Top 5 Creative Ways to Finance Real Estate and Fund Investment Properties
Understanding Traditional Financing and Exploring Creative Financing Options for Real Estate
Real estate investors looking to scale their portfolios understand the power of leverage. In many cases, this means exploring creative financing and alternative methods to fund their investments. This is especially true in today’s economic environment, where interest rates have doubled since the start of the year – surpassing 7% for the first time since 2002. However, not all creative financing methods are equal. In this article we cover several of the most powerful creative financing techniques real estate investors can use to find and close more deals this year with Empora Title.
Comparing Creative Financing and Traditional Financing in Real Estate
Before discussing creative financing, you should understand what investors refer to when they talk about traditional financing.
What is Traditional Financing in Real Estate?
Traditional financing involves applying for a mortgage from one of several money loan programs in the United States, such as a conventional mortgage or an FHA loan. Banks and private lenders issue these loans to make homeownership possible for many people who otherwise may not be able to buy a home.
What is Creative Financing in Real Estate? How Can Creative Financing Can Help Investors?
On the flip side, creative financing allows real estate investors to purchase a property with as little of their own money as possible. Creative financing is a powerful tool for investors in today’s market. It allows real estate investors to do more deals and increase their return on investment (ROI) since they use leverage and other methods to finance one or multiple properties.
*Please note that the buyer and the seller should always consult with their attorney on any creative financing deal. No investment is without risk. Be sure you aren’t violating any laws, that all of your questions are answered, and that you are comfortable with the risk you undertake.*
Exploring the Top 3 Creative Financing Strategies in a High-Interest Rate Environment
While there are plenty of creative financing strategies that investors use today, below are the top three that you should consider in a world of higher interest rates.
1) Land Contracts: A Flexible Alternative Financing Option (a form of seller financing)
A land contract (or contract for deed) is an agreement between the buyer and seller where the seller retains the legal title to the property, but the buyer pays the seller in installments until the purchase price is paid in full. The buyer and seller agree on the terms ahead of time, including the purchase price, interest rate, and down payment. These are typically shorter-term deals with a balloon payment due at the end of the contract – at which point the title would be transferred to the buyer.
A land contract is an alternative financing option that gives both parties the flexibility to tailor the terms of the transaction. It benefits buyers since there aren’t income or down payment requirements, while the seller can sell their property as-is and retain the title to the property until the mortgage is paid off.
2) Subject-to: Leveraging Existing Mortgages for Creative Financing (also seller financing)
Subject-to is a creative financing method where the buyer takes over the existing mortgage on the property. This is an attractive creative financing option in an environment with higher interest rates because more often than not, the seller has advantageous terms compared to current rates. Sellers can negotiate a higher asking price since the buyer will take over the mortgage with its existing interest rate, which tends to be lower than the current market rate. When properly structured, subject-to deals can be a win-win situation for both parties. For sellers, a subject-to sale can enable them to rebuild their credit, avoid foreclosure, and put cashflow back in their pockets.
Check out this video from Pace Morby to better understand how Subject-to deals may benefit your business.
3) Lease Option (or rent-to-own homes)
Without a good credit score and money for a down payment, the path to homeownership may be difficult for many potential homebuyers. That’s why a lease option (or rent-to-own) can be a great way to get involved in real estate for new investors.
This creative financing method allows investors to rent a property with the option to purchase it at the end of their lease. In most cases, a portion of rent payments will count towards the home’s down payment when it’s time to purchase the property.
Lease options allow renters to build equity through their monthly rent payments and give landlords the ability to generate income based on the interest rate they’ve agreed upon. It’s also a great option for real estate investors of all experience levels and tends to be one of the easiest ways to get involved in real estate. However, finding the right landlord and shopping around are key to executing a successful lease option agreement.
Exploring Additional Creative Financing Options to Unlock Capital for Faster Property Transactions
While the three creative financing types we outlined are very popular, there are many other creative financing options that investors have used for years to finance more deals and close faster.
4) Cash-Out Refinance: A Creative Financing Option for Investors
A cash-out refinance is when a property owner uses the equity in one property to borrow money they can use for various purposes – like buying more properties. This is an excellent option for investors who have built significant home equity and want to use the funds from the cash-out refinance to purchase additional investment properties.
It’s important to understand that cash-out refinances aren’t free money–you’ll need to pay back the money to your lender. However, some lenders allow you to finance the cash-out amount into your new loan balance so it won’t be paid in a lump sum.
For investors familiar with the BRRRR method (buy a property, renovate the property, rent the property out, refinance the property, repeat) this is a powerful tool for converting equity from a recently rehabbed property into working capital that can go towards the purchase of your next property. In this 12-minute YouTube video, our friend Austin Rutherford walks you through the BRRRR method.
5) Private Loans
Private loans are given to individuals who can use the money at their discretion. While interest rates are usually higher than a traditional mortgage, and the loan term can be considerably shorter, private money typically comes with fewer strings attached and can be more quickly obtained. This is especially true once you’ve established a track record with a private money lender. For investors flipping a property in a matter of months, or planning to refinance with a bank after renovations are complete, the financial impact of a higher interest rate private loan is minimized. Check out this helpful video for more information on private loans and other types of loans that may be right for you.
Empora Title: The Ideal Partner for Real Estate Deals
Investors considering creative financing will find that Empora Title is the ideal partner to help scale their business and increase cash flow. Whether you’re interested in leveraging a home equity loan, private money, or another creative financing option, Empora is ready to help you to close faster with less upfront capital. We are experts at closing efficiently, accurately, and in a compliant manner!
We’d like to thank creative financing expert, and valued Empora customer, Antoine Tucker for his input on this article!