Investing in Real Estate Creatively
Investing in real estate can encompass anything from a no money down real estate deal to an owner taking back a second mortgage behind a conventional lender. It can be one strategy or a mix of strategies. By and large, creative real estate investing refers to buying, selling and controlling properties by sidestepping conventional methods, including institutional lenders.
In order to understand investing in real estate in a creative way, you need to know how conventional way that investing in real estate works. The average person finds a property, makes an offer, usually through a real estate agent and begins the process of qualifying for a loan from an institutional lender. On properties that are one to four units, a residential loan is applied for. More than five units on a property kicks the loan up to a commercial status and the qualifying parameters are slightly different. With either type of loan, the lender will expect a large down payment – anywhere from 10% to 30%, a strong credit score and a proof of your ability to repay the loan. Qualifying for the loan can take anywhere from 30 to 45 days or longer and it is best if you don’t apply for any other loans during this process or you will find your loan denied. In effect, you have to sit on your thumbs for a month while qualifying for a loan which slows down your acquisition process.
In addition to that, lenders are leery of extending credit to people with more than four mortgage loans. Once you have four properties with loans on them, you will probably be shut off by conventional lenders. Some lenders will make loans on up to ten properties, but that lending practice has been tightened up and for the average investor, four properties is about as far as lenders will go.
At this point, if you want to acquire more properties, you are going to have to get creative.
The Basics of Investing in Real Estate: Getting Creative
The most popular definition of creative real estate investing refers to negotiating a no money down deal. Most conventional lenders want a 10% to 20% down payment on a residential property as part of the qualifying process for a loan. This is fine for people who are buying just one property, a personal residence. For investors who are building a portfolio of properties, whether they are buying two a year or two a month, even a 10% down payment per property would eat up their available funds very quickly.
The idea behind investing in real estate is that the asset pays for itself. A property that can be rented for more than the monthly payment and maintenance costs will pay for itself over time and create a cash flow for the investor. The more properties you have, the greater your overall cash flow and the more assets you have working for you.
Creative investing in real estate allows the investor to acquire more properties in a shorter amount of time. Because the investor can create deals with little to no money down, they can spread their working capital over a greater number of properties. Using private lenders and seller financing, they aren’t limited as to the amount of properties they can finance. More importantly, because creative real estate investors deal with home buyers and sellers without a middleman, they can create deals that work for both parties. Everything is negotiable in creative real estate: the down payment, the interest rate and monthly payments, the length of time the property will be financed. Conventional lenders have a cookie cutter approach; creative real estate investors know that every deal is different and one size does not fit all.
Creative Investing in Real Estate and Privacy Issues
Some people can qualify for conventional loans yet choose not to. Why? These individuals are concerned about their privacy. When you apply for a loan with a conventional lender, you are basically giving the lender a financial blueprint of your life – your Social Security Number, bank accounts, assets, even the names of relatives. In a world that has grown more and more invasive, people, especially those with assets to protect, are more sensitive to giving out their private information.
Conventional lenders have every right to ask for this information. After all, they are trusting a person with a large sum of money and they want to make sure the money will be paid back. For those people who want to protect their privacy, conventional lenders are out of the picture and creative investing in real estate is the key to operating their real estate business “under the radar.”
By using other people’s money, whether borrowed from private sources or owner financed, an investor can acquire more properties faster, renting them out or flipping them for a profit. The asset itself pays back the borrowed funds. When none of your own money is in a deal, the return on your investment (zero dollars) is infinite. That’s what makes creative investing in real estate a perfect fit for savvy investors.