10 Creative Financing Methods For Real Estate Investors

In real estate investing, creative financing is an umbrella term referring to unconventional sources for financing deals, such as private money lenders, lease options, and owner financing. Creative financing typically involves non-traditional terms in order to create a win-win scenario for the seller and investor.

Imagine, for instance, a seller is motivated to sell their property but has a mortgage they haven’t yet paid off. You, the investor, might offer to make payments directly to the owner (this is called “subject to”) for their existing mortgage in order to close the deal and start cash-flowing the property immediately without closing costs, origination fees, broker commissions, or higher interest rates.

This is just one example.

Check out the video below to see a few more…

The truth is that there are many creative financing methods that you can use to make great deals happen.

And the most successful real estate investors do just that — they view each motivated seller lead as an opportunity to solve a problem and create a win-win scenario.

They don’t operate in a strict bubble of wholesaling, flipping, buy-and-holding, or BRRRRing… they do a little of everything…

…because that’s where the real wealth and success of real estate investing lies.

So without further ado, here are 10 creative financing strategies to add to your repertoire.

1. Cash Out Refinance

A cash-out refinance is when you refinance an existing loan you have on a property to turn your equity into cash.

If, for example, you have $30,000 left on a mortgage for a property you own and approximately $100,000 in equity, you could do a cash-out refinance and increase your loan to pull out up to $100,000 in cash.

This is a great way to turn your existing equity into cash to purchase new properties and it’s a key part of the BRRRR method.

How/When to Use This Method

If you own a property with substantial equity (even if that equity was earned through a private lender) and want to use the cash for other investments, you can leverage a cash-out refinance.

2. Home Equity

A home equity loan or line of credit is when you borrow against the equity you have in a property.

This type of loan is similar to a cash-out refinance with a few key differences: it acts as a second mortgage and it allows you to withdraw as needed from your line of credit over a certain period (usually 10 years).

How/When to Use This Method

A HELOC makes sense when you know you will need access to more capital over a longer period of time and/or if you don’t want to pay closing costs associated with a cash-out refinance. It’s also helpful for investors who are just starting out because it gives them access to capital without having to put up any collateral. You can get a HELOC from most major banks or lenders.

3. Private Money

Private money lenders are individuals (friends, family, etc.) who personally provide capital for you to invest in real estate, for some sort of return, of course.

This type of financing is excellent because it gives you access to capital without the hoops and headaches associated with bank financing. It’s faster, simpler, and much more flexible.

The most successful real estate investors maintain a network of private money lenders who helps them do their deals for a return of between 8% and 12%.

How/When to Use This Method

It’s hard to think of a reason NOT to use private money lenders. If you plan on building your real estate portfolio over the long-term, then you definitely want to start building your network of private lenders as soon as possible. Reach out to friends and family and share investment opportunities on social media.

4. Hard Money

Hard money lenders are much like private money lenders in that they both provide capital to investors quickly and easily.

But there’s a key difference that makes it so that private money lenders are virtually always preferable to hard money lenders: hard money lenders are companies that provide loans with sky-high interest rates and often stricter terms than those of traditional banks.

How/When to Use This Method

Hard money loans should only be used as a last resort when all other financing options have been exhausted.

Even then, only if you’re certain that you’ll be able to repay the loan in full (and as quickly as possible). Hard money loans should not be used as a long-term financing solution due to their high interest rates and short repayment terms. A few of the most popular hard money lenders are Kiavi and Lima One.

5. Seller Financing

Seller financing (also known as owner financing) is when the seller owns their property free-and-clear and they create a mortgage, note, or deed of trust for you to pay and take ownership of the property.

In essence, the seller becomes your bank.

You get ownership immediately and can do what you want with the property, but you have a mortgage in place with the seller.

When seller financing, you’re buying the property for full market value.

Why?

Well, your benefit is that you get a property cash-flowing with zero dollars down. The benefit for the seller is that they get to sell their home for full market value and avoid repairs, renovations, and closing costs — instead of getting a smaller amount of money right away (as they would when selling on the MLS), they’re opting to get the full market value of their home paid to them monthly over a set period of time.

How/When to Use This Method

When a seller owns their property free and clear and cares more about getting full market value for their home than they do about getting a chunk of money right away, this is a great option to propose and discuss.

6. Subject To

“Subject to” deals are very similar to seller financing with just one key difference: the seller doesn’t own their property free-and-clear and they have an existing mortgage with a bank.

With a “subject to” deal, you get all the benefits of owning a property (cash flow, full ownership, etc.) without a down payment, credit check, or closing costs.

The seller — who is typically distressed and needs to get out from under their own mortgage payments — keeps the mortgage in their name and the deal is done without notifying the lender. You, the investor, simply make their mortgage payment for them and get full ownership of the property. It even goes through title and escrow. This agreement is put in place privately between the seller and investor.

How/When to Use This Method

This is a great option when a seller has a big mortgage and is in distress (i.e. for one reason or another, can’t afford to keep up with the payments). Simply offer to take ownership of the property and make their payments for them.

7. Crowdfunding

Crowdfunding is a way to raise money from a large pool of people, usually via the internet. This can be done through a variety of websites such as Kickstarter, GoFundMe, Indiegogo, and others. Investors who join will generally receive equity in your deals and a portion of future profits in return for their investment.

How/When to Use This Method

In most cases, this is harder and more complicated than just finding private money lenders. Nevertheless, it can be an effective way to raise money for large projects if you have the right support system in place. It’s also great for investors who don’t have access to a large pool of private lenders and need capital quickly.

8. Partnerships

Earlier we talked about finding private money lenders.

But if you’re just getting started, you might consider a partnership instead with someone who has access to cash and some experience in real estate investing.

Why?

Well, an investing partner will provide the funds for you to buy property in return for equity in the deal. This means they have skin in the game and, assuming they’re experienced, will be happy to offer help and assistance so long as you’re doing the actual legwork.

How/When to Use This Method

If you are new to real estate investing and want help from an experienced investor, as well as need access to deep pockets, this is a great way to get your feet wet.

Start by reaching out to some real estate investors you already know and ask if they’d be interested in partnering with you. Be sure to emphasize that you’ll do all of the legwork and they’ll just provide cash and their expertise as needed.

9. Interest-Only Loans

An interest-only loan is a type of financing where you only pay the interest, not the principal.

You’re probably wondering why the heck you would ever want a loan where you only pay on the interest and don’t build equity.

The answer is rarely. But for people making short-term investments (flipping homes, for instance), the pros might outweigh the cons, foremost of which is a significantly lower monthly payment.

How/When to Use This Method

This can be useful for house flippers who want to keep their cash reserves intact while completing the renovation process. Also, if you’re buying a property that is in need of repairs and renovations, this can be an option for financing those projects and then refinance into a more traditional loan once they are complete.

10. BRRRR Method

The BRRRR method stands for Buy, Rehab, Rent, Refinance, and Repeat.

This strategy is very effective if you’re looking to build a portfolio of rental properties.

Here’s how it works: You buy a property in need of repairs, renovations, and/or upgrades with private money. Then you do all the necessary work to bring it up-to-code and rentable. After that’s finished, you find tenants and get the property cash-flowing as soon as possible to cover your private debt payments. Finally, after about 10-12 months of owning the property, you find a bank willing to do a cash-out refinance, pay off your debt to the private lender, and use any left-over funds (or another loan from the private lender) to repeat the same process on another property.

This is a great way to continue buying real estate without any of your own money.

How/When to Use This Method

This is ideal for investors looking to build a portfolio over the long haul, but don’t have the money or resources to do so. It allows you to acquire and own property without having any of your own funds tied up in it at the time of purchase.

Some Other Common Creative Financing Methods

Those are the best creative financing methods that real estate investors should be aware of. But here are a few honorable mentions…

Wraparound Mortgage — Buyers of property can opt for a secondary financing option in the form of a junior mortgage from the seller. This loan is wrapped around any existing mortgages already secured by the same property.

Borrow Against Your 401(k) — If you have a 401(k), you can take out loans against it to fund your real estate investments. This is usually done through an IRA custodian and the amount you can borrow depends on the type of account you have, but it’s usually 50-75% of your account balance.

Self-Directed IRA — A self-directed IRA allows you to invest in real estate with pre-tax money. You can use this to purchase and/or finance rental properties without having to pay taxes on the income generated.

Final Thoughts

Creative financing can be an invaluable tool for real estate investors, allowing them to do more deals faster.

The key is to understand each option available to you so that you can utilize them when the property opportunity presents itself.

That’s something that, ultimately, only practice can teach.

So get out there and start investing!

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