Creative Financing - Ten Ways

By Steve Gillman - 2006

Do the creative financing techniques you read about really work? Yes, they probably have all worked somewhere for someone at least once. The point isn't if they all will work for you. You just need to know what is possible, so you can find your own creative ways to invest in real estate. Here are ten ways to get you thinking.

1. Use hard money lenders. Ask around or find these online. They specialize in short-term loans with high interest. Typically, you use this type of financing for a "fix and flip." You can get the money fast, and if you make $30,000 on a project, who cares if you paid $10,000 interest in six months, right?

2. No-doc or low-doc loans. This means no (or low) documentation of your income or credit required. You can find banks that do these online now. The catch is you'll only be able to borrow up to 80% of the purchase price or the property value, and maybe only 70%. If you have 10% in cash, you might be able to borrow the other 10% or 20% from a friend or the seller.

3. Seller financing. Sometimes a bank will loan 90%, and allow a seller to take back a second mortgage from you for 5%, leaving you needing only 5% for a down payment.

4. Land contracts. Also called "contract for sale" or other names, this just means the seller lets you make payments, and delivers the title upon payment in full. I sold a rental this way for $1,000 down. I wanted the 9% interest, and the higher price I got this way.

5. Use your credit cards. If a seller is willing to take $10,000 down on a fixer-upper that you expect to make $20,000 on, why not use credit cards? This is a true 0-down deal for you, and if you turn the project around in six months, you'll have paid $900 in interest on an 18% credit card. You won't let $900 get in the way of making $20,000, will you?

6. Use your retirement accounts. The laws get complex in this area, but check with a tax attorney to see how you might borrow from your own retirement account to finance real estate investments.

7. Friends and family. Make it all business, if you use this source, and don't feel that loaning you money at 7% is a gift if their money is getting 2% in the bank.

8. Use note buyers. A scenario: Seller needs cash, and you have none, so he raises the price, and sells to you for $100,000 with no money down, taking back two mortgages from you for $90,000 and $10,000. He, or you, arranged for a note buyer to pay him $80,000 cash for the first mortgage at closing, a $10,000 discount (common). This gets him the cash he wanted, and you pay two payments - one to each note holder.

9. Borrow against another property. If you take out a home equity loan for a vacation, and then forget to use it for that, you can use it for the down payment on an investment property, without violating the rules of the bank that gives you the primary mortgage. In other words, you can buy with no cash of your own.

10. Build partnerships. For bigger projects, you can arrange for investors to each put money into a partnership, paying your share not with cash, but by being the manager.

For more information on creative financing, and in particular, hard-money loans, you can visit the page on "Hard Money Lenders."

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