10 Creative Financing Options For Real Estate Investors

Real estate investment requires one to approach several lenders for a loan to purchase the property, which can sometimes be a drawback. The good news is that there are several real estate financing options that entrepreneurs can use to finance their investments without necessarily relying on traditional bank loans. Here are ten creative financing methods for real estate investors that you should consider:.

1. Seller Financing

Owner financing which is also called seller financing whereby the owner of a property provides the funding for the property. While in the traditional method of procurement the buyer obtains a mortgage from a lending institution, the buyer pays the seller in installments.

Pros:

• No credit check as is normally the case with conventional loans.
• The two common practices are flexible terms and down payments.
• Faster closing process.

Cons:

• This is regardless of the fact that normally the interest rates charged are higher than those of traditional loans.
• Hence, shorter loan period which ranges from 5-10 years.
• If the seller insists on full payment before delivery of goods, then the following risks will occur.

2. Lease Option (Rent-to-Own)

A lease option is where you can rent a home or property with the will to buy the home. Again, a part of your rent is used to buy the house, with the rest of the amount to be paid later when your business or financial position has improved.

Pros:

• Builds equity while renting.
• The chance to try the property before purchasing it and then learn that one does not like it.
• Lower upfront costs.

Cons:

• Higher rental payments.
• A possibility of loss of the sorting option fee when you decide that you do not want to purchase.
• The price at which stocks are bought may exceed the going market price.

3. Private Money Loans

Private money loans refer to funds from private investors, friends, or even family members willing to lend the money to finance your real estate project.

Pros:

• Preferable due to the following factors: flexible terms and quick approval.
• A low credit score is not a big issue as most companies have realized that many people have bad credit ratings after going through some hardships in their lives.
• Ideal for fix-and-flip projects.

Cons:

• Higher interest rates.
• Generally characterized by shorter repayment duration, which ranges from half a year to a few years at most.
• Loss of personal relationships if the deal does not work out as planned.

4. Hard Money Loans

Just like the name suggests, hard money loans are short-term loans that are secured and underwritten based on the value of the property and not the creditworthiness of the borrower. Such financings are usually applied for house flipping or any other kind of occasional investments.

Pros:

• Fast approval and funding.
• Good for Properties that require remodeling works.
• Less stringent credit requirements.

Cons:

• Interest rates tend to be high, sometimes reaching 10-15%.
• Very short tenors of the repayment period are, as a rule, from 1 to 3 years.
• Higher fees and closing costs equal hundreds of dollars in out-of-pocket expenses that should not be borne by a first-home buyer.

5. Real Estate Partnerships

Syndications also involve other investors where the number of people leads to a sharing of the costs and the returns from a given real estate investment.

Pros:

• Internal costs or risks and this is usually divided into shared risk and investment costs.
• You can be in a position to access larger deals that you may not be able to do individually.
• This way, partners can bring in the skills and knowledge required in these processes.

Cons:

• Profits must be split.
• Potential conflicts between partners.
• This process, therefore, demands a clear relationship structure so that disagreements may not arise.

6. Home Equity Loans and HELOCs

If you have built-up home equity, you can take a Home Equity Loan or Home Equity Line of Credit (HELOC) to invest in other properties.

Pros:

• Less expensive than most of the other sources of financing since it involves a lower interest rate.
• Flexible use of funds.
• HEL provides fixed interest rates; HELOC gives clients access to cash if required.

Cons:

• You use your home as security and thus expose your home to risks.
• Variable rates mean that the cost can go high with HELOCs.
• May need good credit, and a good equity position.

7. Crowdfunding

Real estate crowdfunding is also a method used where several people invest in a property through an online platform.

Pros:

• It is easy to obtain small and large-scale projects with little or no capital outlay.
• Diversification of its property portfolio by the investment in more than one property.
• Passive income potential.

Cons:

• More direction of the investment.
• Hence, platform fees are known to decrease returns.
• There is a higher risk in the case of failure of the project in question.

8. Bridge Loans

Bridge loans are a kind of loans that are short term in nature and are used to ‘bridge’ the period between buying a new home and selling the old house.

Pros:

• Fast access to funds.
• Well suited for purchasing and selling property with little time.
• Assists in bridging short-term cash flow deficiencies.

Cons:

• High interest rates and fees are involved when taking a loan from a certain company.
• Short repayment terms.
• It must be scientifically perfect to ensure the founder has a well-articulated and sound exit strategy.

9. Self-Directed IRAs

A self-directed IRA enables an individual to use his/her IRA to buy real estate. This is an inventive approach to investing in properties so as to increase retirement accounts.

Pros:

• Tax advantages on profits.
• Diverse investment options.
• Endowment of the power to control your retirement investments.

Cons:

• Severe penalties that the IRS demands as well as penalties for failure to meet them.
• High administrative fees.
• Limited liquidity.

10. House Hacking

House hacking is when one buys a building with more than one dwelling unit and moves into one of the units while renting the other units to pay the mortgage.

Pros:

• Reduces the cost of living and at the same time creates home equity.
• One is easy to qualify for financing since it is also your residence.
• Generates rental income.

Cons:

• The process of being a landlord is quite confusing.
• Risk of developing vacant property or having tenant-related problems.
• Can only be used in multi-unit or multi-occupancy dwelling homes.

Conclusion

These creative real estate financing options are ideal and give a viable chance for investors seeking ways to diversify their investment. There are several ways of financing your real estate investments including; partnership, private money and other non conventional loans. To get more tips on financing of real estate, you can check out Back Office Admins online.

Fortunately, there are a lot of financing models you can use to determine what type of financing would suit your investment course in growing your real estate business.