Aside from asking for mortgage/bank loan, here are other ways you can finance your property.
Equity release is an essential component of financing for any property investor. This simply means that some time after you have bought and financed your property, you can pull out some of the equity that you have built up by way of re-financing it, based on the property’s higher market value. It goes well with any of the longer-term strategies.
For example, you bought a house worth $100,000 for $80,000 and took a 75% mortgage against it. After some time and assuming you are not bound by a lock-in period, the market value of your house is $110,000 and you re-finance at 75% again and hence the bank will grant you an $82,500 mortgage against it. You have just released $22,500 ($82,500-$60,000) equity from your house and actually have obtained more than what you had initially invested as your own capital ($20,000) back! Effectively, you have now not paid any of your own money to obtain your property and you can re-use this capital for the next deal and so on. Rinse and repeat.
While mortgages are suitable for any of the longer-term strategies, they cannot be used for the short-term strategies. We have to look for alternative options here and the solution is called Bridge Financing.
Just what is Bridge Financing? These are short-term loans to bridge (hence the name) a funding gap for an investor for about six to 18 months. The property serves as collateral. You can obtain bridge financing from smaller lenders other than the big banks. Ask your mortgage broker.
In terms of interest rate, this type of loan is rather expensive and you might be paying 1.2% to 1.8% interest per month (not per year!). If you can make a $50,000 profit within six to nine months with a fix and flip deal, you wouldn’t mind paying $10,000 interest for it, right?
Other People’s Money
Somebody has to pay for your property purchase, but who said it has to be you? If you overcome your limiting belief that asking people for money is ‘not good’, you have endless opportunities to finance your property! I suggest you make a list of 100 people you know whom you could ask, starting with family and friends.
If you find good deals and share them so that everybody wins, you might be pleasantly surprised how positive the response rates will be. The only one stopping yourself is you.
There are two principle ways to collaborate with your sponsors. Either you can let them come into the deal as joint venture partner(s) to jointly finance and own the property, or you could simply take a loan from them instead of taking it from the bank and pay them an attractive interest rate.
Creative financing is not an official term per se, but rather describes a few creative ways on how else you can finance your property besides mortgages and bridging loans. Those might include:
- 100% LTV
- Seller Financing
- Delayed Completion
- Lease Options
- Trade In
- Co-share with a land owner
100% LTV (Loan-To-Value) means that your acquisition is entirely financed by a lender. This is a strategy that many people in the US utilized, and when housing prices came down, was one of the underlying reasons that caused the sub-prime crisis. Nowadays, most banks do not offer it anymore and while it is theoretically an option, it might not be the best one.
What if you could get the seller of your selected property to finance your purchase of his property? Sounds impossible? Not so. Just creative. If for example he wants to sell his property, but does not want to buy another one, and intends to deposit the money into his bank instead, you could offer him a more attractive interest rate on his money than the bank does. The seller might not agree in all cases, but if he does, it means you essentially don’t even have to pay for your acquisition and only have interest expenses.
Delayed completion is something similar. Completion is the legal term for the point in time when the property changes into your ownership and you have to make the final payment. But that could be a year or even years later! If for example you agree that completion is one year after the exchange of contracts and you sell the property again for a higher price within that period, you can use the funds you receive to pay the original seller and pocket the difference. This scenario is also standard for newly built condominium units in many countries. The developer only takes a 10 or 15% deposit and the remaining amount is only due when the construction is completed. You can re-sell your unit before the building is complete, for a higher price, and this way leverage your money well, as you had used only little capital.
For Lease Options you do not need to obtain your own mortgage as you can leverage on the existing mortgage of the person granting you the option.
You could also try to trade for something that the seller wants (be it a different property or anything else) or find somebody who has a piece of unused land and offer the owner to develop it and share the profits. And if you are creative enough, you will find numerous other ways to finance your property acquisition. The sky is the limit. So, is finding the money to finance your property really still a big concern for you now?
The Property Apprentice Master, Jochen Siepmann, wants to share the wealth of his knowledge easily and effortlessly with you for FREE. Start your journey now to greater wealth through passive real estate income and capital appreciation with one, or all, of these FREE offers: