Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

How To Use Creative Real Estate Financing For Your Next Deal

Written by JD Esajian

Key Takeaways

  • Creative real estate financing will have you use non-traditional means (not through a traditional institution) to acquire property.
  • Real estate financing, employed this way, can be a great method for investors of all levels who don’t have huge reserves of capital at their disposal.
  • There are numerous ways to creatively finance your next real estate project: borrowing from your retirement account, seller financing, and private money financing are just a few of them.

Wondering what creative real estate financing is? Curious if creative financing for real estate can help you reach your investing goals, without having tons of capital at your disposal?

Creative real estate financing refers to a method of financing outside of the traditional method, such as through a bank loan. It is not only possible to use non-traditional real estate investor financing for funding real estate deals, but for many investors it is actually a preferable method of raising capital for property acquisition.

Real estate financing comes in many different shapes and forms. Here are six alternative methods for financing real estate investments that may offer a whole new real of possibilities for your investing career.

6 Creative Real Estate Financing Options Available To The Modern Investor

Creative financing for real estate

1. Interest-Only Financing

Though this type of real estate investment financing may sound scary on the surface, it can actually be a worthwhile option for investors. As the name suggests, this type of financing allows you to make smaller payments at the beginning of the loan, which frees up capital that can be used for renovations. Ideal if you plan to procure a property, rehab it, and then re-sell it for a profit.

When you do end up selling the property after a rehab, you pay off the full amount of the loan, usually with only paying a small amount of interest. A good option for the fix and flip investor, but not so ideal – depending on how the numbers shake out – for someone looking to acquire passive income properties.

2. Seller/Owner Financing

Seller/owner financing for real estate properties is an often overlooked option for many investors, which is a shame, since it can be quite a useful avenue to explore.

There are essentially three different types of seller/owner financing:

  • Seller carry-back financing: In this scenario, the seller finances the property to you, the buyer, for the full purchase price. This is done with a transfer of title, you are from day one the owner of the property, in exchange for providing the seller a promissory note and deed of trust.
  • Contract for deed financing: This is similar to seller carry-back financing, the key difference being that the seller keep ownership, or title, of the property until the mortgage is paid back in full.
  • Seller second-mortgage financing: Suppose you’ve raised enough capital to come up with the lion share of an asking price on a property? But you haven’t quite got enough to cover the total amount? With second-mortgage financing you can have the title of a property deeded over to you, in exchange for a promissory note which promises to pay the remaining balance. A great option for those investors able to raise some, but not all, of the purchase capital required.

3. Family & Friends Financing

Your cell phone company isn’t the only one with a “friends and family” plan. In fact, one of the best creative real estate financing options available, especially for beginners, is to reach out to family and friends and see who would be interested in investing in your business.

The criteria for securing this type of financing usually has a much lower bar than other types of financing; these people are usually investing in you, the investor, rather than an individual project. It can be a great springboard, as long as the math works out, for your real estate investing career.

4. Private Lender Financing

Unlike financial institutions, which have a rigid set of lending criteria, private money lenders are usually focused on one thing: a healthy return for their money. So, if you can prove the efficacy of your plan, and back it up with examples of your credibility and past successes, securing private money financing can be one of the most lucrative forms of capital available to a real estate investor.

5. Short Sales

In case you’re not up on your real estate terminology, a short sale is when an owner lists a property below market value and enlists the lienholder – usually a bank – to view the reduced amount as payment in full on the original note.

Though not a quick financing strategy – short sales require patience and a willingness to jump through many financial institution hoops – they can be a great way to buy distressed properties at a very favorable price. And because they require so much diligence, they can be a great financing strategy for those willing to put forth the effort.

6. Retirement Accounts

Though this does not apply to every type of account, most retirement accounts allow you to borrow against the principal, and then repay that borrowed amount back to the account, at a generous interest rate.

If your retirement account of choice does not permit you to direct those funds toward a purchase of property, look into transferring your retirement account over to a self-directed IRA. This gives you more control over how your money is handled, and where you can invest your hard-earned capital.

Outside Your Comfort Zone

No one, single form of creative real estate financing will work for every single investor, but being persistent and exploring different methods of financing might allow you to find the a whole new untapped source of financing.

Have you tried an interesting way to finance a real estate property acquisition? Let us know in the comments below.