Creative Real Estate Financing – Mortgage Alternatives
Creative Real Estate Financing implies ways to fund properties by alternative means instead of the standard mortgage. These strategies could be used for long term funding (buy and hold) or short term investing (wholesaling or fix and flip.)
Investors have to get creative nowadays to thrive and succeed in real estate investing. After the mortgage and housing crisis, standard mortgages are not as easily available and caps are put on by lenders to the number of properties owned as investment.
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Creative Real Estate Financing:
Just a few years ago “Creative Real Estate Financing” was considered a bad term, a big “no-no” in the real estate arena.
The fact is that I have always used creative real estate financing throughout my real estate career, since it has allowed me to move faster on projects and at more favorable terms than standard financing. Some investors have abused the system and gave the concept a bad rep, but you can certain be creative in structuring deals and still keep it legal.
Why using Creative Real Estate Financing?
The most common reason is that you don’t need money or credit of your own.
You also minimize personal risk in investing (even if you do have capital, don’t forget the time value of money principle,) while exponentially growing the real estate business through leverage.
There are 2 types of OPM (Other People’s Money:)
- Debt Financing – means you take out a loan or sell “bonds” to raise capital.
- Equity Financing – entails selling an ownership interest (equity) in the venture.
OPR (Other People’s Resources) entails contribution in the form of services or “resources” that you would otherwise have to pay for. For instance, working with a general contractor who is willing to contribute labor and material to the project without being paid upfront, therefore creating a 100% creative financing alternative.
This is a partial list of mortgage alternatives or creative real estate financing strategies:
- Lease Option to Buy
- Master Lease Option (commercial)
- Subject To … (existing mortgage staying in place)
- Transfer of Title but mortgage stays in place
- Close at Title Co after title work and title insurance
4. Owner Financing
- First Position – Free & Clear – 100% Funding Possible
- Second Position – Second or Partial Mortgage funding
- Wrap Around Mortgage
- Land Contract, Contract for Deed
- Either the seller retains title or transfers to buyer
- Promissory Note on downpayment
- “Hard” Private Money
- 65/70% LTV – 5 to 10 points – prime +8% rate
- “Soft” Private Money
- Transactional and Extended Transactional Funding
- Portfolio Lenders
- Local investors owned lenders
- Regional banks and credit unions
- JV Partnerships
- Asset based lending – also called Money Partners
10. Real Estate Syndication
- “Debt” Funding à Long Term (1+ year)
- “Equity” Funding à Short Term (less than a year)
Especially the last 2 alternatives, JV Partnerships and Real Estate Syndication, have been of special interest to me, because they allow me to fund deals 100% and also make money as an investor/wholesaler – I call the “Double Dip Strategy.”
Like they say, “If there is a will, there is a way.” In real estate this saying lives more than ever. Ask the big real estate tycoons – they became tycoons not by the power of what they had in their savings account or on their credit report, but by knowing how to leverage funding alternatives.
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