Successful real estate investors have several financing options to purchase properties. Going to traditional lenders can’t guarantee the best terms and can be a lengthy process sometimes. You’ll have to get creative to get favorable terms and be able to close more deals. Not all deals can be completed with traditional financing, so you need these creative financing strategies in your investor toolbox to have a sustainable business.
With a cash out refinance, you use an existing property and borrow enough to pay off the mortgage and you pocket the rest which can be used however you’d like. The one downside is that the mortgage gets reset on the cash out property, so another 15 or 30 years of payments. As long as you can handle the new payments and have a reserve to cover payments in case something unforeseen happens, this is a great real estate financing option.
A cash out refinance is also different from a line of credit because a line of credit adds a second mortgage to the property. The interest on a cash out refi are more favorable than a traditional home equity loan, and the interest is tax-deductible unlike a hard money or traditional loan.
Unlike a cash out refinance, you borrow against the value of the existing property with a HELOC instead of paying off the original mortgage. You can borrow up to 80% of the property’s value, minus the mortgage amount. They usually have a draw period of 10 years and a repayment period of up to 15 years. The interest is also tax-deductible up to $100,000. HELOCs are great for repairs or something you don’t need a large sum of money for. They’re not great for down payments, but perfect for bathroom remodels.
The best part about a personal loan is that you don’t have to put up a property as collateral; most times you don’t need any collateral. You’ll also spend less in interest because the repayment terms are much shorter (around 5-7 years).
The challenges and downsides to a personal loan are large monthly payments, great credit score required, and no tax benefits. Shorter term and less interest means more due monthly, and with no collateral required, lenders will want to see a great credit score. Even though there aren’t any tax breaks, this is a good option if you have low home equity but a high credit score.
The ultimate goal of real estate investing is to use as little of your own money as possible. Seller financing is a perfect example. This only works if the home is owned free and clear. So if you find one, this is what you need to do: have the seller agree to holding on to the note of purchase in exchange for you paying them a monthly payment until the note is paid off. Basically the seller becomes the lender you owe money to. It’s perfect for those who would rather take a long-term stream of passive income over a lump sum of cash up front. This is a great tool to utilize when it’s an option.
A lease option is a tool for when you’re not ready or able to purchase a property. You’ll create a lease agreement with the landlord that gives you the option of purchasing the property at the end. You will build equity through the monthly rent payments, and the landlord generates interest income. Depending on how you set it up, the monthly payments may count towards the down payment. It can be difficult finding the right landlord to work with for a lease option. The most common is when a landlord is having trouble selling a rental but can work in other situations, too. If you know how to bring up the conversation with the landlord, this is another viable option to enhance your investing career.
If you have existing retirement savings, you can transfer your account into a self-directed IRA which allows you to purchase properties. All returns must go into the IRA, so this is a pro for you’re retirement plan but a con for regular passive income. If you don’t have an IRA, they’re relatively easy to set up. When examining your options, make sure your cash flow covers the required costs and fees of having the account.
A traditional mortgage should only be an option for purchasing passive income properties as a real estate investor. Other than that, you’ll want to use a different option for your flips. These creative financing strategies should help you purchase more properties depending on each individual situation.