Creative Financing Methods for Real Estate Investing
Creative financing methods for real estate investors are very important because no matter how much money an investor has, he will need more money as he becomes more successful.
Creative financing methods allow the investor the leverage of purchasing or controlling four to ten times the same amount of houses if he uses cash for their purchases. If the investor has little or no money to start with, creative financing is his only choice except for hard money loans or private financing.
Hard money loans are expensive and are called predatory loans because the hard money lender usually loans a low enough percentage of the After Repaired Value (ARV) that he has minimal or no risk if the investor defaults and he has to foreclose.
Private money loans generally have much better financing costs and interest rates, but may not always be available when the investor needs them. So the investor should use any and all financing that is in place against the house.
The first creative financing technique is to have the seller allow the investor to take over the seller’s mortgage. There are not financing or recording costs but the investor has a moral responsibility to pay the mortgage payments timely or give back the deed to the seller if he is having financial problems.
The second creative financing technique is called “seller financing” and this is where the buyer/investor gives the seller a mortgage back for his equity in the property with the intent of paying off this seller mortgage and the first mortgage at closing.
Getting a second mortgage for the seller’s equity virtually allows the investor the ability to purchase the house for very little or no down payment or closing costs except for the document stamps for the seller’s mortgage.
Occasionally investors will find houses where there is no mortgage on the property and the seller will take back owner financing for all or most of the purchase price. Everything is negotiable in these situations with regard to the loan amount, date of expiration and interest rate charged by the seller.
These properties are unique opportunities for the investor because of the reduced closing and carrying costs. A typical offer to a seller is to receive interest only monthly on the principal at 1% above the current Certificate of Deposit interest rate (i.e. 6%) or 2% above this rate deferred to closing and paid all at that time (i.e. 8%). There is no need to offer hard money rates as the seller wants the investor to sell and pay him off as soon as possible and charging a high interest rate won’t help the investor with his cash flow.
Our experience is that 90% of the sellers take the 6% because they like to know that you are doing well and their measure is this monthly check. If the investor needs his cash flow, he can offer a higher deferred rate such as 10% which usually works. It can be seen that creative financing techniques can propel an investor into many more deals than using his or borrowed cash.
This powerful money leverage technique of using “Other Peoples’ Money” (OPM) is a basic financial tool used by both professional and novice investors to increase their ability to control properties.
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