What is and How to Use Creative Financing?
Creative Real Estate Financing - Mortgage Alternatives
Creative Real Estate Financing suggests investors different paths to funding their purchases on properties by using out of the box ideas as opposed to just using the standard mortgage. The great thing about these financing options is that they can be used for long term funding with buy and holds or short term investments like wholesaling or fix and flips.
Many investors realize that they have to start getting creative in today’s market in order to stay on top and relevant in the real estate investing field. Due to the mortgage and housing crisis, standard mortgages have become less available and caps have been put into place by lenders to the amount of properties an investor can own.
Creative Real Estate Financing:
A few years back, ‘Creative Real Estate Financing’ was not the best term to throw around with other investors. With its negative connotations, a lot of investors saw this option as a item under the things not to do checklist within the real estate investing field.
However, I have always used this option through my real estate career and it has shown me that I can move faster on projects and even use more favorable terms than one would use with the standard financing option. I even understand how Create Real Estate Financing has gotten it’s bad reputation which was mainly due to the bad apple investors that misused the strategy and traumatized people along the way. I’m here to reassure you, when done right and kept within the legal guidelines that you can use this option to help bring a new route to financing when structuring deals.
Why Use Creative Real Estate Financing?
The average response we hear from this is because you don’t need money or your own credit.
On top of that, you will also limit the amount of personal risk in investing (despite not having the capital or the time value of money principle,) simultaneously growing your real estate business rapidly through that supportive leverage.
Here are the 2 types of OPM (other people’s money):
- Debt Financing – means you take out a loan or sell “bonds” to raise capital.
- Equity Financing – entails selling an ownership interest (equity) in the venture.
OPR (Other People’s Resources) basically means that the contribution in the form of services of “resources” that you would otherwise have to pay for yourself. For example, when you team up with a general contractor who is willing to provide labor and resources for your project without being paid upfront creates a 100% creative financing alternative.
This list is a partial amount of mortgage alternatives or creative real estate financing strategies:
1. Lease Option to Buy
2. Master Lease Option (commercial)
3. Subject To … (existing mortgage staying in place)
- - Transfer of Title but mortgage stays in place
- - Close at Title Co after title work and title insurance
4. Owner Financing
- - First Position – Free & Clear – 100% Funding Possible
- - Second Position – Second or Partial Mortgage funding
- 5. Wrap Around Mortgage
- - Land Contract, Contract for Deed
- - Either the seller retains title or transfers to buyer
- - Promissory Note on downpayment
- 6. “Hard” Private Money
- - 65/70% LTV – 5 to 10 points – prime +8% rate
- 7. “Soft” Private Money
- - Transactional and Extended Transactional Funding
- 8. Portfolio Lenders
- - Local investors owned lenders
- - Regional banks and credit unions
- 9. JV Partnerships
- - Asset based lending – also called Money Partners
10. Real Estate Syndication
- - “Debt” Funding à Long Term (1+ year)
- - “Equity” Funding à Short Term (less than a year)
Specifically with the last 2 strategies, JV partnerships and Real Estate Syndication, have been of special interest to me and my team. Simply because they allow me the option to fund my projects 100% while making money as an investor/wholesaler. This is what I like to call the “Double Dip Strategy”.
It’s like what they always say’ “If there is a will, there is a way.” This is especially true within the real estate field and is alive more than ever. You can ask any of the top successful real estate investors - they become geniuses at their sport not by the power they gain of what’s in their savings but by knowing how to leverage their funding options and alternatives.