One of the most talked about real estate investing concepts is investing without putting your money or credit on the line. It can be and is often done. It doesn't mean that you don't need money. What it means is you need access to other people's money.
Creative financing has long been a main stay in the toolbox of real estate investors. The following, taken from a Motley Fool review, is not a comprehensive list of ways to invest in real estate using other people's money but it does represent the most used methods.
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- Seller financing. Instead of collecting all cash at closing, the title is transferred to the buyer and a mortgage or deed of trust is recorded against the property along with a promissory note defining the terms and loan amount the buyer owes to the seller.
- Subject to existing financing. This technique is used when the seller still owes money on a mortgage. It requires the buyer to continue making the sellers mortgage payments as well as a second payment to the seller (his or her profit).
- Using private money is becoming popular in today's bank loan restricted economy. This money can come from many different sources. Wealthy individuals looking for a better and more secure investment than banks and Wall Street offer are getting into the home loan business. Less affluent people with money in retirement accounts are another common source. As are pooled funds in the form of hedge funds.
- Hard money is similar to private money but with some key differences. Hard money loans are typically for short periods of time, often for between six months to one year. The interest rate charged is higher than for private loans and hard money lenders seldom loan more than 70% of the market value of the property. These are usually the loans of last resort but are used when a house will be flipped within a few months.
- Working with partners. Often these are silent partners that put up all of the money but you do all of the legwork to make a profit that they share in.
- Leveraging other property. This is less common today than in the past when loans were easier to get. But if you own other property, you might be able to get a loan that is cross-collateralized by both the property being purchased and another property that you have equity in.
- Double closing. You use this when you already have a buyer. You make arrangements with a trusted escrow company to both purchase and sell the property at the same time without ever putting in any of your own money.
- Lease option sandwich. In this scenario, you lease a property at one price and then turn around and lease to a potential buyer for a higher amount. Both you and the second lessee have the option to purchase the property within a defined amount of time. Keeping your money out of this deal works when you have the second lessee lined up before you sign the original lease option.
Obviously, these are only summaries of how these methods work. They are not without risk. Before you involve yourself in any of these lucrative methods to invest in real estate using other people's money, learn the intimate details to how each works. It's also wise to obtain the counsel of a competent real estate attorney before making any commitments.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
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