Creative Financing Options
Looking to purchase an investment property, but you keep hitting roadblocks when it comes to financing the purchase? There may be more options than you’re aware of. In this post, we’re going to talk about some creative financing options for the purchase of your investment property that can bust through that roadblock and set you on the path to real estate wealth.
First, what is creative financing? It sounds kind of shady, right? Well, it’s not. Creative financing is simply thinking outside of the typical mortgage box when it comes to how to purchase your investment property. It’s just doing things a little differently to achieve the same goal.
Here are some of the top creative financing options and how you can use them in your real estate investing journey.
Owner Financing
Pretty self-explanatory. This creative financing option is simply having the original owner of the property (or at least the owner you’re purchasing it from) hold the mortgage note for you. Feeling unsure of your ability to secure a loan? Or perhaps you think you can negotiate better terms with an individual rather than a corporate entity? This may be a great option. And don’t feel awkward asking! As the old saying goes, “If you never ask, the answer is always no.” A couple of things to keep in mind:
- The owner must own the property outright.
- This option tends to work out best if the owner is motivated.
Here’s some more information about owner financing.
Installment Contract
(Aka contract for deed, installment purchase contract, installment land contract, or bond for deed)
Have an owner intrigued by owner financing, but still wary? Offer an installment contract. This creative financing option allows the original owner to retain ownership of the property until you pay off the loan balance in full.
Since this is an agreement between you and the property owner, you can structure it any way that suits you both. Just be sure to record the contract for deed with your local land records to protect yourself against any possible future shenanigans. Always better safe than sorry.
Here’s a more in-depth look at installment contracts.
Hard Money
A hard money loan is a creative financing option in which a private investor loans you money for a real estate purchase using the property as collateral. Typically, this loan is used when the would-be investor (you) doesn’t have enough time to go through more traditional channels to secure financing, such as a multiple-offer scenario. They can also be used as a sort of bridge loan until the investor (you) is able to secure traditional financing.
This is a good option if your credit is less than stellar, as private investors don’t usually go over your finances with the same fine-tooth comb that banks and other lending institutions do.
The downside is that this is an expensive alternative. In 2020, the average interest rate for a hard-money loan was 11.25%.
Looking for more detailed information? Read this article.
Cross Collateralization as a Creative Financing Option
This creative financing option allows you to use the equity you have in another property to eliminate the need for a downpayment in the new investment property.
The way this works is that the lender takes first lien position on the new investment property and second lien position on your existing property.
Some people think it’s a better option than a HELOC or a second mortgage because you don’t have to pay closing costs on the loan.
Others point out the caveats: You have to have significant equity in your first property for this to work. Plus, it’s risky. If, for some reason, you can’t pay the loan, you risk losing two properties instead of just one.
Want to know more about cross collateralization? Check out this article.
Another Creative Financing Option: Borrow Against Your 401(k)
Now, you can’t use your 401(k) specifically to invest in real estate, but you can borrow against it. Generally speaking, you can borrow 50% of your balance, up to a maximum of $50,000, though be aware that some 401(k) administrators don’t allow loans at all.
The great news about 401(k) loans is that they come with low interest rates, though they do also charge fees. The terrible news is that you’re borrowing from your own retirement funds. If anything happens, it’s your financial future hanging in the balance.
Here’s some more information about borrowing from your 401(k).
Economic Development Grant
If you’re looking to invest in a traditionally low-income area, government funding might be an option for you. In trying to add jobs and stable housing to economically challenged neighborhoods, the state and federal government may offer grants and/or other technical assistance to investors and developers.
While this is a great option for a specific set of investors, be aware that these grants don’t cover all or even the majority of financing needed. Plus, they can take several weeks to review and acceptance is not guaranteed.
But if this is where your heart is, it’s a good option. More information here.
Private Notes
If you have a good track record and know the right people, private notes can be a great creative financing option for you.
Private loans are made by individuals, not banks, and they are usually people you know who know your background and trust your track record enough to entrust you with their own personal funds.
This option is for seasoned investors who know the ropes and have already made their rookie mistakes. The upside is that everything is up for negotiation and private notes can typically be funded very quickly. The downside is if the deal goes sideways, you’ve lost the money of someone you have a personal relationship with and that can get really sticky, really fast.
Peer-to-Peer Loans
This last creative financing option is worth mentioning. Peer to peer loans are a form of personal loans, targeted to those who have less than great credit. Because of their potentially astronomic interest rates, some may think of them as loans of last resort, but if there’s nowhere else to turn and you really want to get a deal done, this could be an option for you.
Here’s a primer to help you decide if this is the right route for you.
I hope this information has been useful! If there’s anything I can personally help with, please don’t hesitate to get in touch.
