There are many ways to think outside the box when it comes to financing your real estate transactions.
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June 9, 2021
5 minutes to read
Opinions expressed by Contractor the contributors are theirs.
One of the main issues for real estate investors is how to finance their real estate investments. The two most common ways for an investor to purchase their first investment property are with a cash transaction or a traditional bank loan. These are two acceptable ways to finance a purchase, but they’re not always the best options. Instead, using alternative solutions to secure capital can be a great way to quickly grow your business and expand your investment portfolio.
Using creative financing options in your business will give you the opportunity to make deals that you might otherwise miss.
What is creative finance?
Creative finance refers to unique methods and strategies for obtaining funds and capital to purchase real estate investments. Traditional financing options are normally provided by financial institutions, banks and mortgage lenders. With creative finance, an investor can access finance in a variety of creative ways.
Related: 6 Signs Your Business Idea Is Ready for Funding
Vendor financing is one of the easiest ways to acquire investment property without any bank or lender. As long as the seller owns the property and is mortgage free, they can offer an option to an investor for seller finance (also known as owner finance). The investor and seller simply set the purchase price and the terms of the finance agreement. , and the investor agrees to pay the seller directly until the purchase is complete. In some cases, an investor may be able to close the deal without a down payment, essentially buying the property for zero dollars.
Hard money is one of the most common sources of finance for real estate investors. This type of financing is almost always asset-based, which means that the lender will look at the property in question to make the decision about the loan, rather than the borrower’s creditworthiness. Hard money loans are a great option for investors who may not qualify for a traditional bank loan due to their personal financial history or credit rating. In addition to the easier approval process, access to funds is also much faster than with a conventional loan. With no paperwork, hard money lenders can provide an investor with funds in days or even hours compared to the weeks and months it takes to get funds approved by the bank.
Private money is a relatively broad term. Basically, private money refers to anyone with access to funds that they are willing to lend. A friend, colleague, or family member who is willing to lend you money for an investment might be classified as private money. Typically, a private lender does not provide financing to multiple investors. They tend to partner with one of the two trusted investors and they become the source of funding for those investors’ transactions. Since this is not their core business, this type of lender prefers to establish a mutually beneficial relationship with only a handful of investors, rather than providing capital on a large scale.
STABBL is a short-term asset-backed bridging loan. Another creative option for purchasing a real estate investment is a STABBL loan. A STABBL loan is very similar to a hard money loan in that the loan is asset based and secured by a mortgage. These loans generally act as “bridge” loans for investors. An investor will have access to this type of loan to secure an investment purchase with the intention of withdrawing the deal in less than 12 months typically. This loan option is good for fix-n-flip purchases because it allows the investor to use the money from the lender to finance the purchase so that their money can fund rehabilitation. Once the property is renovated and sold, the investor repays the loan and is ready to repeat the process.
Related: Now is the Perfect Time to Refinance Your Mortgage
Lease options, also known as option-to-buy lease purchases, are an easy way to purchase investment property without any bank approval or lender involvement. This is different from seller financing because the seller will retain ownership of the asset and act as the owner, while the investor will act as the tenant. With a rental option, a portion of the rent or rent payment is applied to the agreed purchase amount for the property. The investor is not obligated to buy the property because he only has one option to buy. This is usually a very simple strategy to negotiate with a seller who is looking to receive monthly payments and maintain control of the property while it is being purchased.
To take with
The benefits of using creative financing in your real estate investment business are endless. These strategies can provide a virtually unlimited pool of funds for your investment purchases. Creative financing options are extremely flexible and almost all terms and conditions are negotiable. Although few in number, there are a few drawbacks to using these creative solutions. Interest rates on creative lending methods are much higher than with traditional lenders, and loan repayment terms are likely much shorter. That being said, I would definitely include some of these creative fundraising methods in your business. But as an investor, you need to decipher which options are best for you and your investments.
Related: 3 Golden Rules for Starting a Real Estate Investment Business