6 Reasons I Prefer Creative Financing to Bank Financing
[This is part 1 of 7 in a series of articles about creative real estate financing. Each installment will include an article and a short, 10-15 minute YouTube video]
I graduated from Clemson University in 2002. Soon after graduating I began real estate investing full-time with a business partner. Like many recent college grads, we were ambitious, a bit naive, and cash poor.
We started when easy-money loans were the norm, but it turns out that having no job, no experience, and no assets were still seen as problems for loans against investment properties.
So, in order to get rolling we had to get creative with financing. The vast majority of our deals were put together using some combination of non-traditional, creative techniques like:
- private loans
- credit partners
- seller-carry-back financing
- loans from self-directed IRA owners
- lease options
- equity partnerships
- purchasing subject-to the mortgage
Little did we know that our challenging situation was a blessing in disguise. We developed our creative muscles early, and we still use those skills today.
But, we also learned that we actually preferred creative financing, even when we could get bank loans.
Why? I’ll give you 6 reasons.
1. Creative financing works in up and down market cycles.
Did you notice how difficult it was to borrow bank money during the BEST buying opportunity of our lifetime in 2008-2010?
Creative financing still worked better than ever in a bad market. That means we bought deals when others who were dependent upon bank loans could not.
2. Creative financing is flexible and fast.
We recently closed a deal in three days. The bank’s appraiser wouldn’t have even started by the time we closed with private funds.
3. Creative financing has a virtually unlimited supply of money.
What’s the institutional mortgage limit now? 10 loans? 5 loans? Whenever you hit this ever-changing cut-off point, you’re done.
Instead, think about how many motivated property owners are out there who will potentially finance to us? The numbers are virtually unlimited.
Or, how many retirement accounts are languishing with dismal interest rates? TRILLIONS of dollars. If you just show a few of these people your deals that provide safety, reasonable returns, and good service, you’ll be a financial hero for life and have all the private money you need.
The amount of creative financing you get is only limited by your knowledge, ambition, and trustworthiness.
4. All terms of creative financing are negotiable.
Banks give you a rate and term sheet. Take it or leave it.
Instead, with creative financing I sit across the table from a real person and just discuss what each of us needs. It we’re both happy, we do the deal.
Consider just a few of many examples of flexible terms with creative financing:
- The lowest interest rates I have ever received came from motivated sellers, not from banks.
- Private lenders regularly let us accrue interest (no payments) on fix-flip houses.
- We have negotiated no interest and no payments for months or even years on seller financing.
- We have done numerous no-money-down deals.
5. Creative financing is less risky.
Most of our creative financing deals have no personal liability (the property itself is the only collateral). On the other hand, most bank loans require personal guarantees, which mean things like a personal house, cars, other investments, and bank accounts are all at risk if things go bad.
6. Sources of creative financing become friends and partners for life.
Our first private lender became our mentor and continues to do deals with us today. With other creative financing sources, we regularly send (and receive) Christmas gifts and consider them our friends. These creative financing relationships don’t expire or get transferred to another bank, so the mutual benefits can last a life-time. Even better, referrals from all of these happy customers have led to even more creative financing so that the cycle goes on and on.
For all of these reasons and more, creative financing has proven to be more profitable, less risky, and much easier than traditional bank sources.
We still use bank loans from time to time. We see benefits in using all available sources. But to show you our preference, of the payments we make today in our portfolio, over 90% are to individuals or IRAs and not to mortgage companies or banks.
For an even more in-depth explanation of WHY we prefer creative financing to bank financing, I made a 13-minute video that I’d like to share with you ...
In the next 6 articles, I will unpack this concept of Creative Financing and cover some of the most important topics. These will include:
- What is Creative Financing? (and What is it Not)
- Creative Tool #1: Seller Carry-Back Financing
- Creative Tool #2: Lease Options
- Creative Tool #3: Self-directed IRA loans
- Creative Tool #4: Credit partners
- Creative Tool #5: Subject-to the mortgage
I hope you find these articles and videos helpful.
Enthusiastically your coach,