5 Methods of Creative Financing

Recently, I hosted a meetup for real estate investors focused on creative financing.

Here are 5 ideas that came out of the meetup that are worth sharing:

Using stock options as collateral.

If you have restricted stock units in the company you work with, you can exercise the options and take the proceeds of the cash. There will be tax ramifications this way. A more creative approach is to exercise the options, have them become a part of your estate, and use that as collateral. Timing is important this in this method.

Using a 401k.

If you have the ability to convert your 401k into an IRA, and if you can find a custodian that allows you to do this - this may be the hardest part - one that allows you to use IRA assets on real property, this is an option. Be very cautious in terms of titling issues on the real estate.

A note on this: If you leave your employer, you can transfer the 401k to a self-directed custodian.

Seller financing.

This is when you purchase a property from someone (who may be the owner, or may have a mortgage), and instead of getting a mortgage to purchase the property outright, you simply pay the owner back in mortgage-like subscription payments. Maybe you put $20k down on the house, then turn it into a rental and refinance it. Everything is up for negotiation - especially if the owner is a burnt-out landlord.

Buying notes.

Much of our conversation centered around buying notes. A Note is a promissory note, which is sold by a bank who owns a mortgage that hasn’t been paid in a while. So they sell it for 30-50% face value. This is the epitome of “you make money when you buy”, but it is also a riskier way to buy a house, because you don’t initially know the reason why someone defaulted on their mortgage. This is where due diligence comes in.

After you’ve bought the note on the mortgage, which can come in bundles or “pools” of multiple mortgages, you re-work the mortgages by getting in contact with the person who is liable for the mortgage. You set them up on a revised mortgage plan, and create the cash flow. At that point, maybe you sell it, maybe you keep the cash flow. Up to you.

Selling off a partial.

This is a continuation of buying a note. Say you purchase a note with a $25k balance on it and you pay $15k for that note. The note has 150 payments of $300 left on it. You can break down the first 100 those payments, and sell them off for $20,000. Then, the remaining 50 payments are paid to you.

Thanks to Chris Seveney, Harjeet Bhatti, Marshall Chen, Matthew Burnham, and Michael Ross for attending.