Mortgages & Creative Financing

7 Creative Buy and Hold Investment Property Loan Ideas

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development, Real Estate News & Commentary
220 Articles Written
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Buy and hold real estate may be the best investment around. But unfortunately, like all good things, there's always a catch. Buying investment properties and holding them requires money, and if you don't start with much, that can be a great challenge. Luckily, there are many investment property loan solutions to overcome such a problem.

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Before you start seeking out money, you must understand the most important principle of buy and hold investment properties.

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Ready to invest in rental property? BiggerPockets’s guide to the buy and hold strategy will teach you how to analyze rental markets, budget for your investment, choose the best property, and finance your purchase. Ready to start investing in rental property? Here’s how.

The Prerequisite for Buy and Hold

In the famous Stanford marshmallow experiment, children were given the choice between eating one marshmallow or waiting about 15 minutes with said marshmallow staring them right in the face—in which case they would get two. Most kids yielded to temptation and ate the marshmallow well before the 15 minutes were up.

The researchers kept track of the children over the years. Those who waited for the second marshmallow had substantially better life outcomes.

The ability to delay gratification is paramount to success. Buy and hold is the second marshmallow. After all, rental properties are the ultimate get-rich-slow scheme. Most buy and hold investors live substantially below their means for many years before building enough equity and/or enough cash flow to fully enjoy the fruits of their labor.

Once that principle is established, you can incorporate any of the following methods into growing your real estate empire.

Related: The 4 Main Risks of Owning Rental Properties (& How to Mitigate Them!)

Methods for Financing Buy and Hold Properties

1. Traditional investment property loans

Real estate investors don’t always need a rental property loan. In fact, it’s absolutely possible for people with decent jobs to simply live below their means and invest in real estate on the side. Getting bank loans is much easier when you can show W-2 income. Plus, a job also provides a consistent source of income—even if a particular investment falters.

However, it’s also much more challenging to find good deals when you are tied down with a job, and, of course, you are stuck with the job. This is a fairly passive approach to real estate investment, but it can still be very effective.

2. FHA loans

For the “save and hold” investor, FHA loans are a great start. FHA will finance 96.5 percent of the purchase price at very low interest rates.

The great part is that you can finance up to a fourplex. So why not buy a fourplex, live in one unit, and rent out the other three?

Related: House Hacking: A Beginners Guide to Hack Your Housing and Live for Free

3. Flip and hold

This is probably the safest, most effective way to get into buy and hold. For investors who are flipping, why not hold every second or third deal instead of flipping it?

For example, use the profit from the first flip to live off of and the profit from the second flip for the down payment on a property to hold. Then rinse and repeat.

4. Creative financing

When a seller is motivated, there is often an opportunity to get an investment property loan for little to no money down. If the seller has some equity, for example, then they can loan you the money to buy their house from them.

Another option is to buy the property subject to the existing financing. This transfers the deed to you but leaves the seller on the original mortgage. Be forewarned: This does trigger the “due on sale” clause of a normal bank loan, so the bank could potentially foreclose. And furthermore, it will take a lot of motivation—and plenty of rapport—to convince a seller to do these types of deals. However, they’re done all the time.

For more on the subject of creative financing, check out Brandon Turner's book The Book on Investing in Real Estate with No or Low Money Down.

5. Angel investors

It may feel awkward to ask family or friends for money (as an investment or otherwise), but you shouldn’t pass up a major opportunity just because it’s awkward. After all, I went into business with my father and my brother. Family and friends can be a great source of capital, either as partners or as lenders.

And yes, you will want to be extra careful with their money. But then again, you should be extra careful with any investor’s money.

6. Private lenders

Traditional investment property loans won't cover the full cost of an acquisition, and hard money loans are too expensive for the buy and hold strategy. Luckily, there's a third option. The method we use the most to finance properties—both purchase and rehab—is a trust deed from a private lender. Usually, this is someone we know or have networked with, and we settle on 9 percent interest. Yes, unfortunately, you should expect higher interest rates from these loans.

Not all markets allow properties to cash flow at 9 percent. However, in smaller towns and working-class areas—especially in Southern and Midwestern markets—they often do. It requires a lot of rapport-building to convince someone to lend 100 percent to you. Therefore, it’s helpful (but not mandatory) to have some deals under your belt.

And remember, you never know who has money. Tell people what you do often—and if they show interest, invite them to lunch or a casual meeting. Make a business plan and a packet of case studies, if you have them. Once people trust you, they are quite willing to swap the 0.2 percent return they are getting in a CD for the 9 percent you offer.

And if you are buying at the same discounts you do when flipping, you should be able to refinance all or part of the loan with a traditional bank. Yes, you’ll have to wait until after the property has “seasoned”—the bank will refinance it based on appraised value instead of what you put into it. By buying it at a discount, you also protect the lender because you still have a substantial equity cushion even though they have fully financed the property.

7. Partners

Instead of finding several private lenders, you can find one person with a lot of money and partner with them. They bring the money; you do the work. Once you’re in the “hold” stage, split the equity however you both find agreeable. This is one of the most effective ways to buy and hold—although it again needs a track record to convince such a person to partner with you.

Partnerships can also work on a one-by-one basis, but I hesitate to recommend this approach. Lots of partnerships can create an accounting nightmare. More importantly, each partner has a controlling stake in their property, which can lead to all sorts of arguments and disagreements. This problem multiplies if you have a lot of partnerships.

Related: 10 Vital Aspects of a Bulletproof Joint Venture Agreement

Still, the approach can make sense early on with a few properties. Just think carefully about how to split the proceeds. Will you divide rental income 50-50? What about equity?

Don’t let a lack of money stop you from achieving buy and hold success. It may take time, but there are plenty of ways to find investment property loans to launch your buy and hold career.

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What’s your favorite way to finance buy and holds? What would you add to my list?

Leave me a comment below!

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on the BRRRR strategy—buying, rehabbing and renting out houses and apartments throughout the Kansas City area. Today, they have over 300 properties and just under 500 units. Stewardship Properties on the whole has just under 1,000 units in six states. Andrew received a Bachelor's degree in Business Administration from the University of Oregon with honors and his Masters in Entrepreneurial Real Estate from the University of Missouri in Kansas City. He has also obtained his CCIM designation (Certified Commercial Investment Member). Andrew has been a writer for BiggerPockets on real estate and business management since 2015. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, The Data Driven Investor and Alley Watch.
    Dan Harrison
    Replied about 6 years ago
    Call me an amateur real estate investor, but I have established a common but nifty system for adding to my real estate portfolio, assuming you own just your primary residence. A HELOC is high risk high reward for the average American. As a former loan originator I have seen consumers use a HELOC to save $1,000s in credit card and other installment debt by consolidating. Then I have seen them rack up debt again but stuck with no place or room to pay it down. A year ago I opened a $25,000 HELOC on my primary to purchase an investment SFD. I immediately cashed the first months rent and pocketed $550 a month. I have two other rentals that cash flow about $800 in total, so I apply the $1,350 of total cash flow to my HELOC each month. Back out a few expenses and a temporary vacancy, and I can still pay back my initial loan in less than two years. Repeat! Ideally with each property I acquire (including upgrading my primary every 5 years or so) I save for the next one faster than I did before. My goal is to cash flow enough to buy a property once a year without using my day job money. Good luck to all.
    Dan Harrison
    Replied about 6 years ago
    Call me an amateur real estate investor, but I have established a common but nifty system for adding to my real estate portfolio, assuming you own just your primary residence. A HELOC is high risk high reward for the average American. As a former loan originator I have seen consumers use a HELOC to save $1,000s in credit card and other installment debt by consolidating. Then I have seen them rack up debt again but stuck with no place or room to pay it down. A year ago I opened a $25,000 HELOC on my primary to purchase an investment SFD. I immediately cashed the first months rent and pocketed $550 a month. I have two other rentals that cash flow about $800 in total, so I apply the $1,350 of total cash flow to my HELOC each month. Back out a few expenses and a temporary vacancy, and I can still pay back my initial loan in less than two years. Repeat! Ideally with each property I acquire (including upgrading my primary every 5 years or so) I save for the next one faster than I did before. My goal is to cash flow enough to buy a property once a year without using my day job money. Good luck to all.
    Kwadwo Kyeremateng Investor from Chesterfield, Virginia
    Replied about 6 years ago
    Dan, I like your idea it seems very simply and not so complicated, and I prefer to invest in rental properties without any complex financing. So can you please explain a little more
    Dan
    Replied about 6 years ago
    Do you have a primary residence with equity? Most banks offer a line of credit up to 90% loan to value for an interest only payment. After 10 years you must start paying down the balance, but can enjoy freedom and flexibility until then. Ideally you pay back your down payment over a short period of time and can use this process 4-5 times before it becomes fully amortized.
    Aalap Sharma Investor from Fremont, California
    Replied over 3 years ago
    Hey thanks for the article I would like to know a bit more detail. So here is an example. Estm Value of Home = $1000,000 Loan Value = 600,000 Heloc = 300,000 ? Am I doing this right ? So let’s say I buy a rental in cheaper place in all cash ie (300k) which gets me a rent of , say 1600 a month. Would a lot of that money be going todays maintenance and the payment towards HELOC ? I understand that after the HELOC is paid off one would have 2 properties but that would take time. What am I missing here?
    Frankie Woods Investor from Arlington, Virginia
    Replied about 6 years ago
    What a great breakdown Andrew! I love seeing the different methods out there to fund deals. I’m getting close to my limit on loans and funds to account for the 25% down, so it’s good to see what is available to me when I “peak”! I think reaching your current limit is a good thing. It makes you think and gets you out of your comfort zone. Awesome!
    Addison Perez from Jacksonville, Florida
    Replied almost 6 years ago
    Going regular job route here with FHA. We’ll see how it goes.
    Anthony Aguillard from Plano, Texas
    Replied over 5 years ago
    Great article that will come in handy. Thanks.
    Jim Adams from Nashville, Tennessee
    Replied about 5 years ago
    Great article It really has got me thinking… In addition to having ways to ” Get Rich Quick” in Real Estate- I have to make a conscious effort in implementing a strategy to gain a “Get Rich Slow” system. Your article just put more tools in my toolbox. Thanks!
    Pierre A. Investor from NYC
    Replied almost 3 years ago
    Great article! There were a lot of interesting and creative ways to finance a deal. Just curious other than a person about to go into foreclosure, why would someone loan you money to buy their home using their equity?
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied almost 3 years ago
    There are other reasons a seller might want to owner carry. Perhaps the property isn’t performing (say it’s an apartment) very well and it will be tough for a buyer to get a loan on it. Or perhaps, like in the late 70’s and early 80’s, the interest rates are so high, seller financing is important to sell. Or perhaps it’s just a way to get a better price or actually get the deal done in a slow market or one’s where banks aren’t lending. Finally, if the seller doesn’t have a good place to put the money, they may actually like putting it to use and getting a return on it.
    Susan Maneck Investor from Jackson, Mississippi
    Replied 6 months ago
    Because I invest in an area where properties are relatively cheap 35-40K, I've always paid cash for my houses. Then a year later, after it is fixed up and rented, I get a first-place HELOC on it which gives me the money for my next house.
    Nick Falcone Foreclosure Specialist from Grosse Pointe Shores, MI
    Replied 6 months ago
    I have purchased over 100 properties in preforeclosure directly from the homeowner and 80% of them are financed by paying the arrearages to their mortgage company and assuming their loan. This makes it much easier to buy the home, costs roughly 10% down, has 0 financing costs and the best part is I have not had one lender exercise the 'due on sale' clause. This is something that many investors worry about but doesn't happen. Is there a case out there? Maybe, but I haven't heard of it. In addition I often have changed ownership again by transferring my interest into a different LLC or to another investor and again no problem. If they lenders pursued this, they would stop investors from buying a property in their name and quit claiming the interest to their LLC as this would technically trigger the d.o.s.c. as well. I'm not guaranteeing that this is 100% foolproof but after 25 plus years of doing deals like this I find this to be a great alternative method to financing properties while acquiring them at a discount to market value.
    Nick Na
    Replied 6 months ago
    How do you get preforeclosure? Is the process difficult, getting the banks to agree
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 6 months ago
    There are a variety of ways. In some states, I think title companies will provide the list of properties that received notices of defaults, although many states don't allow that I believe. The best way is to just look them up at the courthouse each week. In Missouri, for example, it's a document called an Appointment. It varies by the state. They also publish them all in on cheap newspaper and you can get them from various list services. But the best way is directly from the courthouse or its website.
    Jerolyn Dolan
    Replied 3 months ago
    Would you please share with us, how you write up this type of contract?
    Daniel Peavey from Atlanta, GA
    Replied 3 months ago
    Question? Once employing these tactics, becoming successful, obtaining much equity, in your experience, what is next step??
    Matthew Joseph
    Replied 11 days ago
    Awesome article. For me I think getting an FHA loan and then purchasing a duplex/triplex will be best for me. I will live in one of the units and rent out the others! Thanks for your wonderful insight