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Do you want to invest in real estate, but think you have a long way to go? You may be closer than you think. There are several options to do creative financing for real estate that allow you to secure a property faster for less. In this blog post, we are going to cover four creative financing for real estate options:

1. Seller Financing

2. Lease with an Option

3. Using Partners

4. IRA

 

1. Seller Financing 

Seller financing is exactly what it sounds like. It involves using the seller ‘s finances to purchase their home instead of going to a third party lender like a mortgage or bank. This can be a win-win situation because the costs are typically cheaper for buyers, and sellers can make additional revenue through the interest paid on the property.

In seller financing, the seller is your bank. The seller will take payments for their equity instead of cash for their equity. In this situation, you want to look for sellers who own their property free and clear. 

In a seller financing transaction, the seller takes some or no money down and receives the rest of their equity in monthly payments. Details like interest rate and payment terms are recorded in a document called a promissory note. In addition, you will give collateral for the promissory note in the form of a lien against the property, otherwise known as a security instrument. 

 

2. Lease with an Option

Limiting your risks in an uncertain real estate market is key to success. A lease with an option is a great way to mitigate your risk, and it also allows you to acquire real estate with little to no money and without credit, banks, or other qualifying factors. A lease with an option has two parts: a rental agreement, or lease, and an option agreement. 

An option agreement is different from a normal purchase and sales contract. In the latter contract, a seller promises to sell, and a buyer promises to buy. In an option agreement, the seller is obligated to sell the property at a specified price, but the buyer is not obligated to buy.

So, if there is a market downturn and the property value dips, you don’t have to purchase it. For example, if your lease with an option gives you the option to purchase the property for $300,000, but the value dips to $290,000, you are not stuck with it. On the flip side, if the home appreciates to $330,000, you can purchase it for instant equity. 

In the meantime, you don’t have to live in the property. Instead, you can ask for a master lease which allows you to sublet the property to another tenant for more than your monthly payment.

creative financing for real estate

3. Using Partners

One of the most common creative financing for real estate strategies is using OPM: other people’s money. Partnerships are a great way to leverage your strengths and resources as a real estate investor while mitigating your weaknesses.

For example, let’s say that you are great at finding deals and have great credit, but you need the initial cash to purchase a property. A partner, such as a friend, relative, coworker, or acquaintance, can loan you the money to purchase a property. You can use other people’s monthly for a 20% downpayment and, in return, your partner(s) own a portion of the property. This does not have to be a 50/50 split; you can negotiate the terms depending on what works best for you. 

Another way to purchase real estate with a partner is to use OPC: other people’s credit. If you don’t have the best credit (or you don’t want to affect yours), you can purchase a property with a partner who does. Here’s how it works: the partner with the good credit purchases the property in their name, and the other partner gives them the money to do so. Then, they place the property in an LLC that outlines the agreement.

The beauty of real estate partnerships is that everything is negotiable. The key is to find partners who want something different from a real estate deal than you do. For example, perhaps you are interested in purchasing real estate for monthly cash flow, but your partner wants it for the tax write off. There are many ways to form an agreement so that it is a win-win for both parties!

4. IRA

Do you have an individual retirement plan (IRA)? If so, you might already have everything you need to purchase a rental property. If you have a Roth IRA or 401k plan with your employer, you can borrow up to 50k for a downpayment. 

Here’s an example of how this can work: You can take a loan from your 401k and pay it back with interest (to your own plan, tax deferred!) Or, if you are not working for that employer or are over a certain age, you can roll your IRA into a self-directed IRA. This allows you to call the shots about what you invest in, including real estate and other securities. The only things you can’t use a self-directed IRA to invest in are collectible items and life insurance.