How to Use Creative Financing to Invest in Real Estate
What would happen if you found a great real estate opportunity but you don’t have the funds available to make the purchase? Before you lose hope, you should know that there are several creative financing techniques that just might get you the results you are looking for.
With interest rates going up, investors and buyers can use creative financing to structure their loans. Creative real estate financing uses methods that are outside of traditional approaches like getting a mortgage from a bank. Real estate investors and buyers use creative financing when traditional financing is not their best option, whether they are new to real estate or a seasoned investor.
If you find yourself in a situation where you see a desirable property that is likely to pay off but you don’t have cash on hand to do the deal, here are some creative financing methods that might help you out.
- Use the Equity in Your Home for Cash
A cash-out refinance on your home can give you ready cash to capitalize on a good real estate investment opportunity. If you have enough equity in your home, you may be able to refinance, pay off the mortgage and pocket the remaining funds for investment.
Interest rates are likely to be more favorable with a cash-out refinance than a home equity loan, and the interest is tax deductible. However, you should be aware that the 30-year time period starts all over again, and you have to pay attention to your monthly payment which may be higher.
2. Look at a HELOC (Home Equity Line of Credit)
A HELOC is a Home Equity Line of Credit that allows you to access the equity in your home. HELOCS use your home as collateral and they are granted based on the difference between the value of your home and the balance on your mortgage. You can generally borrow up to 80% of the equity in your home for a HELOC.
The good news is that a home equity line of credit generally offers competitive interest rates that are close to that of a first mortgage, and the interest is tax deductible. The downside is that you are using your home as collateral, and the lender will place a second mortgage lien on your home. You will typically have a 10-year draw period and a repayment period of 15 years or less. A HELOC can be useful if you don’t need a lot of cash.
3. Set Up a Self-Directed IRA
A self-directed IRA is an individual retirement account that can hold alternative investments like real estate. When you buy property through a self-directed IRA you have more control since you manage the account, and you can enjoy tax benefits. A self-directed IRA can be traditional or Roth, where you pay tax upfront.
The IRS mandates that you must have a qualified custodian hold your retirement asset. The custodian might be a bank or another type of financial institution. Keep in mind that when you reach the age of 72 you will have to take a Required Minimum Distribution from your IRA, which can prove tricky with real estate.
4. Seek Private Money
Private money and hard money loans can be much easier to get than a traditional loan like a mortgage. You will probably not have to verify your income or show your credit score. The lender looks at the scope of the work required to repair the property and the ARV, the After Repair Value.
Private money comes from someone you know, like a family member, a friend or a neighbor, while hard money loans are provided by professional lenders that specialize in real estate deals. Both private money and hard money loans are usually short-term, and the interest rate is likely to be higher than a traditional mortgage.
5. Ask for Seller Financing
Many successful investors use OPM – Other People’s Money – to fund their investments whenever possible. Seller financing is a creative real estate financing method where the seller agrees to hold the loan and you pay them monthly until the loan is paid in full. If the seller owns the property free and clear and wants to enjoy a long-term passive income stream, seller financing may be a good option.
6. Secure a Personal Loan
With a personal loan you do not put your house up as collateral as you do with some other loans. Sometimes you are not required to put up collateral at all, of any kind. A personal loan has a shorter term that a mortgage, around 5-7 years, so you would pay much less interest than if you were to hold a 30-year mortgage.
You will need very good credit to qualify for a personal loan, and because of the short term for repayment you will have a large monthly payment. A personal loan can be a good option if you don’t have much equity in your home.
7. Get an FHA Loan
An FHA loan is insured by the Federal Housing Administration. You can qualify for a low down payment of 3.5% with a credit score above 580. if you have a credit score between 500-579, you may qualify if you make a 10% down payment.
With an FHA loan you will pay an insurance premium of 1.75% upfront, as well as an insurance premium of 0.85% of the loan balance annually. It is important to note that this premium is different from PMI (Private Mortgage Insurance).
Investing in Property in New York’s Finger Lakes
When you are ready to invest in property in the Finger Lakes region, count on Kelli Ide to guide you in making smart decisions about buying and selling your home. She can put you in touch with the right professionals who can give you advice about financing real estate. Kelli Ide offers a unique, concierge-style approach to real estate, including staging, photo styling and market preparation services exclusively for clients to give them an edge over the competition.
For further information about buying or selling a home in New York's beautiful Finger Lake region, visit kelliide.com.