By now, most people know you can use real estate to fill your bank account with passive income.
What you may not know, however, is that it’s also a great approach to collecting assets and building generational wealth through acquiring and managing properties. For those looking to create unshakable financial stability, real estate offers several advantages over traditional forms of investing.
This is especially true if you’re investing while also utilizing creative strategies to avoid some of the biggest pitfalls of property investment like debt and asset management.
Creative Financing in Real Estate Investing
Creative financing tactics are different methods to traditional bank loans that allow investors to secure property deals without a large upfront cash investment. These tactics include seller financing, lease options, hard money lending, and private money lending among others
Seller Financing: A Win-Win Strategy
Seller financing is when the seller acts as the lender for the buyer, allowing them to purchase the property with an agreed-upon down payment and regular monthly installments. This benefits both parties involved, as sellers can sell their property quickly and receive interest payments from buyers, while buyers can secure a property without requiring a traditional bank loan.
Seller financing gives you negotiating power to massage various terms like the length of the loan and the percentage interest rate you’re responsible for. Unlike a traditional bank, you get to play an active role in this process, ensuring that the agreed-upon terms are valuable to both parties.
To find motivated sellers willing to offer seller financing, aspiring investors should target distressed properties or people who have owned their properties for an extended amount of time. By approaching these sellers with a win-win mindset and helping them understand how you can solve their problems while helping them gain more than they ever could through a traditional real estate sale, you can increase your chances of securing favorable terms.
Lease Options: Renting with the Potential for Ownership
A lease option involves renting a property with the opportunity to purchase it at a predetermined price within a specified time frame. This lets investors generate passive income through rental payments while potentially letting the renter become an owner of the property in the future.
A lease option is an interesting form of real estate investing because, in a way, both the original owner of a property and the renter who might buy can be seen as real estate investors. If an owner of a home wants to have long-term tenants to make a passive income, they are an investor looking to make a profit on a property. If a potential home buyer has the opportunity to try a property before making the commitment, and they do decide to buy and use the past rent as a lump sum toward the home, then they can own the property to invest in their own net worth.
Beginners can find properties to purchase through lease options by targeting homeowners who are struggling to sell their properties or landlords looking for stable long-term tenants. The key to finding a property that could be profitable lies in things like location and appreciation potential over a set period of time.
To structure a profitable lease option agreement, investors can negotiate terms, including an affordable monthly rental payment, a reasonable purchase price, and an interest rate that is lower than what traditional banks would offer on the final purchase price of the home.
Hard Money Lending: Quick Access to Capital
Hard money lending is a short-term loan option provided by private individuals known as hard money lenders. This kind of financing gives investors access to capital for getting property or rehab projects, even if they have very limited financial resources or a bad credit history.
This is one of the easiest and most passive ways to get income from real estate. A lot of people who already have access to some funds don’t have time to invest the hard work that goes into finding a property, negotiating, closing, rehabbing, finding tenants and maintaining that property over time.
A general rule is it’s easier to make money if you already have money. So, why would you want to do all the hard labor? You can become a hard money lender and act as a bank to fund other people’s deals in exchange for equity in a deal or a payout on top of the loan repayment.
People in the SubTo community have access to hard money lenders and can help beginners in finding other reputable hard money lenders who give competitive interest rates and flexible repayment terms.
Now, like any other type of investor, just because you have money and someone else is willing to find the deal doesn’t mean you don’t have to thoroughly evaluate potential deals before lending hard money for deals. That’s a guaranteed good way to lose money.
It goes without saying, but if you need a hard money lender to help close a deal, you also need to do your research and properly comp and underwrite deals to make sure it’s a profitable venture for you and the lender before pitching.
Private Money Lending: Leveraging Relationships
Private money lending involves borrowing funds from individuals within your own personal network or professional connections. Getting financing this way offers several advantages, including more favorable interest rates, flexible repayment options, and less strict qualification requirements when compared to traditional banks.
To leverage relationships for private money lending, aspiring investors should identify individuals who may be interested in partnering on real estate investments such as family members, friends, or business associates.
The biggest difference between a hard money lender and a private money lender when becoming an investor is that private money lenders are people who lend money to others to purchase a house or houses. Typically, they are usually friends or family who trust each other. As a result, they don't need as much paperwork or documentation to show they will pay the money back.
Hard money lenders are companies that lend money to people and charge more money for interest and fees than a private money lender. They need something valuable, like a house, to make sure they will get their money back. They have rules about who they give money to, and they don't care as much about being friends or if the person is good at buying houses.
So, either can provide you with terms for a loan, but only one is more likely to actually work with you on getting the terms you hope for and working with you towards personal success. Either way, providing a resource to aspiring investors or home buyers is a good way to make money and get started in real estate if you have some money to spend already.
Overcoming barriers to enter real estate investing can seem impossible if you’re operating under the notion that the only way to get a house is to go into debt through the terms a bank presents.
To be fair, barriers to entering the real estate world have traditionally been too high for the average person to find a way to make a living without putting themselves and their families in a lot of risk; which is why more and more people are turning to creative financing to realize their financial dreams.
That said, it's important to approach these strategies with a “cautiously optimistic” attitude and with a win-win mindset while building connections in the industry. By your success, you may not only be helping your own family, but creating careers and alleviating the pain of people in your community.
Creative financing makes entering real estate easier, but every opportunity to invest needs to be viewed as any other investment you make – by weighing risks, benefits and profitability.
These are tactics you can take even within the next month to explore the endless possibilities that await you. And that’s why there are online communities like SubTo that focus on real estate investing the smarter (and much easier) way than traditional investing.
The opportunities are out there - you just need to take action to take advantage of them!