Let’s Get Creative: 6 Ways to Finance Your Next Real Estate Investment
The rebounding national real estate market makes this a great time to get back into investing, but the tighter credit markets might put a damper on your enthusiasm.
Investing takes a combination of liquid assets and a stellar credit rating. Banks just aren’t as eager to hand out money like they used to — when investors were raking in cash during the housing bubble — so investors need some financial bona fides, or they’ll need to get creative.
Here’s a look at six ways you to finance your next real estate investment.
(As always, investing is risky. No matter how good it looks, there is always the risk of losing money on a deal. When considering any financing strategy, we urge you to consider every option thoroughly.)
This is what most people think of when financing a real estate purchase. The traditional route means going through a bank, credit union or mortgage company.
This is the safest way to finance your investment, but it can be tricky for some investors.
Nowadays, most banks require loan recipients to have at least a 680 credit score, a 10% down payment and extensive documentation of your debts and income sources. If you’re able to get approval, this is likely your best bet.
Private loans are designed specifically for investors buying and rehabbing real estate. Instead of banks, these mortgages are financed by private lenders and the terms are much shorter (6 months to three years, usually).
The loans are based on the quality of the property and not the borrower, so this is a means of entry for some investors with not-so-solid financing.
The catch? Interest rates are significantly higher. Expect to pay up to 20%, so these loans are usually only a viable option until you get some cash on hand.
Seller carry back
Now we’re starting to get creative. Seller carry back is an “other people’s money” strategy, which involves the original seller taking on your note.
It can only happen if the property is already paid off, and it usually comes with a time limit. You’ll be able to make monthly payments to the seller for the home, and in 1-5 years, the loan will be transferred to you.
At this point, you’ll be able to refinance. The point here is that it’s easier to refinance than get a new loan.
If you’re unable to make a down payment on a loan, you can ask the seller to take on a second mortgage for the value of the down payment.
This puts you in the house, and it allows the seller to close the deal.
The full name is “subject to existing financing,” but most refer to it as “subject to” for short. This option can come into play if the seller still has a mortgage and is motivated to get rid of the property quickly.
The title is transferred to you, but the loan will stay in the seller’s name and he’ll continue to make payments. The seller won’t want to continue this arrangement for long, so after a short period the loan can be transferred to you, and you can refinance.
This allows you to take the property with no money down, and it’s also a great option if the seller has a loan with a favorable interest rate.
On a lease option, you simply lease the property until you reach an agreed-upon point where you must purchase the house.