Creative financing allows investors to purchase properties without going the traditional route. Here are 10 creative financing options.
It doesn’t matter how much money you have, or how much money you have access to.
If you’re a real estate investor, you always need more.
More cash. More properties. You name it.
And that cycle never ends.
So when it comes to getting your hands on more deals, you’re also going to need to know how to get your hands on more cash.
In this guide, we’re going to break down 10 of our favorite creative financing options for real estate investors, when to use them, how to use them, and why they’re so effective.
At its core, creative financing for real estate investors is an umbrella term that refers to uncommon methods for obtaining funding for deals that wouldn’t typically be available.
Many times, investors will use multiple different creative financing options to help them get deals done.
The strategies became popular in the 1970s when interest rates were sky high, reaching up to 18% in some cases, which made traditional financing strategies extremely difficult to use for most investors.
Prior to that, investors were able to locate a property, ask the bank for a loan, have the loan approved, the property secured, and the deal finalized. This is what most people refer to as ‘traditional’ financing.
As interest rates climbed, though, these loans were out of reach and quickly ate up most of (if not all of) the profit inside of these deals.
That’s when investors started thinking outside of the box, and where the term “creative financing” came from -- they were forced to get creative if they were going to secure properties in such a hostile financial environment.
Today, especially for brand new investors, creative financing strategies can help you get access to properties that most traditional banks would tell you are out of reach -- whether due to your lack of history, lack of credit, or a lack of cash on hand to fund the down payments on the deals you’re looking at.
So when traditional mortgages are out of reach for you, you’ll want to use some of the creative financing strategies we’re breaking down for you in this guide.
Each one has its own specific time and place that it’s best used and, in some cases, you’ll use multiple strategies to fund a deal.
We’ll explain more as we break down each of the strategies available to you, whether you’re a brand new investor looking to secure your first deal, or an active, seasoned investor that’s looking to get your hands on as many deals as possible.
One of the quickest creative financing options you have available, if you own the home you live in, is to tap into your existing equity.
A cash-out refinance can let you borrow enough against your current mortgage to help fund your next deal.
And since it’s different from a traditional line of credit that would require you to take out a second mortgage, the interest rates on a cash-out refinance tend to be far more favorable.
The downside to this strategy is that the loan terms on your original mortgage will be reset. So if you have 10 years left on a 30-year note, for instance, you’ll be resetting the clock back to 30 years.
But it’s a great option if you have a lot of equity.
As long as you know you have a great opportunity in front of you, while a cash-out refinance can be risky, if the potential exists in the opportunity you’re looking at, this can be a great way to get access to cash faster than more traditional financing options.
For a lot of investors, especially if you can’t access a cash-out refi, private money is going to be your next best bet.
For private money, you’re going to be looking to borrow from private individuals instead of banks. This opens up more deals because the people you’re typically looking to borrow from are people who have money to invest.
This can be anything from your family and friends, your network of associates, networks of investors, you name it. It can also be private companies who have a track record of lending money to real estate investors.
The upside to using this strategy is that you typically do not have to put any collateral on the line, outside of the property you’re investing in. The property will secure the funding for you.
And if you don’t currently have access to a network willing to invest in your properties, you’ll want to start looking for local real estate investing meetups in your area. These will bring together investors that are looking for places to put their money and will help you jump on a good deal if they see one.
Subject To, or Subto, is a strategy that lets you get away from utilizing the 3 C’s required by most investments: your cash, your credit, or your credentials.
To give you an example, let’s say you’ve found a property owner who is in a distressed financial situation, or looking to move but only getting lowball offers on their property.
In these cases, you can introduce a Subto offer where they will retain the loan in their name but allow you to make payments on it, accept the deed in your name, and then claim the title once the property is paid off.
Since you’re relieving them of a financial situation, they get the upside of not having their financial history negatively impacted or being forced to accept a lowball offer, and you are able to assume the property so you can begin making money from it.
You’re assuming the property subject to you continuing to make the payments for the owner, rather than them being forced into a worse financial position.
And because you’re not applying for a new loan on the property, you don’t have to use your own cash, credit, or credentials to begin making money with it.
If you have a business that generates consistent revenue, you may have access to more funds than you realize.
This is especially true if you run your invoicing through companies like Stripe, Quickbooks, PayPal, etc. Even your local bank in a lot of cases.
These companies offer business loans that are guaranteed by the revenue you’ve generated inside of your business, with some of the loans being worth anywhere from $100,000 to $200,000.
And since you’re only paying interest on the portion of the loan that you’re actively using, you can typically borrow money again and again as you secure more deals.
These loans are perfect for investors because they’ll give you access to the cash as and when you need it without having to deal with the complicated process associated with traditional loans.
With business loans, you will need to meet the minimum eligibility requirements for the platform that you’re borrowing from -- which vary from platform to platform.
For Stripe, that means being a U.S. based business, having more than 6 months of revenue activity, processing more than $5,000 USD per year, and being in good standing with Stripe Capital.
While a home equity loan or line of credit may seem similar to a cash-out refinance that we mentioned above, there are a few key differences.
A cash-out refinance is taking out a new first mortgage that allows you to pull cash from the equity that you’ve built up in your home.
A home equity loan, on the other hand, is a second loan that is separate from your mortgage that still allows you to tap into the equity that you’ve accumulated.
This means that the terms, like the repayment period, of your original loan won’t be changed but, instead, you’ll have a second mortgage with a separate payment.
With home equity loans, you can typically expect to see higher interest rates and there will be limits placed on the total amount you’re able to borrow. For most lenders, it’s typically between 75% to 90% of the equity.
These loans are also contingent on your debt-to-income ratio, your loan-to-value ratio, and your credit score and the application process can be lengthy -- but you get access to your entire lump sum almost immediately after approval.
Because of this, it’s important to assess the numbers against the potential upside in the property that you’re looking at and only move forward if those numbers make sense.
If you’ve already invested in properties and you’ve held them for long-term growth and profits, you can use them as collateral for your future deals.
Cross collateralization is a strategy that you’ll see used most commonly by financial institutions like credit unions to offer funding options like construction loans to buyers and investors who already own more than one property.
Because credit unions are owned by members instead of shareholders, you’re able to receive more favorable terms by using your existing properties as collateral.
The upside here, aside from the more favorable interest rates, is that you typically undergo a less stringent application process.
The downside, though, is that even though you are using your properties as collateral the banks will also be able to seize your checking, savings, and investment accounts you have with the credit union that gave you the cross collateralization loan.
This means you’ll want to avoid borrowing from where you bank by keeping your checking, savings, and retirement accounts in a separate institution.
A self-directed IRA can be your best friend when it comes to securing new investment properties.
These IRAs let you use pre-tax dollars to purchase the properties you want to invest in and allow you to grow your wealth tax-deferred, or even tax-free in some cases.
And since it’s self-directed, you have full control over how the money inside of it is being invested so you don’t have to worry about fines, fees, or penalties associated with other types of retirement accounts, like a 401k for instance.
If you use this creative financing strategy, you will need to ensure that all proceeds from your investment flow back into the IRA, not into your personal or business accounts.
If you do not already have a self-directed IRA, there’s no better time to start one than now, especially if you intend to invest over the long-term.
A lease option, or a lease with the option to purchase, is a great strategy you can use if you’re currently renting a property that you want to convert into investment income.
This option lets you arrange a lease with the existing property owner, where you will rent the property from them for a fixed term. Then, at the end of that term, you can purchase the property.
A lease option prevents the property owner from listing the property for sale or entertaining other offers before you’re given the ability to exercise your right to buy.
With this strategy, you will typically pay a small percentage over the rental terms and may be required to maintain and repair the property rather than relying on the landlord for maintenance and repairs.
The excess that you pay in rent, ranging from 1% up to 10% in some cases, will be considered your down payment on the property if you choose to exercise your right to buy at the end of the lease terms.
This is a great strategy if you’re currently building (or rebuilding) your credit and are looking down the road at potential options that will become available once you have established a payment history and began the credit repair process.
Similar to a lease option, seller financing is another great strategy for obtaining your first investment property.
While a lease option will have you paying rent with a surplus that will be considered your down payment when the lease terms expire, seller financing is a bit different.
With this strategy, you will typically be paying above-market prices for a property, but you will be making payments directly to the seller without having a bank involved.
That means you can typically obtain the property without paying interest -- so all of your payments go directly to the principal.
This works great with sellers who own the property outright and are willing to sacrifice an upfront cash injection in exchange for long-term cash flow.
Crowdfunding really is the new kid on the block but it’s picking up steam year over year because of the access it provides to new investors.
You can use platforms like Feather The Nest to start sourcing investment funds from other people, whether in your community, your local network, or even around the world if your message is compelling enough.
When you’re using these platforms, you will need to create an account, make the case for why you believe you should receive funds from other people/investors, and then either wait for funds to begin rolling in or begin marketing your campaign to entice more people to donate.
Do it right and you might be able to receive enough funding to provide for a downpayment on a property, making this a great option for new investors looking to start opening up their portfolio.
Whether you’re looking for your first deal or your next deal, there are quite a few different creative financing options for real estate investors.
The one you use ultimately comes down to your unique financial situation and the property that you’re looking to invest in.
Some are better for new investors while others are more readily available if you have established credit, collateral, and credentials or history that can prove you will achieve a return on your investment.
So while traditional mortgages may be one way to purchase real estate, it may not always be the best option for you.
For instance, a personal or business loan can help you expedite the process if you need to get the deal done quickly, while seller financing can provide you with options that may not normally be available -- although, at a higher interest rate.
If investing is a priority for you, spend time with each of the strategies we’ve broken down for you here, compare them against the type of investing you’re trying to do, and then begin exploring the creative financing strategies that make the most sense. You may find your journey to building wealth is closer than you first thought.