Creative and Alternative Financing Strategies
Now that we've discussed a standard overview for financing real estate, let's take a look at other ways to creatively finance a deal. There are several alternative financing scenarios that can suit your needs. Let's begin by looking at lease options, otherwise known as rent to own:
Lease Options: Lease with option to buy homes offer a combination between a rental agreement and a purchase option. Essentially, it allows you to rent to own a property over a fixed period of time. You'll maintain the right to purchase the property at an agreed option price during the term of the lease. The benefit of this approach is that it gives you the right, but not the obligation to purchase the property. For example, if property prices escalate rapidly during the option term, chances are that you will be able to purchase the property for below market value. Another benefit is that the cost to secure a lease option is usually much less than a down payment, effectively giving you control of the property for very little cash.
Use Equity in Your Home: If you currently own a home, there is a very good chance you can borrow against the equity in your home. This is probably the fastest and easiest way to finance investment property. Home equity is determined by the fair market value (or appraised value) of your home, less the balances of mortgages or liens against it. If your home is worth $200,000 and you owe $120,000 secured by a lien against your home, then you may have $80,000 of available equity, which you can use however you wish. And remember that the interest you pay on a home equity loan may be tax deductible.
Hard Money Loans: This type of loan gives the applicant access to funds without the red tape required for conventional loans. Pre-qualifying for a hard money loan is usually faster and less tedious. However, hard money lenders charge interest rates and fees that are substantially higher than conventional borrowers. Interest rates can range from 12 - 18% annually and typically require 4 - 8 points on singing. Hard money loans fill a niche in mortgage lending, helping consumers who have specialized needs or too many credit problems to get conventional financing. Real estate investors frequently use hard money loans. These buyers purchase properties on the cheap, fix them up and sell them for profit. They use private loans because the loans come with less red tape and restrictions than bank loans.
Owner Financed Mortgage: In some cases, the property seller may be interested in financing your home purchase directly. These homeowners may be interested in earning long-term interest from you on your payments. In most cases, you will be paying a slightly higher interest rate versus standard investment interest returns. But, overall the rate you pay may still be below standard mortgage rates. In addition, if you prefer to use a standard mortgage for part of your purchase amount, an owner financed mortgage may be a way to cover the balance. This is called a partial owner financed mortgage.
Find Partners: By partnering with others, you will no longer be limited to only those properties meeting your individual budget. This provides greater flexibility in identifying the right investment property. Other benefits of partnering include the pooling of expertise and financial backing while enjoying the support of partners who have the same objectives. Completing a successful real estate transaction with partners can be a very exciting and fulfilling experience. The primary downside is that you lose some control and must make decisions jointly. Bottom line , pick your partners very carefully.
Equity Sharing: For a first-time buyer with limited cash for a down payment, equity sharing can be a great opportunity. The common equity sharing agreement involves one party living in the property and the other partner financing the purchase. Both the occupant and the investor enjoy tax benefits and share the profit. First-time homebuyers make great resident partners while family members or real estate investors fill the non-resident partner role.
While there are many benefits to equity sharing, joint ownership can have its challenges. For example, what happens if the resident does not maintain the property or make the mortgage, insurance or property taxes payments? Furthermore, the property may not go up in value, so the investor who put up his credit or cash may not realize any profits. Like any real estate investment, the shared equity arrangement should be approached with profit, not just financing, in mind.