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Finding the right financing for your investment can seem like an exhausting task, especially if you’re not a numbers person. Also, there might be any number of reasons why you can’t apply for a conventional mortgage. This is where creative financing in real estate comes in handy.
In this guide, we’ll define what creative financing is and how it fits into the world of real estate. Next, we’ll go over why creative financing is commonly used in real estate. Finally, we’ll provide several creative financing real estate examples and strategies.
This post covers:
- What is creative financing in real estate?
- Why do lenders use creative payment plans?
- Which loans are a form of creative buyer financing?
- 5 additional creative financing ideas
What is creative financing in real estate?
Creative financing, by definition, is when somebody receives funding through unorthodox methods. Creative financing in real estate applies to securing loans to purchase or develop a property.
All loans have pros and cons as well as a loan-to-value (LTV) ratio. And every unique property or development strategy has a specific financial strategy that will suit it best. You may even discover that creative financing in real estate is the right financial strategy even when you meet the criteria for conventional loans.
Is creative financing illegal?
Creative financing is not illegal. If you hear somebody mention “creative financing” in a mob movie, then they’re definitely referring to something else. Creative financing in the financial world is all about uncommon ways to secure funding. The risks associated with it are purely financial in nature with all investments. It’s entirely transparent and adheres to all tax laws and regulations.
Why do lenders use creative payment plans?
Lenders use creative payment plans for a variety of reasons that, of course, benefit them just as much as the recipients. One of the biggest reasons is that if someone can secure a loan with them through a creative payment plan, then that’s another customer paying them interest who they wouldn’t have otherwise had the opportunity to work with.
Which loans are a form of creative buyer financing?
There are some official loans that are still considered creative financing (again, because they’re unconventional).
Creative financing loans include:
- Government loans. These include loans from the Federal Housing Authority, Veterans Affairs, and agricultural loans.
- Seller financing. This is when the seller lends you the money and becomes who you make payments to (often at a high-interest rate).
- Rent to own. Also known as leasing, this involves paying rent for a property until the property is paid off. The seller acts as a landlord and often still has most rights over a property. This is especially common for single-family homes.
- Hard-money loans. These are often provided by individual investors and involve the property being considered as collateral and an asset.
How do you creative finance a house?
Creative financing to buy a house is no different from creative financing to buy a multifamily or commercial property. Our list of creative financing loans that we mentioned above can apply to most property types, including single-family homes.
Specific financing strategies for single-family homes include:
- Renting to own
- Partnering with an investor
- Seller financing
Learn how to invest in multifamily real estate:
5 additional creative financing ideas
Creative financing ideas don’t actually have to be all that creative. Odds are, a strategy has been done before, and there’s a name for it. Some of these financing strategies will be more beneficial under certain circumstances than others.
Creative financing ideas include:
Utilizing equity for creative financing in real estate may be one of the more brilliant strategies. If you already own a property, odds are you have gained some equity in it. If you purchased a property for $300,000 and it’s now worth $400,000, the value it’s gained is called equity.
A bank will offer a portion of the equity you’ve gained as a line of credit. This can be especially helpful if you need a down payment for a new investment.
Remember: You’ll get more of your equity to use as a line of credit if your property’s mortgage is paid off. If it’s not paid off, you’ll only be paid the difference. For example, if you have $60,000 left on your mortgage with $100,000 in equity, then your line of credit will only be as much as $40,000.
If a real estate investment is too difficult to go through on your own, then that’s what partnerships are for. By teaming up with another investor, you can pool your funds together to purchase a property you otherwise can’t afford. Also, you may be able to apply for loans together that you wouldn’t normally be approved for.
But how do you find a partner?
Ideally, you’ll team up with someone you know and trust, such as a family member or close friend. If that doesn’t work, then perhaps a friend of a friend, a co-worker, or likewise associate. You’ll want to find someone who is highly regarded or who has previous experience with partnerships in real estate investing.
3. Hacking your retirement fund
Setting up a retirement fund is one of the most important financial strategies. However, if you’ll make just as much money from a real estate investment, then withdrawing some of your retirement fund isn’t the worst idea. But notice how we said some and not all of your retirement fund.
Take just enough for an initial downpayment or combine this amount with other creative financing strategies. If you’re resorting to hacking your retirement fund, make sure you know the risks associated with your intended real estate investment.
4. Private money
You might laugh at seeing this on a creative financing real estate list, but when you can’t secure conventional financing, it is a legitimate strategy to consider asking someone you know.
This is a similar strategy to choosing a partner, but a private money lender will give you the money directly for you to handle on your own. Unless your lender is your loving grandparent, they’ll expect to be paid back (and also with interest).
Come up with a pitch before asking a potential private money lender. Go over the pros and cons of your investment. Be as detailed as possible and treat this as seriously as you would if you were pitching to a professional institution such as a bank. If you’re a serious real estate developer who has put in the research, you will have a greater chance of finding a private money lender to help you out.
Post your investment plans to a crowdfunding website in order to receive money from the public. However, instead of using GoFundMe or Kickstarter, utilize a real estate-specific crowdfunding website such as Hatch My House. If you make a convincing enough case for why you need financing, enough members of the public may deem you worthy and donate to your investment.
Remember: Any money you receive from crowdfunding is taxable.
- Creative financing in real estate is all about finding uncommon ways to secure funding for property investments or developments.
- Lenders may from creative real estate financing just as much as investors and developers.
- Some types of creative financing loans include hard money loans, government loans, and seller financing.
- Some creative financing strategies involve using equity, forming partnerships or asking for private money, and crowdfunding.