Creative Financing
Creative financing is an umbrella term for all the different types of financing that exist, especially in real estate. There are private money lenders, owner financing, and lease options among other types. Creative financing usually involves non-traditional terms so that you can create a win-win situation for the lender and the borrower.
If a seller wants to sell their home but is still making payments, you might offer to take over his payments. This way you can avoid closing costs, origination fees, broker commissions, and higher interest rates. There are other ways of creative financing, this is just one example.
If you are a company or person that buys homes that need repairs and you renovate them so that you can resell them, you might need non-traditional methods of funding. You can try creative financing in order to finance your business ventures. There are many ways that you can do this.
Different Types of Creative Financing
- Cash Out Financing – This is when you refinance a loan that is existing on a property so that you can turn your equity into cash. An example of this is if you still owe thirty thousand dollars on your mortgage for a one hundred-thousand-dollar loan, and you do a cash out loan. You could then increase your loan so that you could get one hundred thousand dollars back.
- Home Equity Line of Credit – A home equity line of credit is a loan that allows you to borrow against the equity in your home: https://consumer.ftc.gov/articles/home-equity-loans-and-home-equity-lines-credit. It is similar to cash out financing except that it allows you to withdraw money as needed over a period of time that can go as long as ten years.
This type of loan is good for you if you need to access more capital over a longer period of time. It is also good for those who don’t want to pay closing costs that are associated with a cash out loan. This is good for those who are just starting out because they don’t need to come up with the money upfront.
- You Can Try Private Money – Private money lenders are individuals such as friends and family members. They usually ask for something in return such as interest or property. This is good for those who have more difficulty with traditional loans or have no credit or bad credit.
- Hard Money Loans – Hard money loans are very similar to private money loans – they both provide capital to investors without them having to jump through hoops. See more here. The key difference is that hard money lenders are companies that usually have high interest and stricter terms than traditional banks. Before committing to such loans, investors should also understand what is an expense ratio for ETF, as managing investment costs effectively can improve overall financial performance. You want to use this only if you know that you can repay the loan on the lender’s terms.
- Owner or Seller Financing – This is when the seller of the property owns their property free and clear and will create a mortgage, deed of trust, or note for you to pay and then take possession of the property. Basically, the seller becomes your bank. You will get possession of the property immediately, but you will still need to pay the mortgage each month, much like a traditional bank.
- Subject To Deals – These deals are similar to seller financing except that the seller doesn’t own the property free and clear – instead they still have a mortgage with their bank. This is good for a seller that is in dire straits that needs money in a non-traditional way. The buyer would take possession of the property and make all the mortgage payments – the bank is not involved at all in this type of transaction.
- Crowdsourcing – Crowdsourcing or crowdfunding is when you have a pool of people, usually from the internet, fund a project for you. There are many sites that can help you do this including Kickstarter and GoFundMe. Most of the time, investors will receive equity in your deals and some of the future profits for their time and money.
- Partnerships – This is another form of private funding – only the investor becomes your partner. This would work if a friend or family member had the cash and wanted to have equity in the deal. They might even be able to give you advice on how to run your business, if you are lucky.
- Loans that are Interest Only – An interest only loan is one that, as the name implies, you only pay the interest and not the principal. This is good for house flippers who will pay the interest during the year or so that they are working on renovating a home and then paying off the loan once the home sells. It can also be good for you if you have bought a home needing repairs and then you get a traditional loan once the home has been repaired.
- Buy, Rehab, Rent, Refinance, Repeat – BRRRR is effective when you’re looking to build a portfolio of rental properties. Basically, you buy a rental property that needs repairs with a seller finance or private lender and make the repairs. Once you have made the repairs, you rent it out for about a year to build up equity and then refinance with a traditional loan.
Conclusion
There are many ways that you can get funding for buying real estate. You can go the traditional way through a bank or other traditional lender, or you can check into some creative financing. Creative financing allows you to get the funds that you need if you don’t qualify for a traditional loan.
