When it comes to owning or acquiring real estate, so many individuals believe that the way to acquire it is only by securing a mortgage from their bank or through any lending organization and paying cash for the property. But aside from these two ways, there’s another way/concept called creative financing in real estate.
This method has gained immense momentum in the past years by offering workable means for individuals to fulfill their lifelong dream of being an owner of real estate. From leasing to purchasing to personal loans, creative financing has paved the way for numerous aspiring property investors worldwide.
Creative financing offers investors and individuals a path to own properties without requiring them to use any traditional or old method of real estate acquisition. It involves funding real estate deals without using mortgages or traditional bank loans.
Creative financing approaches are designed to help sellers and buyers of real estate overcome obstacles to owning a property. These obstacles include credit score issues, lack of down payment, or strict lending requirements.
Unlike mortgages, creative financing methods are not dependent on your credit history or income. Instead, they’re contingent on other factors such as the seller’s motivation, property’s worth, and negotiating skills. Visit https://www.debt.org/real-estate/mortgages/ to learn more about mortgages.
Types of Creative Financing in Real Estate
01. Hard Money Loans (HML)
This loan is a high-interest, short-term loan offered to real estate investors by private lenders to invest in real estate solely. The value of the property secures this loan and can be used for renovation, acquisition, or construction.
The interest rates of hard money loans are higher than those of conventional loans or private lenders. Most hard money lenders charge points of 4% and more. These points can be paid up front, but few lenders roll these points into the loan.
One of the significant reasons hard money loans are an attractive option for creative financing in real estate is their fast approval & funding. HML is the last resort when real estate investors cannot meet the borrowing standards set by government-sponsored organizations or banks.
02. Equity Sharing
It involves two or more individuals combining their resources to buy a property. The parties involved come to an agreement on a pre-defined ownership percentage, and each benefit from the rental income and property’s appreciation based on the share. Read this for more information on how a home equity-sharing contract works.
03. Subject To
“Subject to” is short for subject to already existing financing. It’s a strategy where a buyer purchases a property without interfering with the seller’s existing mortgage. The buyer takes complete ownership subject to the existing mortgage of the property.
The deed of the property is transferred to the buyer’s name, but the mortgage loan or debt remains in the name of the seller. Below are the ways “subject to” works.
- Existing Mortgage: The property’s seller already has a standing mortgage on the property, and the mortgage’s terms and conditions remain unchanged. The buyer will not take out another mortgage but must agree to take over the property “subject to” the existing mortgage.
- Ownership Transfer: The buyer and the seller will then enter into an agreement, and the property’s title will be given to the buyer. However, the existing mortgage will remain in the seller’s name.
- Responsibility for Payments: As the original mortgage stays in the seller’s name, the buyer is responsible for the mortgage payments. The buyer must uphold the terms and conditions of the existing mortgage to eliminate issues with the lender.
- Benefits & Equity: The buyer gains total ownership of the property, any appreciation in the property’s value, and the tax benefits of home ownership. However, the mortgage liability still stays with the seller.
- Considerations and Risks: This type of creative financing comes with risks. For example, if the property buyer decides not to make mortgage payments, it will negatively impact the seller’s credit.
Also, due-on-sale sections in mortgages allow borrowers to call the loan amount due if the ownership of the property changes. However, in some practices, the borrower cannot exercise this right.
- Exit Strategies: Buyers that utilize the “subject to” method regularly have withdrawal strategies. This involves selling the property before the existing mortgage term ends or refinancing it in their name.
04. Crowdfunding
This creative financing approach entails raising money from many people to finance real estate projects. Through various online platforms, real estate investors can pool their funds and invest in commercial or residential properties for a small minimum investment.
This approach allows real estate investors to expand their portfolios and access hard-to-reach deals through traditional financing strategies.
Benefits of Creative Financing in Real Estate
01. Numerous Solutions
Creative financing in real estate offers a vast range of solutions that can match your situation. Whether you want to purchase a home, invest, or participate in real estate projects, there’s a financing option that will suit your goals and needs.
02. Enhanced Flexibility
Creative financing solutions can adapt to diverse individual needs. If your goals involve long or short-term ownership, creative financing can be personalized to match the specific goals of every individual. Also, you can bargain with the seller on the terms and conditions of the deal, such as payment schedule, interest rate, contingencies, duration, and exit strategy. You also have the right to choose the property’s location, price, and type of property to suit your criteria and goals.
03. Improves Cash Flow
With creative financing in real estate, you can frequently purchase properties below market value, increase their value through management/improvements, and keep it for steady cash flow or sell for a profit. Also, you can use other people’s money to purchase more properties and grow your income & portfolio.
Conclusion
While traditional mortgages are a well-known choice for buying real estate, it isn’t always the right option. Creative financing in real estate empowers individuals to acquaint themselves with diverse solutions to their specific needs. You don’t have to go broke to invest in real estate deals; creative financing helps turn your property dreams into reality without solely relying on your capital.