Easy Creative Financing For Real Estate

What Is Creative Financing For Real Estate?

Creative financing for real estate refers to unusual or distinctive ways a person can buy real estate that is up for sale. When an investor or house buyer wants to use as little of their own money as possible, they will often use one or more creative financing techniques.

1. Cash Out Refinance

With a real estate cash-out refinance, you borrow money to pay off your home’s mortgage and then pocket the remaining amount. This can free up money for other investments. Furthermore, if you know what you’re doing, a cash-out refinance is one of the greatest real estate financing alternatives available. So if you have a great opportunity and need some ready capital to make that opportunity happen, it can be a good source of investment dollars.

2. Home Equity Line Of Credit (HELOC) 

With a home equity line of credit, unlike a cash-out refinance, the initial mortgage is not paid off. Instead, you borrow up to 80% of the home’s worth, less the mortgage balance, against the value of your house.

HELOCs normally have a draw duration that lasts ten years or less and a repayment period that is frequently no longer than fifteen years. The interest on a HELOC is tax deductible, but only up to $100,000, similar to a cash-out refinance.

So when would you use a HELOC rather than a cash-out refinance? A HELOC is ideal for making renovations to your own residence or a rental property. Instances where you don’t need a large sum of money to buy a whole property.

3. Personal Loan 

If you have good credit, make good income and have very little equity in your home or investment property you should consider using a personal loan. These often require no collateral and can be obtained very quickly with no pre-payment penalties. 

4. Seller Financing 

The seller of a property agrees to finance either the entire purchase price or a portion of the purchase price often taking a second position to a more tradition hard money lender. Once the sellers note  is in place, you simply make a monthly payment on the note for a period of time. Naturally, this will only be successful with sellers who have free and clear title to their properties and are willing to trade some short-term cash for some passive income streams that will last for a long time. (Motivated sellers who are behind on their payments will not be accepted here.)

5. Lease Option 

With a lease option property, investors can negotiate with landlords to buy the property at the end of the lease. This gives landlords the chance to earn income and allows investors to increase their equity through regular rent payments. A percentage of the rent payments may then be applied toward the down payment on the house, depending on the terms of the contract. The most frequent time for this setup to be used is when an owner is having trouble offloading a rental property, although it can also occur in other situations. Investors searching for a lease option scenario should be ready to shop around and know how to approach the conversation when they find a viable property.

6. Self Directed IRA 

Investors may be able to increase their retirement savings by adding one property at a time using a self-directed IRA. A self-directed IRA is yet another innovative approach for investors with retirement funds to purchase real estate. Compared to other retirement plans, this method gives investors more control and has a number of tax advantages. It is important to remember that all returns must go to the IRA rather than the investor directly. This may or may not be a pro for you, depending on your preferences.

7. Hard Money Lenders 

Compared to typical lenders, hard money lenders have a superior understanding of the real estate investment process (real estate is their specialty, after all). Hard money lenders will examine your rehab plan, the scope of the work, and the ARV to determine loan terms rather than looking just at credit score and contacting references. When using this creative financing method, make sure you have your exit strategy in mind because the last thing any investor wants is for their loan to expire (remember, hard money loans are short-term).

8. Private Money Loan 

Private money is extremely similar to hard money in many ways, but it can be distinguished by the nature of the relationship between the lender and the lendee. While private money lenders often know their borrowers for more intimate reasons, hard money lenders are experienced real estate investment lenders. Anybody you feel comfortable asking for money from can provide you with a private money loan, including friends, family members, neighbors, coworkers, and other acquaintances. Because the entire transaction is less “business” focused, investors can bargain more lenient loan terms with their private money lender. In addition to their predetermined interest rate, private money lenders may also earn additional cash flow based on the project’s profits.

9. Real Estate Crowdfunding 

Real estate crowdfunding is a method of using a small sum of money from a big number of investors. Real estate crowdfunding is a means of financing a real estate project as the name suggests, raising money exclusively for projects involving real estate, raw land, and other real estate assets – any kind of real estate, from office parks to hotels to residential complexes.

10. Cross Collateral

One choice if you’re looking to grow your real estate portfolio is to use the equity in one current property to finance another. You are using that property as additional collateral rather than borrowing against that equity, as with a home equity loan. If you were to default, the lender would then have a lien on both your collateralized real estate property and the new one. Without a down payment or supplementary loan, you can finance your transaction in exchange.