Maybe you’ve heard the term…maybe you haven’t. Creative financing is becoming an increasingly popular means of building a portfolio. Some rental investors mistakenly think that creative financing is only used for wholesalers or flippers. Not true! Buy and hold investors can benefit just as much from using creative financing.
PURCHASING A PROPERTY THAT A BANK WON’T TOUCH
Every once in awhile we find the diamond in the rough…the very rough. A property that sparks our imagination about “what could be”. Then we go to the bank and they tell us…what can’t be.
For most investors this is where the thought process stops. They think “Oh well, I don’t have the cash to buy it.” You may not have the cash to buy it but that doesn’t mean you can’t buy it. Just because a bank won’t finance it doesn’t mean your dream has to die.
You can get a private money lender. Someone who has the cash to fund a real estate deal in full. (You may be thinking “I don’t know anyone like that”. Truth is most of us do know someone like this, we just don’t know that we know them.) Another option is hard money lending. Which is a “unregulated” loan from a non-government backed institution. This type of lending isn’t just something you look up in the Yellow Pages (or now days Google). Your lender should be reputable and hopefully come recommended, especially because the industry is highly unregulated.
FUNDING THE REHAB
Sometimes our diamond in the rough is worthy enough to be financed by a bank…but they only will fund the purchase. You need to find the moola to do the rehab. You have the funds for the down payment, but you can’t fund your rehab. Enter creative financing.
You can use the same two methods above to fund your rehab. Finding someone you know who could fund a $25k rehab is much easier than finding someone to fund a $155K purchase. You’ll have to be a little creative with how the loan is secured but at least your pool of potential lenders is larger. You can also use a hard money lender. In fact, this is their bread and butter transaction. (Though they don’t issue a loan for the rehab. Its work similar to a reimbursement system.)
USING AN EXISTING LOANS REALLY SWEET TERMS
The idea of an existing loan have significantly better terms than what you can secure now may seem odd in today’s financial climate. But there was a time when the already established loans had interest rates that were 1.5-2.25% lower than what the market at the time allowed. Even today we are over 1% higher than the lowest rates in the past 10 years. If you are having trouble following this, in 2012 the residential loan market hit a low of 3.31% on a 30 year loan. As of writing this, the interest rate is 4.51%. Someone purchasing an investment property with a 2012 mortgage rate would likely prefer that rate and want to secure it if possible. To do this you are entering into a form of seller financing which involves assuming the mortgage (taking over the loan payments).
Now this does come with its inherent risks. Since all mortgages have a “Due on Sale” or “Acceleration Clause”. These clauses give the banks the right to call the loan due in full if there is a change in ownership or they believe any other violation of mortgage terms occurred. Will this happen to you if you assume someone’s mortgage, don’t change title or deed and never miss a payment? Likely not. After all we’re familiar with the idea of the bank wanting their money more than the property. To many investors the risk is worth even the 1% decrease in the mortgage interest they get by assuming the mortgage.
Remember 1% isn’t as small as you think. On a principal loan of $200,00 a 1% jump in the interest equates to an additional $35,900 over the 30 year life of the loan! That’s a game changer for your calculations and profit down the road.
Creative financing doesn’t need to be scary. It doesn’t need to seem risky. It’s also not the unicorn that most people on the outside think it is. Situations do arise where creative financing is feasible to be used and feasible to secure. But don’t think securing it doesn’t involve a little leg work and grit. You will likely need both to get your first creative financing deal done.
But now you can go out in the investing world knowing that what 90% of investors think is implausible is achievable. Those are 3 real world plausible investing situations where creative financing can be your asset…or tool. As famed small multi-family investor Brandon Turner says “The more tools you have in your tool belt the more investing you can do.”