How Can I Use Creative Financing?

Types of creative financing:

1. Joint venture partnerships
2. Private lending
3. Seller financing
4. Home equity line of credit
5. Hard money loan
6. Lease option
7. Deferred mortgage payments
8. An unsecured line of credit
9. Land contract
10. Blanket/wrap mortgage
11. Self-directed funds
12. Balloon payment
13. Contracts for deeds
14. Syndicate mortgage
15. Interest-only payment
16. Credit cards

Are there more?  Of course!  These are some of the more common types.  Savvy investors who use creative finance maximize their capital, allowing more deals, increasing profits, allowing unlimited growth, and increasing ROI.

Let’s expand on some of the more common types we have listed:

• Joint venture (JV) partnerships are a powerful and relatively common way of using creative financing and taking your investments to the next level.  The terms of the partnership can be varied. Still, typically, one partner (real estate investor / you) has access to the deal, a team of real estate professionals, experience, proper paperwork, and the time to manage or at least initiate the deal.  The other partner (money partner) typically provides the funds required to acquire the property, including closing money, renovation money and contingency funds.  Again, each party’s offer is entirely negotiable, and you can obtain multiple money partners when needed.  JV partnerships are common on all types of properties and a great way to grow your investment portfolio.

• Private lending can be very beneficial to both the lender and borrower.  There are many ways these can be established and again is negotiable to what is agreed upon by both lender and borrower.  Variables can include the loan length, the interest rate charged, frequency of payments, principal and interest or interest-only payments, qualifications of the borrower, and the borrower could even defer some or all payments to the end of the term.  You are starting to see the flexibility to create private lending and borrowing opportunities that can benefit everyone.

• Seller financing is an arrangement where the seller agrees to hold some or even all of the financing required for the buyer to acquire the property.  This is a very powerful strategy that can benefit both lender/seller and borrower/buyer.  There is a wide range of advantages for the buyer. Some common advantages could be easier qualifying for mortgage approval, less down payment needed, fewer restrictions on credit score, and unlimited seller financing deals.  Some advantages to the seller could be a regular income or mortgage payment, possible income tax benefits, reduced property management, and the most significant benefit is their property is sold!  A savvy seller could even get a higher selling price for assisting with the financing.

• Home equity line of credit (HELOC) has so much opportunity utility. Yet so many homeowners are unaware it even exists!  If you own a property, you likely have some equity in that property.  Equity is calculated by the value of the property minus any debts or mortgage you owe on the property.  For example, if your home is valued at $300,000 and your mortgage is $100,000, your equity is $200,000.  You are entitled to access a large percentage of that equity and do whatever you like with it!  I would suggest you invest it into a cash-flowing property and grow your net worth.  

Let’s assume your lender allows you to refinance up to 80% of your equity. In this example, you could access $160,000 from your property because it is your money!  Be sure to understand there are fees to set up a HELOC and interest payments associated. To a wise investor, these expenses are very worthwhile!  The reality is that if you choose not to access this money in your property, your bank is doing it, utilizing your money, and keeping the profits!  And yes, if you have multiple properties with equity, you can have multiple HELOCs.  This could be a simple and very effective first task for you to get started on.  Right now!  Get going!  

• Hard money loans (HML) are powerful and versatile.  A hard money loan is based on the asset’s value, such as a house or building, etc.  A true HML does not factor in the borrower’s income, job status, or credit score, which can be advantageous to anyone with challenges in those areas.  Interest rates will be higher than other types of loans. There are often lending fees or “points” in addition to the higher interest rates.  It can be a versatile way of accessing cash at a higher cost. However, the ease and speed of an HML can offset the increased costs associated.  HML is typically shorter in duration and can significantly benefit both the lender and borrower.  Lenders enjoy having their loans renewed multiple times to gain more lender fees/points, which will increase their ROI.

• A lease option is a very creative way to buy or sell a property and has many advantages to both buyer and seller.  With a lease option, the tenant is also the potential buyer, and we call them tenant-buyers.  The tenant has the opportunity to purchase the property for a predetermined price at a specified time, usually 1 – 4 years.  The tenant-buyer can use that time to repair credit challenges or continue saving more down payment money. At the same time, they enjoy and live in the home they plan to purchase.  The tenant-buyer may be responsible for all maintenance and repairs to the property, just like a traditional homeowner. The agreement can be written to accommodate what is best for both tenant-buyer and investor.  The investor has many advantages, including reduced (no zero) property management, higher cash flow, an end-user or exit plan already in place, possibly maintenance-free investment, and an opportunity to be a landlord in nice areas with great tenants.

• Deferred mortgage payments are powerful and can help a buyer accumulate cash or redirect that useful cash elsewhere.  Often it is possible to defer the first 1 – 2 mortgage payments at the beginning of owning a property.  You may need to use this cash for renovations allowing the property’s value to increase and make the property more desirable to rent.  A good negotiator may defer mortgage payments for longer periods if the lender agrees, and deferred payments are common with properties needing significant repairs.  Deferred payments accompanied by a balloon payment are powerful and creative combinations.

• The balloon payment is offering to pay a large sum of money at a later time.  Perhaps a property needs renovations, and there is little or no income during the renovation process.  Once revenue in the property occurs, a balloon payment to the lender could be an attractive offer and beneficial to both lender and borrower.  In combination with a deferred mortgage payment, a balloon payment gives a nice cash boost to the lender and could make the deal more appealing.  For example, a buyer could offer to purchase a property with private financing in place.  The buyer estimates the property will need six months to renovate and get tenants in place.  A creative offer could be to purchase property, defer mortgage payments for six months and offer the lender a balloon payment in 6 – 12 months.  Very powerful and allows the buyer to redirect the funds to more vital areas such as renovations.  Be creative with this in your offers, and you will be amazed to negotiate with the right seller!

• An unsecured line of credit is similar to HELOC discussed earlier, except there is no property as security.  The loan is unsecured and based on your banking relationship and history.  This is a great way to increase your access to capital. The interest rates are excellent, although slightly higher than the HELOC interest rates.  Apply for one now.  Right now!

Check back next week as we continue to dive into all things Creative Financing!