to you in exchange for a promissory note and deed of trust for the full purchase price of the property.
Seller second mortgages If the buyer can obtain a loan, but not for the full price of the property, sometimes a seller second mortgage is what is needed to make the transaction possible. In this case, the bank mortgage pays the seller for the bulk of the amount owed , and the seller deeds the property to the purchaser in exchange for a promissory note for the amount of the balance remaining .
Contract for deed Similar to seller carry-back, a contract for deed is another method of owner- financing. The difference under a contract for deed is that the seller retains title to the property until the mortgage has been paid in full.
Real Estate Investment Groups
Real estate investment groups are ideal for people who want to own rental real estate without the hassles of running it. Investing in REIGs requires a capital cushion and access to financing.
REIGs are like small mutual funds that invest in rental properties. In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group.
A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent.
A standard real estate investment group lease is in the investors name, and all of the units pool a portion of the rent to guard against occasional vacancies. To this end, you’ll receive some income even if your unit is empty. As long as the vacancy rate for the pooled units doesnt spike too high, there should be enough to cover costs.
More hands-off than owning rentals
Provides income and appreciation
Similar fees as mutual funds
Susceptible to unscrupulous managers
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Private Lending Or Hard Money
Hard Money is not ideal for many investors because it is very costly. Private Lending also comes with strings attached. However, both of these are feasible options to get funding for your next deal WITHOUT tolerating the dreaded 80% LTV rule.
The 4 Most Effective Creative Financing Approaches
There are several types of techniques when it comes to creative financing for real estate. Moreover, these financing methods can vary widely in terms of credit requirements, processing speed, and loan term flexibility. Below is an in-depth look at some of the most common approaches to creative financing for real estate.
1- Seller financing
Seller financing is often used by real estate investors who donât qualify for institutional lending. As the name implies, this method of creative financing for real estate involves the seller acting as the lender. But unlike a bank that provides cash to the investor, the seller issues a loan with the investment property acting as collateral. The seller will then hold on to a note of purchase and the real estate investor will be expected to make monthly payments in order to service the debt. It is important to note that investors will still have the option of applying for a traditional loan to pay the seller off.
2- Master lease agreement
- The property owner agrees to lease a property with an option to purchase.
- The real estate investor receives an Â«equitable titleÂ», which allows him/her to manage and operate the investment property as he/she sees fit.
- The investor receives all profits from the investment property minus the lease payments.
- The legal title to the property passes to the investor if the option is executed.
3- Home equity line of credit
Creative Financing Works In Up And Down Market Cycles
Did you notice how difficult it was to borrow bank money during the BEST buying opportunity of our lifetime in 2008-2010?
Creative financing still worked better than ever in a bad market. That means we bought deals when others who were dependent upon bank loans could not.
Best Books On Creative Real Estate Financing
Financing is a key aspect to being successful with real estate investing. If youd like to read up about the ins and outs of cash flows, calculations around real estate investing and get more detail on getting creative with your real estate financing, here are some of the most popular books.
- Creative Seller Financing: How to Use Seller Financing to Buy or Sell Any Real Estate by Chuck Sutherland
- The Book on Investing in Real Estate with No Money Down: Real Life Strategies for Investing in Real Estate Using Other Peoples Money by Brandon Turner
An Introduction To Creative Finance
In this blog, I will be giving you an introduction to creative finance. In other words, how you can finance your next property deal using none of your own money. I have purchased a number of properties using none of my own money, and I’ve taught many of my students how to do this successfully as well. Now it’s important to say at the very beginning, we’re not talking about doing anything dodgy or illegal. We want to make sure we do things properly and correctly, and that we’re just working creatively with motivated sellers.
If you’ve got someone who’s selling a property, they probably just want to get it sold. They don’t want to do anything creative they want a nice, simple transaction. However, you may come across a motivated seller. A motivated seller, which is something I talk about in “Property Magic,” is someone who might have a property problem so they need speed and certainty. Those people might be more open to being creative. It’s interesting to see that when the market declines and there aren’t that many buyers in the market, just lots of people who still need to sell, buyers become a bit more open to creative solutions. They might consider things like vendor finance, purchase lease options or exchange with delayed completion. All of which I’ll talk about in this blog, but it’s about being open to understanding that there are different ways to invest, rather than just the traditional way of investing.
Build Your Belief
Purchase Lease Options
What Does Creative Financing Mean In Real Estate
In real estate, creative financing is non-traditional or uncommon means of buying land or property. The goal of creative financing is generally to purchase, or finance a property, with the buyer/investor using as little of his own money as possible, otherwise known as leveraging…. continue reading
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Using An Assumable Loan To Buy Property
Some types of mortgages openly advertised that a new buyer could assume the existing owner’s loan. If the buyer qualified to assume the loan, the bank released the seller from liability. A loan assumption saved a buyer in those days thousands of dollars in lender fees, and many sales could quickly close under these terms. Today, there are few to no assumable loans available.
Real Estate Investing: Creative Financing 101
This episode is going to be about creative financing everyones favorite subject, a good friend of mine Pace Morby is made subject to such a popular subject within real estate investing that I have to keep up with the Joneses and make sure you guys understand how to start getting some of these creative deals done. I even had my team today contract a subject to deal and actually sold it already today, where the homeowner is leaving his mortgage in place. He is done with the property he is over it, he basically just wants to avoid foreclosure. And were helping him with that. And weve already sold it to a user an end user, an investor whos going to keep it as a rental until we actually wholesaled a subject to property now, Funny enough, my buddy pace would probably yell at me and say, Justin, why arent you keeping it? And quite frankly, because its in Kansas, and I dont know Kansas very well. And I dont necessarily want to random rental in Kansas. But what I want to talk about is some of the basics of creative financing here on this episode, things that you can try to just gather some information in first basic of creative financing is theres no right or wrong answer. Thats why we call it creative financing.
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What Is A Creative Investor
Creative Investor has been built by a unique team of investment specialists, accountants and forward thinking businessman who are passionate about the industry and are always looking for the latest and most unique ways of successfully investing funds into various emerging sectors, with the aim of generate maximum …… see details
Apartment rentals, REITs, commercial real estate, land and crowdfunding platforms are all types of real estate investments…. see details
A real estate investor may also be described as one who plans, directs, or coordinates the selling, buying, leasing, or governance activities of commercial, industrial, and/or residential real estate properties with the sole aim of making profit…. continue reading
Lease Option / Lease Purchase / Rent To Own
A Rent-to-Own arrangement is not exactly financing, but they can be structured to help a tenant/buyer purchase a home.
One type of rent-to-own arrangement is a lease option, where the tenant rents the property for a time, usually three years or fewer, with the option to buy the property outright at the end of the term.
Another variation is the lease purchase, where the tenant agrees to rent the property for a specified time and commits to buying the property outright at the end of the term.
The creative financing aspect comes into when these agreements stipulate that a portion of the rent payment is credited toward the down payment.
For example, the owner might agree to credit 25% of the monthly rent toward a down payment. If the monthly rent amount is $1,200, the down payment credit would be $7,200 after two years .
The buyer usually pays an option fee or consideration upfront and the rent is often above-market rent. If the buyer decides not to buy the property at the end of the lease, the owner simply keeps the option money and any down payment credit.
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Creative Financing Real Estate: The New Norm
The financial crisis of 2008 was a game-changer. Many countries had to reassess their mortgage approval processes. With these changes came a new attitude to property investments and, in particular, how theyre financed. This has led to a resurgence of alternative financing options as people increasingly seek out creative financing ideas. As a result, creative financing real estate is no longer a synonym for creative accounting its a smart way to access the best property deals.
Why Build Community In Leadership
While leveraging creative finance through sub to or seller finance is great, the ability to be successful and further grow your business takes more than just the deals.
When you start building a community of leaders, those leaders will go out and share their knowledge with others, who go out and share their knowledge with others, and so on and so on.
This creates a network of creative finance investors who are leaders and mentors, that help to empower beginners and foster an environment of collaboration. And when you collaborate, you begin to partner with awesome people who can support and help you if needed.
When I started Subto, I wanted to motivate and inspire entrepreneurs and investors and I wanted to build a community of creative finance investors who would also grow to be leaders for others.
Having a community that connects, supports, and helps you along the way has far more benefits and better outcomes than going it alone.
And when you have a community where everyone is a student and everyone can be a teacher, thats an environment where learning new ideas, new approaches, and new techniques is great for everyone.
Want to see how to build a community while also investing in real estate?
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How Real Estate Financing Works
Real estate financing usually works like this:
1. A real estate investor or prospective homeowner applies to a bank or other financial institution to secure a mortgage loan for an amount equal to the propertys total purchase price minus the down payment.2. The financial institution loans the money at a specific interest rate, which represents the amount of interest the borrower must pay the financial institution annually, expressed as a percentage. For instance, a 5% interest rate on a $100,000 loan requires the borrower to pay $5,000 in interest per year.3. The borrower buys the property and begins to pay off the mortgage. Mortgage payments usually pay down a mix of the principalthe amount of the actual loanplus interest.
Real estate investors aim to secure financing that creates a positive cash flow, meaning that the rent that a property generates exceeds the mortgage and other monthly costs.