With inflation soaring at levels not seen since 1981, everyone wants to invest in assets that protect against inflation.
Assets like, say, real estate.
But real estate is expensive, costing hundreds of thousands for a single rental property. You can take out an investment property loan of course, but you still need to come up with a 15-30% down payment.
This begs the question: What are some creative financing strategies to cover the down payment, too?
In This Article:
What Is Creative Financing?
If you’re new to financing investment properties, start with the standard options: traditional mortgages and portfolio loans.
Traditional mortgage lenders pick a Fannie Mae or Freddie Mac loan program for you and then bundle and sell your loan right after you settle. They’re cheaper than most options, but they only let you have a few loans reporting on your credit before they stop lending to you.
That usually means a maximum of four mortgages total, including your home mortgage. Four loans won’t take you far as a real estate investor.
Portfolio lenders keep their loans on their own books — within their own portfolio — rather than selling them off. That makes them far more flexible; many portfolio lenders also lend hard money loans for buying and renovating properties. They don’t report to the credit bureaus or limit how many loans you can have. Try Forman Loans, Visio, or Kiavi as strong options.
But that still leaves you to come up with a down payment.
This is where creative financing can come into play.
Creative financing is a financing method that is considered “non-conventional.” As such, they offer different benefits over traditional financing.
Advantages of Creative Financing
So, here are the advantages of creative financing:
| Advantage | Description |
|---|---|
| Access for Non-Qualifiers | Allows individuals who might not qualify for traditional loans due to credit issues or unconventional income to still invest in real estate. |
| Flexibility in Terms | Terms can be more flexible than traditional financing, including payment schedules and interest rates, tailored to both the buyer’s and seller’s needs. |
| Lower Initial Costs | Many creative financing methods require lower down payments or might eliminate certain fees, such as closing costs, which can reduce the initial financial burden. |
| Speed of Transaction | Creative financing can often bypass the lengthy approval processes associated with traditional banks, leading to quicker transaction closures. |
| Potential Tax Benefits | Some methods, like lease options, offer specific tax advantages, such as deferring capital gains tax. |
| Opportunity for Seller Benefits | Sellers might benefit from steady income in seller financing scenarios or might secure a sale in otherwise challenging market conditions. |
Top Creative Financing Ideas for Investment Properties
Try these creative financing ideas as you explore ways to minimize your down payment on a rental property.
1. Owner Financing
In investing as in life, you don’t get what you deserve; you get what you negotiate. So as you make offers, feel out the seller on whether they’re open to owner financing.
That could come in the form of a seller-held second mortgage. Or, if you can’t get financing for an investment property through a conventional lender or portfolio lender, you can try negotiating seller financing for your primary loan. Anxious or motivated sellers may consider financing your deal themselves in order to settle fast.
You and the seller can negotiate everything from the loan term to interest rates and beyond. Usually, seller financing involves a balloon: you have to refinance the loan within a few years, to pay off your remaining balance in full. That gives you time to build your credit, and the property time to appreciate in value.
Downsides
The only downside to owner financing is that it’s not a reliable source of funding for investment properties. The seller must agree to it, and some sellers refuse to consider it.
Still, many do, especially if it means a quick settlement. Push that angle as you negotiate with sellers, and consider combining business credit lines (more on them shortly) with seller financing so the seller gets to walk away from the table with a hefty paycheck even if they finance the rest.
2. Assume the Seller’s Loan
When interest rates are high, it’s extra enticing to take over the seller’s mortgage loan rather than borrowing your own.
You get a low-interest loan, further along in its amortization schedule. That means more of each monthly payment goes toward principal rather than interest, and you enjoy low monthly payments with a relatively short remaining loan term.
Of course, it also leaves the seller vulnerable to you defaulting on a loan in their name. Some sellers approach this with a variation on owner financing called a wrap-around mortgage. You sign a promissory note for seller financing, and they keep their existing loan in place while they come out of pocket to finance the rest of your loan. They earn a relatively high interest rate on the portion of the loan they funded, and you still get a deal on financing.
Downsides
Most sellers don’t understand how wrap-around mortgages work. You’ll need to wrap your own head around them before you explain and pitch them to a seller.
The greatest risk with wrap-around mortgages is that lenders typically include a “due on sale” clause in their loan documents. If the ownership transfers, the loan becomes due in full. That leaves you and the seller crossing your fingers that the lender doesn’t find out they transferred the deed to you.
Unless, that is, you buy through an installment contract.
3. Installment Contracts
Also known as a contract for deed, installment purchase contract, installment land contract, or bond for deed, installment contracts work similarly to owner financing, except the seller keeps legal ownership until you’ve paid off the balance in full.
Deni and I use installment contracts in our land investing business. We offer parcels of land for sale in two ways: a traditional purchase price, or a slightly higher total amount financed over several years.
Contracts for deed can either be amortized like a mortgage loan, can involve a set margin over the cash price which is then just divided by the number of months of installment payments, or they can feature a balloon payment. Again, all terms are negotiable with the seller.
If you go this route as a buyer, make sure you record the contract for deed among your local land records, so you can enforce the contract if the seller tries to pull out or otherwise misbehaves.
Alternatively, you could sign a lease-option agreement with the ability to sublet. You lock in a future purchase price, and you can rent it out to start collecting revenue now. Many investors use this strategy for Airbnb arbitrage, where they sign a long-term lease agreement and then rent the property out short-term on Airbnb.
Downsides
Installment contracts come with risk, since you don’t actually take title to the property. The seller could fail to pay the property taxes, and the property could end up in tax sale. Or they could try to renege on recording the deed, after you pay off the balance in full.
Or, if you fall behind on payments, the seller may not have to foreclose on you to reclaim possession — in some states, they can simply file for eviction.
4. Business Credit Lines & Cards
The beautiful thing about most business credit lines and business credit cards is that they are unsecured: they don’t attach a lien against your home or rental properties.
And yes, real estate investors qualify for them. Real estate investors are entrepreneurs, after all!
Creditors typically set limits on your business credit lines and credit cards based on your personal credit score, your income and revenue, and your business credit (if established). We work closely withFund&Grow to help real estate investors get business credit lines totaling between $50-250K, with the average investor getting $150-200K in total credit lines and cards. They also show you how to use credit cards to fund real estate transactions without paying a cash advance fee.
You can use these rotating credit lines for down payments, renovation costs, or to buy properties outright. From there, you can pay them back on your time, however quickly or slowly you prefer.
Once you have the credit lines, you can keep using them repeatedly, forever. That makes them an excellent ongoing source of funds for deals.
And hey, you might even rack up some credit card reward points!
Downsides
While you could probably get one or two unsecured business credit lines on your own, most real estate investors need help with these. They need help negotiating higher credit limits, scrubbing the credit pulls from their credit reports, and going through multiple rounds of account opens. See this webinar we held recently on how the process works.
