An issue, like many in today's age of investing, real estate investors are facing is how to fund their real estate investments.
There are two common ways for investors to purchase their first investment property:
- All-cash Transactions
- Traditional Bank Loan
These two methods are acceptable ways to finance a purchase, however, they aren't always the best options. Instead, there are alternative solutions to secure capital that can be an excellent way to scale business, while expanding your investment portfolio. Utilizing creative financing strategies will provide you with the ability to secure deals that can be missed out on.
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What is Creative Financing?
The term creative financing refers to distinctive methods and strategies for securing funds and/or capital to purchase real estate investments. While traditional financing options are provided by financial institutions, banks, and mortgage lenders, with creative financing we see an investor having access to funding in several creative ways.
Continue to read to find 5 creative financing strategies in real estate investment.
1. Seller Financing
Considered one of the easiest ways to acquire investment properties is through seller financing, without the use of banks or lenders. As long as the seller owns the property and it is clear of any mortgages, this option is wide open. For the use of seller financing, both the investor and seller will simply work out the purchase price as well as the terms of the financing agreement, with the investor agreeing to pay the seller until the purchase is complete. In many instances, an investor can enter the agreement with no downpayment, acquiring the property for next to nothing.
2. Hard Money
Hard money is a common funding source for real estate investors as this is mainly asset-based, meaning the lender will review the subject property to decide on your loan. This can be a wonderful option for investors that face difficulty qualifying for a traditional bank loan, whether it is due to personal financial history or credit scores. The approval process is considered much easier, with access to funds being much faster than a conventional loan. Hard money lenders can provide an investor with funds in days, if not hours, compared to the weeks and months it can take when waiting for bank-approved funds.
3. Private Money
Being under an umbrella of broad terminology, private money technically refers to anyone with access to funds they are willing to lend. For example, a friend, family member, or colleague that is willing to lend the money for an investment would be considered and categorized as private money. Private money lenders do not provide funding to multiple investors, instead, they tend to partner with one or two trusted investors to become the funding source for investors' deals.
4. STABBL Loans
S.T.A.B.B.L refers to a short-term, asset-backed, bridge loan. A STABBL loan is a creative option for purchasing real estate investments. It is very similar to a hard money loan in that the loan is asset-based and secured by a mortgage. These types of loans often act as "bridge" loans for investors in that they can be accessed to secure investment purchases with the intent to cash out of a deal in less than 12 months. For those who are interested in fix-n-flip purchases, this lending option may be right for you as it allows the investor to use the lender's money to fund the purchase so money can fund the rehab. Once the property is fully remodeled and sold, the payoff on the loan is ready to restart the process.
5. Lease Options
Known as rent-to-own purchases, lease options are easy ways to purchase investment properties without the use of bank approvals or lender involvement. Commonly confused with seller financing, it is different in that the seller will retain ownership of the property while acting as the landlord, with the investor acting as the renter. A portion of the lease or rent payment is applied to the agreed-upon purchase amount for the property. The investor is not obligated to purchase the property, as there is only the standing option to purchase. This is an easy strategy to negotiate with a seller that is looking to receive monthly payments to maintain control of the property while it is being purchased.
For more information on creative financing strategies and understanding how to utilize them to your benefit, check out our website! For more local information on St. George Island real estate and fun spots to visit on Florida's Forgotten Coast, contact us at any time