Most beginning investors need creative real estate financing.
Indeed, the single biggest roadblock to building real estate investment success is financing.
After all, as an investor you’re working in a business where you need to make multiple multi-six-figure deals per year.
Needless to say, unless you’re loaded or someone who loves you a lot is loaded, you’re going to hit a few brick walls before you figure out how to keep financing coming in to fund your real estate investments.
The first place every new investor thinks to go for financing is the bank.
After they get that out of the system, they begin to realize they are going to need creative real estate financing.
Though it would be nice to buy real estate with no money down, this often is not true.
Most financing options, even creative real estate financing options, require you to put some skin in the game.
However, you can use OPM – other people’s money – for the majority of most of your real estate deals.
That said, let’s dive into some popular creative funding options.
Seller Financing
Also called owner financing, is a great way to finance real estate deals.
Difficult to get financing because of credit score, predictable salary, perfect employment history.
This is a great to leapfrog into a deal you otherwise could not afford. Al that’s needed is to execute a promissory note.
The interest rate, repayment schedule and default conditions must be set by the seller, to which you agree as a buyer.
Seller financing deals are usually more popular in areas or periods of time where it’s harder to get loans.
The pros of this type of financing is that you don’t have to worry about the rejection of the banks. The seller is usually motivated to sell. It breeds trust in the quality of the deal being made if the seller is willing to finance it.
Sellers get to collect interest payments, which built some of the richest institutions in America – banks…and the mafia!
Some cons of this type of arrangement is you may pay a little higher interest rate than you would with a traditional bank loan.
They usually come with a balloon payment in 5 years or so.
For sellers, they don’t want to play the ‘banking’ role. They want to get their money to invest into their new deal.
This means that it may be harder to come across seller financing deals.
Other ways to buy that count as seller financing include lease-options, equity sharing and lease-purchase agreements.
Private Lenders
Another great way to fund your real estate deals is private lenders. This is not to be confused with hard money lending companies.
These can be people you know or know through a friend of a friend, that have been blessed with an abundance of modern civilization’s most precious resources…money!
People who received an inheritance, just sold their company, or won the lotto could be swimming in dough and not have great ideas for what to do with it.
You could approach these people with an equity share or interest payment proposition, which may be the investment opportunity they’ve been searching for.
You could offer 8%, 10%, or 12% interest on their money, which may be the best rate they could hope to make.
The pros of this kind of deal is that these deals tend to look more at your track record of success and the actual deal, instead of looking at things such as employment history, credit score, liquidity and other factors that banks tend to focus on.
This is also a great way to do business because you may get good at this form of real estate deal financing and find unlimited opportunities to get private money.
If you know you make winning presentations and sell yourself you may love hitting the streets and dazzling crowds with your ideas.
The cons of private lenders include the fact that they usually depend on you having a good track record of success. This is no good for you if you are just starting off as a real estate investor with.
Most people with a lot of liquid cash are pretty smart folks and know how to watch their money, and the last thing they want to do is put their money in the hands of an un-trusted partner.
The other thing about private lenders is that they can be hard to find. If you have a broad network of friends and family and friends of friends who are a more affluent crowd then you will love the private lending strategy of financing your real estate deals.
However, if you don’t have a network then it could be difficult to gain traction with this form financing.
Lastly, if you’re not good at selling yourself you may find it difficult to succeed with private lender financing, because often times private lenders are buying you as much as the property you’re investing in with.
Hard Money Lenders
Asset/property-based loans are another very common way to invest in real estate deals is hard money loans.
Admittedly, hard money has a very sinister sound to it. Images of meeting in dark alley ways with guys named ‘Tony batters and Pitbull Paul’ come to mind. You may think striking a deal with these guys is a one-way ticket to swimming with cement shoes and alligator infested swamps.
Indeed, predatory lenders have given hard money lending a bad rap but it’s actually a legitimate way of funding real estate deals, and very common.
Hard money loans are short term loans that are secured by the hard asset – real estate. Funds made up of private investors usually provide the money for hard money lenders to lend to you. The length of time hard money loans usually go for is 12 months. Longer term hard money loans may extend 2 to 5 years.
The pros of hard money lending is that most often when the bank says “No” to your deal, a hard money lender can still say “Yes” to your deal.
Hard money lenders usually have a niche they specialize in. Some residential and some commercial, some multi-unit and some double wide trailer parks. This this means you need to find a hard money lender that specializes in the type of property you are investing in.
It’s also good to have hard money lenders who specialize in the type of property you’re investing in literature deal because if the deal raises red flags for them perhaps it should for you as well.
Plus, there are plenty of hard money lending institutions that can easily be found, so you should not have a problem getting in contact with one.
Some of the cons of hard money lending is that you will usually pay much higher interest rates for the loan. This means it is expensive money to secure.
Another issue is that since these are usually short-term loans, you could run into trouble if you’re not able to refinance or sell for your term is up.
Hard money loans are not appropriate for all types of deals. For instance, they are not appropriate for buying your primary residence. If you have good credit income history and no history of foreclosure, bank financing is your best bet.
Hard money loans are great for:
- fix and flip deals
- construction loans
- buyers with credit issues
- quick money
Credit Cards
When bootstrapping your way to the top as a real estate investor, credit cards can come in handy.
You may not be able to finance the entire property with them, but you could use credit cards for rehab costs. If you get credit cards that don’t charge annual fees, offer bonus points, and have low minimum balances, with thinking creative financing solution if then some of the above options.
Pros of credit cards: If you have decent credit you can get approved for tens of thousands of dollars by just submitting applications online. Because it’s such a competitive industry you can also earn points and cash back just for using the credit cards.
Plus, there are many credit cards that offer no annual fees and low or no interest for the first one to three years.
Cons of credit cards: They’re so easy to use that you can get yourself in trouble quickly. They may not feel like real money so before you know it you can be in debt up to your eyeballs with nothing to show for it.
However, if you stay focused on the fact that you are using real money and that she should make it your goal to eliminate your debts monthly for as soon as you close a profitable deal this can be a great long-term way to finance properties.
The next time you get those credit card offers in the mail tear them open and see what they are offering.
These are just a few of the many creative real estate investment options available to you and provide a great place to start your search for financing your next big deal.
What is your favorite creative real estate financing option?
