7 Creative Financing Options for Real Estate Investments

A 2024 Bankrate survey found that 78% of Americans believe homeownership is a vital component of the American dream.

But what if you could have more than homeownership? What if you could make passive income from investing in real estate? The monthly rent payments and home equity would allow you to build healthy retirement savings, as well as create significant generational wealth for your family with purchased properties.

With abundant investment strategies and creative financing for real estate, it’s easier than ever to invest in real estate.

So don’t miss out on a real estate deal because you lack funding. Instead, check out these seven creative financing options for purchasing investment properties!

1. Cash Out Refinance

When it comes to types of creative financing in real estate, consider a cash-out refinance. This financing option allows you to use your home’s equity to borrow enough money to pay off your existing mortgage and have leftover funds to invest elsewhere.

This creative financing technique is desirable because it offers better interest terms than a traditional home equity loan, and the interest paid is tax deductible. However, this option resets your mortgage term, meaning you must continue making monthly payments for 30 more years. Your loan-to-value ratio will also increase.

A similar option is using the equity in an existing property to finance another property through cross-collateralization, where the existing property acts as additional collateral. With this strategy, you can finance a rental property without needing an additional loan.

2. Home Equity Line of Credit

A HELOC allows you to borrow funds against the value of your primary residence. HELOCs usually consist of a draw period (around ten years) and a repayment period of up to 15 years. The interest is tax-deduction up to $100,000.

HELOCs support creative financing strategies in the following ways:

• Allow interest-only payments to preserve capital
• Facilitate down payments
• Finance renovations without high interest rates
• Offer bridge financing

Because interest rates are variable and not fixed, you need a solid repayment plan before taking out a HELOC.

3. FHA Loans

FHA loans are ideal for first-time homebuyers who don’t qualify for a traditional loan. Although they are available from conventional lenders, the Federal Housing Administration backs these loans so those with a poor credit score or minimal funds for an upfront down payment can still purchase a home.

An FHA loan also typically has a lower interest rate than a traditional mortgage loan, making it an attractive financing option.

However, borrowers must still pay a small down payment (usually 3.5%) to secure an FHA loan. If you require a no-money-down option, you’ll need to consider other types of loans.

4. Hard Money Lending

Hard money loans are a short-term financing option used primarily for the following purposes:

• Home flipping
• Rehabilitation projects
• Situations where quick funding is necessary and traditional financing is unavailable

Hard money lenders use the property as collateral, resulting in fast approval times. However, these loans typically have higher interest rates and origination fees than loans from traditional lenders.

Because of the heightened risk, you should only consider a hard money loan if you have experience in the real estate market and a sound exit strategy.

5. Down Payment From Your IRA

Another creative financing method for real estate is a personal loan from your IRA or 401k plan with your employer in order to get your down payment. You can typically borrow up to 50k for a downpayment and pay it back with interest to your own plan without paying tax on it. Oftentimes, you can get it auto-deducted from your paycheck, so you won’t even miss it.

You will lose some compounded interest, but a good real estate investment will give you appreciation over the years, so be sure to take a look at what makes the most sense for your finances. The interest you pay on the loan also goes back to you, so you’ll make up a little bit of the difference.

6. Leveraging Your Friends

Going in on an investment with a friend with better credit or more liquid assets than you is a smart way to bank on your strengths and mitigate your weaknesses.

You might be a great negotiator with awesome credit but have no cash to buy a second property. Your friends or family might be able to loan you money for a down payment, and in exchange, they’ll own part of the property and possibly receive a portion of the rental income.

And if you don’t have great credit? You might consider trying to purchase some real estate with someone who does while supplying the cash for the down payment.

You might also consider crowdfunding to raise some capital. Crowdfunding uses online platforms to aggregate investments from multiple people, allowing those with few funds to participate in real estate investing. Popular crowdfunding sites include GoFundMe and Kickstarter, but there are also sites specific to raising funds for real estate investment opportunities, such as EquityMultiple, Fundraise, and RealtyMogul.

7. Additional Alternative Financing Options

You have a few other options that are a little bit more complicated:

• Seller financing (or owner financing) is when the property seller provides funding directly to the buyer. However, motivated sellers struggling with their mortgage payments should not consider this option.
• Like seller financing, you could also do a lease option (or rent-to-own) with the homeowner, where investors purchase the property at the end of a lease agreement for a predetermined purchase price.
• Private money lenders customize loans to meet borrowers’ needs, something traditional banks can’t do because these lenders are often coworkers, family members, friends, or neighbors.

Explore Creative Financing in Real Estate With Associates Home Loan

When exploring creative financing for real estate, the best option for you will depend on your financial situation and investment goals. Yet, with many real estate financing options available, there’s something suitable for your needs.

Ready to secure funding for your real estate investment? Apply now for the loan type of your choosing from The Associates Home Loan of Florida, Inc. We offer numerous loan and refinancing options for homeowners and investors alike, including jumbo loans, traditional loans, and USDA loans.

Not sure what loan type suits you best? Reach out to our team, and we’ll help you explore your options.