All About Creative Financing

All About Creative Financing

We all know just going to the bank to get a loan doesn’t work for everyone.  As a matter of fact, I would venture to say, it doesn’t work for most.  I know investors who have great credit scores and money in the bank and still have problems getting “traditional” loans.  That’s why alternative or “creative” financing was invented.  

Are all creative financing techniques created equal?  The answer is no, but the point is to know what is possible so you can find your own creative ways to make one (or more) work for you. Here are a few methods to get you thinking:

1. No-doc and low-doc loans.  No (or low) documentation of your income or credit required.  You can find lenders that do these online now. The catch is that you will only be able to borrow up to 70 of the purchase price or property value in most cases.  If you’re short on cash, say for instance, you have only 10% in cash, you might be able to make arrangements with the seller for the other.

2. Seller-carried second mortgages.  If a lender will only loan you 70 of what you need, they may allow the seller to take back a second mortgage from you for 10, so you will only have to come up with 5 for a down payment.

3. Seller Financing.  This just means the seller carries the full note and lets you make payments, then, delivers the title upon payment in full.  I sold a rental this way for $1,000 down, because the Buyer didn’t qualify for a traditional mortgage and I didn’t mind making the 9% interest I was getting.  Also, the Buyer didn’t have to come up with 20% down and pay 12% interest to a hard lender.

4. Credit cards. If a seller will take $5,000 down on a fixer-upper that you expect to make $20,000 on, why not use credit cards? This is a true nothing-down deal for you, and if you turn the project in six months, you will have only paid $450 in interest on an 18% credit card. 

5. Retirement accounts (Self-directed IRA’s).  The laws get pretty complex in this area, but you can check with a tax attorney to see how you might borrow from your own retirement account to finance real estate investments or talk Private Investors into using theirs.

6. Private Lenders.  There are private lenders out there who are only interested in passive returns who will loan their money on real estate deals that promise them a much higher return on their money (usually 8 or higher), rather than letting it sit in the bank getting 1% or 2% annually.  These investors can be found in places like local REIA (Real Estate Investors Association) meetings, local IRA groups, online real estate platforms and, sometimes, even family members or friends.

7. Get a loan on another property.  You can take out a home equity loan on your primary home (and, conveniently, forget to use it for that spare room you were going to build) but, instead, use it for the down payment on an investment property.  If it’s a rental property, the rent you get should offset whatever payments you might have or if it’s a fix and flip, once it’s completed and sold, you can pay off the loan, then take the profits that’s left and invest in another property. 

8. Syndication. For bigger projects like buying an apartment complex, you could arrange for five or more investors to each put money into a partnership or syndication deal, with your participation being as the “Sponsor” or Managing Partner in exchange for your share of the equity.  The Sponsor oversees the project and is the point person for the General Partnership.  As a sponsor, you can be paid a fee for putting the deal together, then a monthly fee for overseeing the project, and also a “dissolution” fee when the project is sold.

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