Mortgages & Creative Financing

Real Estate Financing: The 4 Best Ways Savvy Investors Fund Deals

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Personal Development, Flipping Houses, Landlording & Rental Properties, Personal Finance
103 Articles Written

Do you know how you are going to use real estate financing to purchase your next deal? If an awesome property became available in your favorite market, how would you pay for it? BiggerPockets is filled with ideas for creative financing, in addition to the traditional mortgage or cash routes. Successful investors have several options to fall back on, so they never lose a deal due to financing.

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Real Estate Financing: 4 Ways Savvy Investors Fund Deals

Traditional Mortgage

I have always gone the traditional mortgage route. I have excellent credit, and most of my investing has been live-and-flips. A traditional mortgage has always been very easy to obtain.

Related: How to Improve Your Credit Score

But last November, my husband's position changed from a W-2 employee to a 1099 or contract employee. We had to form an LLC, and he is technically self-employed now. He still works the same job he has been working for the last 12 years, he just gets paid slightly differently.

We had nothing on the horizon and had never been self-employed before, so it didn’t occur to us to consider different financing ideas. Then a deal popped up. So we called our mortgage guy, the one who has worked with us the last seven times. We discussed rates, and as an afterthought, I mentioned my husband’s new job.

(Cue tires screeching to a halt.)

“I can’t give you a mortgage until you have two years of tax returns with the new company.”

Wait, what? No, he still has the same job. The exact same job. He just switched from W-2 to 1099. He still does the exact same thing he has been doing for the last 12 years. (When you are a W-2 employee and you have switched jobs but are still employed in the same field, a job change isn’t viewed as a red flag.)

“I’m sorry. I can’t give you a mortgage until you have two years of tax returns with the new company.”

Deal comes to a screeching halt. I call my parents, but they are retired. No job = no mortgage.

This particular deal may not be completely dead — after the traditional mortgage was no longer an option, we began discussing seller financing.

Then another deal popped up, literally across the street from me.

The Absolute Ugliest House left on the block (I bought the previous Ugliest House on the Block two years ago to live in) had a sign planted in the front yard a couple of days ago, with a "Coming Soon" sticker slapped across it. I called the listing agent, and showings started the next day. It will be listed at a ridiculously low price, as-is because of "plumbing issues." Ooh. I like as-is houses.

But it has only been 6 months since my husband’s job change, so I still can’t get a mortgage. My parents are still retired, so they still can’t get a mortgage.

I don't have friends with money. I don't have family with money. My money is tied up in the stock market, and while I am working on diversifying my holdings, this would represent a significant chunk of my portfolio that I would have to liquify. I don't wish to meet Mr. Capital Gains Tax.

So what are my options for this new deal?

Hard Money Lenders

I could find someone to loan me the entire purchase price at a higher interest rate and for a shorter term than a traditional mortgage. This would give me time to get the tax returns I need to convert the property to a traditional mortgage.

The drawbacks of this route are:

  • Higher interest rate of the hard money loan — 8% to 14% vs. 4% for a mortgage
  • Inability to refinance the entire purchase price into a traditional mortgage due to market fluctuations

Right now, my market is ultra super red-hot. Properties under $500,000 get listed with Broker’s Remarks that say, “Showings start this date, all highest-and-best offers must be in by this date, decision will be made this date.”

Almost everything sells instantly for well over asking — all-cash offers that can close in a week, foregoing appraisals and inspections. It doesn’t seem like this market can sustain itself, and I would hate to be stuck in a hard money loan without being able to pay it off.

Portfolio Loan

Some lending institutions create mortgages for the sole purpose of selling them to larger institutions or investors. Other lenders create mortgages to keep them in-house as part of their investment portfolio, called a portfolio loan.

To qualify for a mortgage that will be resold, the borrower must meet the Fannie Mae/Freddie Mac guidelines, which include that "2 years of tax returns" requirement. They do not take into consideration your savings or other investments.

A portfolio loan has different requirements determined by the lending institution. They will be keeping the loan in-house, so they decide their own criteria.

Private Lenders

A private lender is a regular person or non-bank institution with money to spare. It could be a friend, family member, or someone you are introduced to. They have money to loan and want to make more off it than just having it sit in the bank.

Private money tends to be less expensive than hard money — fewer points upfront and a lower interest rate. But private money can also be more difficult to obtain, at least in the beginning. Hard money lenders do this for a living. They can look at your numbers, make sure you have factored everything in, and look at your track record.

Private money can be easier to obtain if it is coming from friends or family who believe in you and want to help you succeed.

Related: Private Money Lenders: Who They Are & How to Find Them

So How Are YOU Going to Finance YOUR Next Property?

If you are just starting out, perhaps you haven’t even thought of this question yet. You have so many other things to do first, right? Such as:

  • Find an investor-friendly agent
  • Find the property
  • Analyze the deal
  • Get it under contract
  • Get it inspected

Many markets have either recovered or are well underway. When a hot property comes up, you need to be able to write an offer quickly. Have you thought about what happens after that? Start thinking now, so you don't miss that next great opportunity.

Investors: What are your favorite real estate financing methods to purchase investment properties?

Be sure to leave your comments, questions and suggestions below!

Mindy Jensen has been buying and selling homes for more than 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real est...
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    Christy Barton Wholesaler from Indianapolis, Indiana
    Replied over 5 years ago
    Thanks for the great post, Mindy! They are really putting you to work… this has to be at least the 5th blog post I’ve seen from you. 🙂 I have been searching and searching for details about private money and all I’m finding is very general information. My question is this: is it “normal” for private money lenders to request a percentage of the sale price in addition to the interest being earned during the term of a loan? I know private money terms are flexible and much like seller financing, the terms are decided by the lender and the borrower, but do private money lenders usually request interest on the front and back end? I’d love to hear any feedback you have or feedback others have. Thanks!
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 5 years ago
    I think the general information will be all you are able to find, since there aren’t regulations regarding private money. Usury laws don’t even apply, because the purpose of the loan is for an investment. I don’t know if it is normal for private money lenders to request a percentage of the sales price, but I would make sure those terms are hashed out before accepting money. Thanks for reading!
    Karyn T. Investor from Bellingham, WA
    Replied over 5 years ago
    So what’s your plan for getting this next deal? I’m in the same boat! Just went from W2 to LLC. I *do* have a little bit of money hanging out in a SD 401k, for a down payment. I’m thinking a live-in fix & flip, if I can find something where the numbers work!
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 5 years ago
    Thanks for reading, Karyn. Unfortunately, I am unable to do this deal. All offers had to be in before I was able to get my ducks in a row. There will always be another deal, but I really like deals across the street! You have money for the down payment, but how will you finance the rest? Live-in flips can net you a LOT of money, but they can also be a touch draining. Make sure you schedule down time – even one night off can re-energize your spirits!
    Shaun Reilly Landlord and Rehabber from Newton, Massachusetts
    Replied over 5 years ago
    I’m not an accountant, an attorney or an IRA expert. All that being said I can tell you that if you are planning on using SD 401(k) money to fund a flip you definitely can’t live in the place. You can’t even do any of the work yourself, and you will get differing opinions on how actively you can even manage the project. If you meant you would cash out the account for the purpose of doing that then you can do that, but you will have to pay the applicable taxes and penalties (This is where you need to consult you tax professional first). If you are a first time home buyer you can avoid some (maybe all, can’t remember[talk to a professional:) ]) of those penalties.
    Eric Munson from Rocky Hill, Connecticut
    Replied over 5 years ago
    Typically private lenders do not request up front points but some may. With private money you will be negotiating your terms and they can very quite a bit. Some lenders may be happy with 4-6% while others may expect 8-10% returns. The terms also very with the type of deal…is it a short term flip or a longer term buy and hold with a balloon? Everything is based off of your relationship and what you can negotiate to make both parties comfortable.
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 5 years ago
    Thanks for the additional information, Eric!
    Eric Munson from Rocky Hill, Connecticut
    Replied over 5 years ago
    *vary No problem Mindy…great post!
    Natalie Darcy
    Replied almost 5 years ago
    It is interesting that if you know what you are doing, there are several different ways that you can handle this type of thing. These methods can be as traditional as mortgage to something that you hadn’t heard of before. Do you have any information on how to get a really experienced professional to help you with this process? Thank you for the helpful article about financing commercial real estate!
    Eliseo Medrano
    Replied almost 3 years ago
    Mindy, another great post! Thank you!
    Adaora Nwogbo New to Real Estate from Arlington, TX
    Replied 4 months ago
    Great article in looking into the mind of an experienced investor. I am still starting out so summarizing the steps again is appreciated.