There are quite a few ways to think outside of the box when it comes to funding your real-estate deals.
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One of the biggest issues real-estate investors have is how to fund their real-estate investments. The two most common ways for an investor to purchase their first investment property is with an all-cash transaction or with a traditional bank loan. These are both acceptable ways to finance a purchase, but they’re not always the best options. Instead, using alternative solutions for securing capital can be an excellent way to quickly scale your business and expand your investment portfolio.
Utilizing creative financing options in your business will provide you with the ability to secure deals that you otherwise may miss out on.
What is creative financing?
Creative financing refers to unique methods and strategies for securing funds and capital to purchase real-estate investments. Traditional financing options are normally provided by financial institutions, banks and mortgage lenders. With creative financing, an investor can access funding in a variety of creative ways.
Related: 6 Signs Your Business Idea Is Ready for Financing
Seller financing is one of the easiest ways to acquire an investment property without any banks or lenders. As long as the seller owns the property and is clear of any mortgages, they can provide an option to an investor for seller financing (also known as owner financing).The investor and seller simply work out the purchase price and terms of the financing agreement, and the investor agrees to pay the seller directly until the purchase is complete. In some instances, an investor may be able to enter into the agreement with no down payment, essentially acquiring the property for zero dollars.
Hard money is one of the most common funding sources for real-estate investors.This type of financing is almost always asset based — which means that the lender will review the subject property to make the decision on the loan, rather than the creditworthiness of the borrower. Hard money loans are a great option for investors that may not qualify for a traditional bank loan due to their personal financial history or credit score. In addition to the approval process being easier, the access to funds is also much faster than with a conventional loan. With the lack of red tape, hard money lenders can provide an investor with funds in days — if not hours — compared to the weeks and months it takes to get bank-approved funds.
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 that is willing to lend you the money for an investment could be categorized as private money. Typically, a private money lender does not provide funding to multiple investors. They tend to partner with one of two trusted investors and they become the funding source for those investors’ deals. Since this is not their primary business, this type of lender prefers to build a mutually beneficial relationship with just a handful of investors, rather than providing capital on a large scale.
S.T.A.B.B.L. stands for a short-term, asset-backed, bridge loan. A STABBL loan is another creative option for purchasing a real-estate investment. 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 typically act as “bridge” loans for investors. An investor will access this type of loan to secure an investment purchase with the intent to cash-out of the deal in less than 12 months typically. This lending option is good for fix-n-flip purchases because it allows the investor to use the lender’s money to fund the purchase so their money can fund the rehab. Once the property is remodeled and sold, the investor pays off the loan and is ready to repeat the process.
Related: It’s a Great Time to Refinance Your Mortgage
Lease options, also known as rent-to-own purchases, are an easy way to purchase investment properties without any bank approvals or lender involvement. This is different from seller financing because the seller will retain ownership of the property and act as the landlord, while the investor will act as the renter. With a lease option, a portion of one’s lease or rent payment is applied to the agreed purchase amount for the property. The investor isn’t obligated to purchase the property, as they only hold an option to purchase. This is usually a very easy strategy to negotiate with a seller that’s looking to receive monthly payments and maintain control of the property while it’s being purchased.
The benefits of using creative financing in your real-estate investing business are endless. These strategies can provide a virtually unlimited supply of funds for your investment purchases. Creative financing options are extremely flexible and almost all of the terms and conditions are negotiable. Although not many, there are a few drawbacks to using these creative solutions. The interest rates on creative lending methods are much higher than with traditional lenders and the loan repayment timeframes are likely much shorter. That being said, I would definitely include some of these creative financing methods into 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
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