Creative Real Estate Financing Ideas for Investors

Creative Financing For Investors

For decades, the golden rule of property investment was 80-20, with 20 percent going toward a down payment, and the remaining 80 toward the loan. Now, there are dozens of ways to finance the purchase of a new property, whether it is for pure investment or a primary residence.

One of the most common finance options is the acquisition of a second mortgage. Buyers generally come up with a mere 5 percent, borrowing the remaining 15 percent on a separate loan. The buyer is not responsible for nearly as much money out-of-pocket, but the interest rate on this second loan is usually quite high. In addition, since the buyer has not met the standard 20 percent on his own, lenders almost always require private mortgage insurance (PMI), another hefty expense.

In theory, it is possible to convince the lender to remove PMI once you have established reliability with a significant number of prompt payments, but the removal of PMI is rare, and not something that should be expected. A lender may be willing to remove PMI once the loan-to-value ration (LTV) reaches 80 percent, the combined result of your mortgage payments and the appreciation of the property value. In many cases, though, the loan is refinanced or the property is sold before this happens.

Ambitious investors may also find other sources and creative financing options. In some new developments, such as planned communities and new housing tracts, manufacturers are willing to fund home loans for early buyers at a fraction (5% frequently) of the purchase price.

It is even possible—technically speaking—to buy a property and then sell it without actually stepping foot on the land. Some daring investors will purchase houses, establish contracts for them, and then sell the contract for as much as $500 - $5,000 without ever taking possession of the property. In this scenario, the buyer is not even on the title. Deals of this nature require excellent credit. Your profit margin is generally smaller, but the turnaround time is incredibly fast.

A ‘subject-to' deal (shortened sub2) involves the transfer of property deed from seller to buyer, while maintaining the existing mortgage. Legally, the buyer does not assume the loan, but simply begins making the required payments. It seems easy enough, but there are many variations on this relatively new way of buying property, and it is not recommended for beginners.

A property may also be financed through the formation of a limited partnership. Costs are divided in any number of ways between each partner—usually split in half, but sometimes arranged according to the percentage initially invested. In some instances, one partner will invest 100% of the cost, while the other(s) perform related repairs and services, such as with a fixer-upper.

You might also consider purchasing a property with one or more credit cards, depending on your individual circumstances. There are several obvious risks associated with this method. Buyers will surely be hit with substantially higher interest rates, and lenders consider outstanding debt to help them decide whether or not to grant a loan on the remaining balance.

Investments from friends and family members are generally considered in the same manner as a regular loan, unless you can prove to the bank that the money is a gift, rather than a loan. Mortgage lenders have seen it all, and it would be unwise to attempt to fool them.

Some government programs have also been set up to assist low-income buyers, those with military background, and a variety of other special circumstances. Most of these programs are designed for and limited to individuals who intend to occupy the property as their primary residence, but they are certainly worth looking into.