5 Ways To Finance A Real Estate Investment

Now is a great time to be looking for deals in real estate. The biggest profits can be made by buying in a down market. That being said, if you don’t have substantial liquid assets available or a great credit rating as a safety net, buying real estate with the current credit market could prove to be more of a pitfall for you than a springboard to prosperity. Assuming that you do have a stellar credit rating and feel financially secure, these forthcoming financing methods may be a great way for you to grow your net worth. Whether you're looking to upgrade your current home, buy your first home or start buying rental properties, you're going to need to be savvy when it comes to financing. Here are five ways to finance a real estate investment.

Traditional

The traditional route taken through banks, credit unions and other home mortgage companies is a great way right now to finance a real estate investment. Rates are currently pretty good but expect to be asked for full documentation of income and debts to be qualified. For those that qualify, most lending scenarios require at least a 3.5% down payment for an owner occupied property and about 20%-30% for an investment property. If you are able to get approval, now is the time to lock in a great rate.

This way to finance a real estate investment really is the most traditional, safe and well-known method. So, I'm going to take you through a number of ways to finance a real estate investment you may not have heard of before.

Owner Financing / Seller Financing / Seller carry back

There are a few different names, but the same principals apply. Whenever you hear someone talking about buying "on terms," they are speaking of creative financing. Creative financing refers to any method of financing besides the traditional method. Knowing these methods is essential to savvy investing because they allow you to buy properties using the much-talked-about OPM (Other People’s Money). Investors often try to use as little of their own money as possible so it will stretch further. The first creative-financing method you’ll need to be aware of is a “Owner Financing.”  In this method, the seller agrees to carry the note for your purchase. This will happen when you find a seller that owns his/her property free and clear. They don’t want the property anymore, but they don’t mind receiving a monthly payment on it. Most of the time, however, the seller will place a time limit for when the note must be paid in full -- typically, between one and five years. This is a great way to finance a real estate investment as long as you realize you’ll need to refinance later. Remember: It's generally easier to qualify for a refinance loan than a purchase loan.

Subject-to

This subject-to method is a great way to finance a real estate investment quickly, though it will be a short-term solution. The name "subject-to" comes from the phrase "subject to existing financing." This means that you buy the property on the condition that the existing financing stay in place. The title is transferred, but the loan will stay in the seller's name, and the buyer will make the payments. The reason why this is a short-term fix is because seller's aren't going to be very comfortable leaving the loan in their name for an extended period of time. Savvy buyers will use this method when they don't want to come up with a down payment, knowing they can refinance in six months and get the loan put in their name. This method is commonly used when buying pre-foreclosure properties. The buyer gets into the property with zero down, and the seller is willing because they have to get rid of the property immediately. If you use this method to finance a real estate investment, just make sure you uphold your end and make the payments on time.

Seller second

This way to finance a real estate investment is extremely useful and used often. The "seller second" means that the seller provides a second mortgage. Typically, the second will be just large enough to cover most, or all, of a required down payment. For instance, if you know you're pre-qualified for a loan that will require a 20% down payment, you should make an offer contingent on the seller carrying a note for 20%. This way, you will get into the property without using any of your money and the seller gets the bulk of his equity and makes the deal. One caveat: Make sure the loan you are qualified for will allow this type of transaction. Some will, and some won't.

Lease option

Finally, if you can’t find a way to finance a real estate investment, you can do a lease option. The lease option allows you to get into the house for little to no money down, and it gives you the right to buy the property down the road -- typically, in two or three years. This time period will give you ample opportunity to procure financing. Also, often you can arrange it so a portion of the monthly lease payment will go toward the balance of the home.

property purchase planning

There are actually many more ways to finance a real estate investment creatively, but you are now acquainted with some of the most popular. The bottom line is: If you're determined to buy a property, you will find a way.