Most people are familiar with the traditional financing process for buying a property. Apply for a loan with a mortgage lender, get approved and use the qualification letter to go through the process of buying a property. The problem for investors is that it can be difficult to obtain traditional financing for investment properties. While there are some options, many investors will need to be familiar with creative financing options if they want to expand their investment portfolio without using all of their own savings on deals. Here are some of the most important things to understand about using creative finance options for investment properties.
Hire Professionals to Assess and Manage Risks
Before utilizing any creative financing options to purchase real estate, it is important to understand all investments have risk and each individual should review the property and potential financing options with qualified professionals, like financial advisors, real estate attorneys, accountants, real estate agents, mortgage brokers and experienced real estate investors, that can help assess whether you should proceed with the deal. With creative financing, there are risks in the investment itself and the structure or contract used to secure that particular financing option. It is vital to work with a team of experienced real estate professionals if you want to have the best chance at growing a long term portfolio of investment real estate.
Understanding Creative Financing Options
There are a few key categories of creative financing options beyond traditional mortgages available to those looking to purchase investment real estate. These include seller financing, hard money lenders, partnerships, lease options, and seller take-back mortgages. Private money lenders are another option, typically individuals or small organizations that are willing to loan you money for a property. Hard money lenders are more expensive, but often work with borrowers with less-than-perfect credit. Each of these options come with their own set of pros and cons, and it’s important to understand the details of each before making a decision. With the right financing option, you can purchase the property you need to grow your wealth.
There are many creative financing options available to purchase investment real estate and these are just a few of the more popular options. Here is a brief overview of different creative financing options that can be utilized by real estate investors:
- Seller Financing: The seller effectively becomes the mortgage lender to the buyer. The buyer agrees to a purchase price, length of mortgage term, interest rate and monthly payment on the home. This option can be more attractive to sellers when interest rates are high. While seller financing is common, buyers and sellers should consult with an experienced real estate attorney and accountant to structure a contract that accomplishes the agreed upon terms and provides ample protection for their interests.
- Hard Money Lenders: These private lenders are typically used for short term financing, commonly used by investors looking to fix-and-flip a property. They can also be used to secure a property if you have vetted plans to restructure the ownership after closing.
- Partnerships: There are many experienced real estate investors looking to partner on residential and commercial real estate investments. Building a network of active investors and keeping track of their preferred investments can provide lots of ways to finance a real estate purchase. This can be a great way to get started for people without the resources to buy their own investment property and can provide a great education on evaluating potential investments and closing deals.
- Home Equity Lines of Credit (HELOC) or Retirement Accounts: It is common for people that own a home to use a line of credit from their equity to purchase investment real estate. Many people also use their self-directed IRA or 401(k) to invest in real estate. Just make sure that you understand these methods put your home and retirement savings at risk if there are issues with the investment property. It is more important than ever to have a professional team representing your interests if you are pursuing these financing options for investment real estate.
Benefits of Creative Financing
While we have explained and continued to stress there are risks, there is no doubt that creative financing has helped many investors get more deals done. For starters, many creative financing options require a lower down payment than traditional financing, making it easier for investors to get into a property. Some creative financing options can come with lower interest rates, making it easier to manage the cost of financing. Furthermore, the qualification requirements for these financing options are often simpler and more flexible than traditional financing, providing potential buyers with more options. The closing process for these financing options can also be much quicker than traditional financing, allowing buyers to get into their investment property in a timely manner. Many experienced investors use traditional and creative financing options to fund their investments and projects. Experienced investors generally understand that creative financing can be another valuable tool for them to use when it benefits them most and can be structured to adequately protect their financial interests.
Drawbacks of Creative Financing
When it comes to purchasing investment real estate, there are many creative financing options available. However, these options can come with drawbacks. For example, repayment terms can be shorter, and only certain types of property may qualify. It is important to weigh the pros and cons of each available financing option to determine the best fit for your individual investment goals. Additionally, it is always wise to enlist a financial advisor to help you navigate the various creative financing options, as well as the associated risks and costs. Ultimately, creative financing has been used successfully by many investors to get into the investment property market, but it is important to do your research and consider all of the potential drawbacks with experienced real estate professionals representing your interests.
Work with an Experienced Real Estate Attorney for Creative Financing
When it comes to purchasing investment real estate, there are a variety of creative financing options that can be utilized to get investment deals done. From seller financing and home equity loans to hard money or private money loans, each financing option has its own benefits and drawbacks. Seller financing, for example, can potentially provide more favorable terms, but it also requires that the seller is willing and able to offer such terms. On the other hand, home equity loans and lines of credit can be easier to secure, but they typically have higher interest rates and additional risks in the event of a default. Hard money and private money loans are more expensive and require more time and effort to acquire, but they can offer more flexibility once secured. Ultimately, each financing option has its own advantages and disadvantages, and it is important for potential investors to understand the different options so that they can make an educated decision about which one best suits their needs.
At Gottlieb Law, we can help real estate investors with every aspect of finding and securing investment real estate. Our experienced real estate attorneys can also assist with reviewing potential financing structures and contracts to minimize risks. Contact our firm today at 602-899-8188 to schedule an initial consultation or make an appointment on the contact us page of our website.
Gottlieb Law published this article solely for informational purposes and nothing in this article creates an attorney-client relationship for any specific scenario regarding real estate financing.