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Real Estate Investing - Creative Finance Basics

There are three main parts to ‘real estate investing.’  Buying, Selling, and Financing.

And “Financing” is like the sun, as both buying and selling revolve around financing.  With the exception of ‘wholesaling,’ (selling a contract and it’s inherent right to buy) and cash, you’ll need some form of financing to buy property.  Likewise, when you sell property, your buyers will more than likely need financing to buy it.

The #1 Myth regarding financing is that you need to put 20%-30% ‘down’ to qualify for a mortgage for an investment property.  Oh, and you still need a high credit score too…!

This is true of conventional mortgages and is probably the number one reason why real estate investing is considered a ‘rich man’s investment.’

The truth, however, is that the truly rich don’t use their own money, or their own credit to buy real estate investments.

And understanding the various creative financing options that allow you to buy without using your own money or your own credit is how you invest in real estate.

Types of ‘Creative Financing’ include:

Hard Money/Private Money - this type of loan usually requires that you buy at a price that is 70% or less, of the ‘market value’ of the home.  You won’t need to verify any income or credit score.  The interest rates are high, usually between 15%-18% and are ‘interest only’ payments (this keeps the payment ‘low,’) and has a balloon somewhere between 2-5 years.

These types of loans are best used when buying a property that you plan to fix up and sell quickly.

They can also work for getting a property that you intend to ‘hold’ (rental), allowing you to buy quickly and then ‘refinance’ with a conventional mortgage (for a lower rate) later. 

Subject T0 - Commonly referred to as ‘taking subject-to’ this means that you are taking over the deed, ‘subject-to’ the existing financing.  More simply put, it means that you are taking over the financing.

The key to making this work is knowing how to take the ‘deed’, without triggering the ‘due on sale clause’ that the seller’s bank has put in their mortgage agreement.

The process isn’t complicated, once you know how to do it, and because it involves the use of ‘Trusts’ and “Power of Attorney” forms, you’ll want to study “The ABC’s Of Subject To” to make sure you have all your i’s dotted and your t’s crossed.

This type of financing works well for buying any property where the seller just needs to get those payments covered.  This could be a seller in pre-foreclosure (though you may have to negotiate any back payments with the bank, among other things), a job transfer or job loss, a divorce, or even a death where the spouse or heirs can’t make the payments.

… And Speaking of “Seller Situations”….

Other types of ‘creative finance’ can be used in the same situations as described above.

  • Rent-To-Own
  • Lease With Option To Buy

Both of these terms relate to the financing of the property, the only difference being that the seller retains the deed to the property until such time as the option to buy is exercised or the entire sales price, and any interest, is paid off over the period of the ‘rental’ in a Rent To Own agreement.

Well, there is one other possible difference…

You can also use all of these same creative finance strategies with YOUR Buyers to get property SOLD… so when you are the Renter or Leasee on a ‘Rent To Own’ property, you’ll want to make sure that nothing in the contract prevents you from sub-leasing to your buyer… but when you are selling using these strategies, you may want to make sure that those restrictions are in place for your ‘Tenant/Buyer” (the term used for the ‘leasee’ or ‘renter’ in a ‘rent to own’ or ‘lease with option to buy,’ agreement.

There are other kinds of ‘financing’ for buying real estate, but those are more advanced, and not recommended for beginners. Beginners are best to focus on the basics, build up cash reserves before venturing into advanced investments or the advanced financing options that go with them.

This post was provided by Vanessa Blais from Graspfinance.



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