In this article, we are going to cover different financing options that are available. It is very important to note that not all methods will work for everyone, nor are these methods only limited to those doing investment. These methods are even possible to be used for those who are attempting to purchase a home for themselves. Make sure you carefully review all of these methods and determine which you think would work best, as well as being flexible in terms of which options may best benefit the seller. Remember to make a successful transaction, you need the buyer, and seller to both be happy and satisfied.
Some of the sources of money will likely surprise you; however, the best way to succeed is to keep an open mind and to work as many options as possible until you find something that works out the best for you. Remember you do not have to be rich or have stellar credit to become a real estate investor. Moving along let, we start looking over the various options.
Option #1. Private Lenders, this is the typical type of lending that probably pops into the head of everyone who is interested in purchasing property for any reason, whether investment or their own personal residence. This consists of the typical mortgages, whether conventional, FHA, VA, fixed rate, adjustable rate mortgage (ARM), balloon, or even a Home Loan Payment Relief Mortgage (HLPR).
Now we are going to cover some of the less known options that exist for financing your real estate purchase. Read closely, some of these will seem a bit strange, while others will make perfect sense, some you would never have thought of, while others are likely popping into your head right now.
Option #2. The seller, this is a little known option that most people do not think of. Typically, this is best used when you are either doing 100% owner financing, or when you just need the seller to hold a 2nd mortgage for the down payment. While financing the down payment can have several options to secure it, a 2nd mortgage is the most popular. Typically, with the 2nd mortgage there is a slightly higher than standard interest rate in exchange for the seller graciously helping you purchase the property with no money out of your own pocket. Make sure you always make payments on time to the seller, you may need them as a reference later for your next transaction, the more happy sellers you have, the better your references will look to your next potential seller you work with.
Option #3. The property, this may seem a bit strange, however it is not unheard of for the buyers to work with a company to secure funds in exchange for something after the property is purchased. For example, a buyer makes an agreement with a lumber company to allow them to clear the trees from the property; in exchange, they receive money upfront that they are able to use for the down payment. The buyer has created a wonderful situation here, their land is being cleared, plus they have spent no out of pocket money for the property with little upfront risk to them. While this is a bit harder to work out it is very possible to do with a lot of creative thinking and good people skills.
Option #4. Promissory Notes, these are typically used when the seller is doing a 2nd mortgage for the purchase of the property, because you are promising to pay a certain amount, as well as a specified amount of interest at specific intervals. This even applies if the promissory note is written to have one large balloon payment or lump sum payment. While this is most common with the sellers, it is possible to also use with other investors. A good sound business plan, as well as through investigation into the property are likely to be necessary components of making this option work successfully.
Option #5. Investors are a great method of securing cash to purchase property without actually using your own money. Investors want you to have good common sense, the ability, and desire to succeed; it is easier to get investors to work with you if it is not your first piece of property, as they like to see that you are able to handle it, without risking their money. Investors tend to charge high rates of interest; however, they are more flexible in the payment terms than a typical mortgage will be.
Option #6. Equity Partners, this is something that is not well known of gathering funds. This is similar to investors, however most investors are silent, where equity partners own a portion of the purchased property, and have a say in how it is managed, and the prices charged if selling or renting. If you want to be the only person making the decisions in regards to the property, this is not going to be a good option for you. However, if you do not mind sharing the decision making power then there is some comfort that can be taken in strength in numbers. The more partners you have, the greater your buying power will be.
Option #7. Tenants, this may seem surprising that a tenant can help finance the purchase of property, however if you have someone ready to move in before the sale is finalized, then you should have at least the security deposit, as well as the last months rent. If you so choose to require the first month as well, this gives you additional funds. Can you see how this can provide you with a great source of income for the down payment? This can be very tricky to work out, as most sellers will not allow you to show the property until the sale has been completed. However, with an open-minded seller, this is entirely possible to work out, especially if you are in an area where good priced rentals are in high demand.
Option #8. Real Estate Brokers and Agents, this option should really seem strange to most people. However, most agents and brokers receive a large commission from the sale of property that they are handling. If you can get the broker or agent to take a promissory note for the down payment this is one of the options. However, another option is to see if the broker or agent will loan you the money for the down payment. Often an agent or broker will loan the money for the down payment if it means quickly closing a sale. For this to work, it is best to offer to repay an amount larger than what you are borrowing as well as interest. This is something that not all brokers and agents will be willing to agree to, however this is where a good rapport with brokers and agents and already having an established relationship will greatly help increase your chances of success. The broker who knows you already successfully own and manage other properties will be less likely to decline such an offer, compared to a broker who has never seen you before, and does not know what you are capable of doing.
Option #9. Home Equity Loans, is another option that you have. While this is possible for someone who owns their home, it is not possible if you do not own your home. You also need to have some equity in your property in able to be a home equity loan. If your home does not have, equity built up yet then this is virtually impossible to make work. Try to find the best interest rates possible when using this method and carefully shop around; if you are able to borrow enough, you could possibly purchase more than one property with this method. It depends on the selling price of the property, as well as the down payment requirements, as well as the amount of equity you have available.
Option #10. Life Insurance Polices, this is something that most people have lying around and if you shopped well your policies have been accruing cash value that you can borrow against. Typically, the fees and interest associated with this type of loan is very minimal especially compared to other options. It is important to have a large amount of insurance as well as having been making the payments steadily and faithfully for years for this to be a viable option that can be successful. You also want to be careful that you do not tap out the insurance policies, after all this money is in case the unthinkable happens. You still do not want your family to be without just to purchase property. Try to balance both needs so that you are still growing your investment portfolio, as well as making sure your insurance needs are still fulfilled.
Option #11. Equities in Other Real or Personal Properties is something that few people really think of. You might own a boat, a car, empty property, stocks, bonds; anything that has cash value can be used as equity against the new property to secure the financing. Most people have more equity in personal property than they really realize. If you borrow against this equity, it is basically found money that is not coming out of your pocket, and is still enabling you to grow your investment portfolio.
Option #12. Existing loans on the property is another viable option that is often possible. What this means is that you assume or take over the loan that currently exists on the property. This means that typically you can do a 2nd mortgage for the sellers’ portion of the property that they need. This is something that most people never stop to think of. However, more and more this is an option for people to explore, it may enable you to get the property at a much-reduced interest rate depending upon the original rate of the loan.
Option #13. Pledged Asset Mortgages are another option. What this means is that you pledge an asset to help secure the mortgage for the property. Most banks require a CD to be sued in asset mortgages. For a personal home, the CD typically only has to be 10%, for investment properties it typically has to be 20%. Once a certain period of time has lapsed with payments made on a timely basis and the terms of the mortgage are being fully met, the hold on the secured property is typically released so the owner of the pledged property is free to do with it as they wish. The property that is pledged does not have to be owned by you, if you have a relative or friend who is willing to pledge their property this will work as well.
Option #14. Lease Options, are a viable option for those who do not have a lot of money or assets to use for their down payment. This entails the seller agreeing to lease you the property for a specific period of time, at the end of this period you have the option to purchase the property. Any rent payments that you have paid, a percentage of this is typically applied towards the down payment amount that has been pre-determined in the lease purchase agreement. This typically allows a buyer the time to see how well a property will do, as well as pay very little upfront, for the property out of their own pocket for the deposit, as well as last months rent that most sellers would require. This is a great option that can be combined with other financing options to increase your purchasing power, which if carefully used will allow your investment portfolio to grow quickly.
Option #15. Government Programs, various different loans are backed by the government that is free money lying around. Some are grants; others are loans that must be repaid. The terms and conditions as well as applying procedures and rules vary depending on the exact program. There are also down payment assistance programs designed specifically to help people purchase homes with money given to them for the down payment. Check around carefully for the best program for your needs, and make sure you stick closely to deadlines for applying.
We have covered 15 options for securing funds for property. Some you already were aware of, some are probably new to you. Do you see now how it is possible to become an investor with little money out of your own pocket? Remember keep calling, keep talking and keep viewing properties. Do not settle for something just to own a piece of property, always stick to your wishes and standards, and make sure it is affordable and a good financial decision.
As you can see this installment is very useful to those purchasing property for investment as well as those looking to purchase property for their own personal residence. Our next installment will cover a lot of information about the lease purchase option.