Regardless of where you are in your real estate investing career, you will go nowhere – at lightning speed – unless you find ways of raising the cash you'll need to fund your real estate transactions.
As useful as traditional financing strategies can be in the acquisition of real estate, you should never overlook the joys of creative financing and the many ways that it can unlock doors to wealth and prosperity.
The average real estate investor is like the average person who takes an average job with an average company – and expects to reap the kinds of financial rewards typically reserved for those who take risk and create cutting-edge businesses with a never-before-heard-of marketing plan.
While it's theoretically possible, it's just not likely. If you're interested in breaking the mold of mediocrity that prevents many real estate investors from realizing their dreams, keep reading. In this article I'm going to explain how creative real estate financing can help you to reach the pinnacle of success with a simple strategy: embrace new ideas, modify existing ones, and think outside the income-limiting box of conformity.
If you rely only on institutional financing sources – primarily banks, credit unions, etc. – you are by definition limiting your options because Fannie Mae and Freddie Mac have strict rules in place about how many mortgage loans you can have at any given time.
While the government does some things very well, their well intentioned rules do tend to limit how far your real estate investing career can go with a traditional funding vehicle.
This is where creative financing comes in. Instead of going to your local lender for financing, you can instead exercise one of the many creative investing options available to you. This allows you to get around the government's career-stifling mortgage loan rules – while keeping you in compliance with the letter and the spirit of the law.
So what qualifies as creative financing?
The beauty of creative financing is that just about anything goes. If Donald Trump were to trade an island that he owns, an airplane,or some other possession instead of making a cash down payment for a hot property he wanted to acquire, that would technically qualify as a creative real estate deal.
The number and design of a real estate transaction is limited only by your imagination and your ability to convince a seller that your creative financing offer makes sense. While you may not have an airplane parked in a hangar just waiting to be traded away, it is likely that you might have something that someone would be willing to trade for as part of a real estate transaction.
However, creative financing strategies aren't just ways of avoiding down payments. Creative real estate financing is an all-encompassing way of looking at funding a real estate transaction without relying on the socially accepted tradition of getting a bank loan with a 20% down payment and making payments for 20 or 30 years.
Creative Financing Is Innovative Financing
Creative financing could be taking small amounts of equity you have in multiple properties and pledging that equity instead of making a down payment on a property you want to purchase. While it sounds unusual, this process – cross-collateralization – is a creative financing technique that has been used for years in commercial real estate, and is also being used by some forward-thinking real estate investors.
This strategy is much less common than lease option transactions, subject-to deals, or even putting government programs to work for you in funding your deals. These strategies can all be used to finance real estate investments and can help to grow your investing portfolio at lightning speed.
The most common form of creative financing involves the seller accepting all or part of the risk associated with real estate by agreeing to carry a note of some kind for the property. This allows you to purchase the property without risking your credit.
You might think that the average motivated seller wouldn't want to consider a creative real estate offer when they could just as easily get all of their cash up-front from another buyer. You're right, the average seller might not be inclined to accept a creatively-financed property offer (but you might also be shocked to learn how many marginally motivated sellers would at least consider a creative financing offer).
However, most creative real estate deals don't involve “average” sellers. Instead, they involve highly motivated sellers with special needs or situations that simply cannot be addressed by selling their property to an ordinary, run-of-the-mill investor with access to a line of credit or a limited supply of cash.
Want an example? Read on…
What if you had a property that you absolutely had to sell because you wanted to live closer to a family member who is receiving radiation treatments for a rare form of cancer? What if the property you were selling had a bedroom decorated with a tree that had crashed through the roof during a thunderstorm -while the property was uninsured due to a mental lapse on your part?
You can see how that would motivate you to at least consider a creative financing idea if it meant being able to get rid of a property you no longer wanted to own.
One of the most invigorating aspects of creative real estate finance is that it sometimes involves asking the owner of the property to participate in financing, as in the case of a contract for deed, a lease option, or a subject to deal.
The world of creative financing is much larger than that, though, because it can also include putting government programs to work for you by letting Uncle Sam pay all or part of the cost of acquisition, financing, or finding and/or retaining great tenants.
Creative real estate financing also includes folding other investors into real estate investments by using private money lenders. These private lenders – typically busy executives or others with a desire to earn a good return on their investment – are often willing to lend money for real estate on a short-term or even an extended basis.
Yet another creative financing strategy is using a self-directed IRA to fund real estate or to accept cash from other investors who wish to use their self-directed IRA for investment opportunities.
Hard money lenders can be an asset I would be remiss if I were to ignore one final creative financing method: hard money lenders. While hard money lenders won't necessarily be your first choice in generating real estate investing cash, they are a source that can provide capital when all other options have failed.
You do want to be careful when using hard money lenders because rates and terms can be somewhat confiscatory, but in certain cases,they can make perfect sense and can be the difference between having a deal that gets done and a deal that remains an unfulfilled dream – teasing your consciousness with the promise of untold profits – only to snatch them back at the last second.
Hard money lenders can allow you to seize real estate opportunities that you might otherwise have to let pass by, so in some cases, they are easily worth the cost.
It's imperative that you obtain the necessary funding in order to experience the positive results available in today's real estate market. Otherwise, your deals will go unfunded – and what could otherwise be an extremely profitable and lucrative real estate investing future could be derailed before the train even leaves the station.
For this reason,you need to make it your business to learn as many creative investing strategies as possible. Your future prosperity is riding on your ability to parlay motivated sellers with unique problems into committed, enthusiastic partners with a willingness to embrace one of many creative financing strategies as a way to solve their real estate problems.
While there are some challenges associated with learning these varied strategies and techniques, easily the biggest challenge that you need to meet is your knowledge deficit.