One of the things that make real estate investing so exciting is the creativity one can implement to fund deals. In truth, your ability to fund is limited only by your imagination (and the law, of course), so the purpose of this article is to expand your mind and allow you to explore the more "creative" side of real estate.
If you own your own home, you may be able to use some of the equity in your home to purchase rental properties. As I've discussed before in this book, equity means the spread between what is owed on a property and what the property could sell for. In other words, if you owe $80,000 on your primary residence but it could sell for $200,000, you have $120,000 in equity. This equity can be borrowed against at very low interest rates through a home equity loan or home equity line of credit at your local bank or credit union.
You may also see these loan products referred to as a "second mortgage," because the lender will place a lien on the property that is in second place to the primary loan on your house.
A home equity loan and a home equity line of credit are similar but have a few major differences. The loan is typically taken out all at one time and paid back in installments until it is paid off, much like a typical mortgage or car loan. The interest rate and payment are generally fixed for the life of the loan (but they don’t have to be).
A home equity line of credit, on the other hand, is a revolving account that works much like a credit card. You can borrow as much as you want, up to the limit, pay it back, and then borrow again.
You pay interest only on the amount that is currently borrowed, so you could leave the balance at $0 until you need it. These lines of credit generally have lower interest rates than home equity loans, but those rates are generally variable and so can rise or fall.
Partnerships have been one of my favorite creative methods of investing in real estate over the past decade, because even though I’m good at a lot of real estate things, I have a lot of shortcomings as well. Partnerships can be valuable tools when investing in rental properties, because two people can work together to cover for each other’s shortcomings and do some amazing things.
For example, if one person is great at getting a mortgage but has no time to find or manage deals, they could partner with someone who struggles with getting a loan but has more flexibility and knowledge to handle putting the deal together and managing it. Or perhaps both parties put in 50% of the income and split the responsibilities 50% also, making less work and less income for both partners.
If you plan to use a partner to invest in real estate, take incredible care in picking the right partner. Never pick a partner based on convenience; rather, choose a person because they are someone you would enjoy working with and because they have something you need, while you have something they need. Pick a partner the same way you would pick a spouse—after a lot of careful consideration.
This is especially true when investing in long-term buy and hold real estate, because you’ll be attached to this person for many years. You don’t want to end up with a partner for the next 20 years with whom you don’t get along. Be sure that your goals and work ethic are in near-perfect sync and that your roles are carefully defined (on paper) before buying a single piece of property.
Have a lawyer write up a partnership agreement to protect you both, because as my friend Chris Clothier likes to say, “Every partnership will end. You decide at the beginning how it is going to end.”
When a seller owns a piece of real estate free and clear (meaning they have no mortgage on the property they own), they can sell the property using seller financing, which can be a really powerful method for investing in real estate without having to work with a bank.
In seller financing, the owner sells the property to you, but they also act as the bank, so your mortgage is paid to them every month rather than to another lender. The title is transferred into your name, but the previous owner holds a lien on the property (a mortgage) so that if you don't pay, they can foreclose, just as a bank would.
Once the loan is paid off (usually through a refinance or when the property is sold), the lien is released, and the two parties go their separate ways.
Seller financing can be a great win-win for both the buyer and the seller. The buyer can purchase a property without needing to go to a bank, fill out the paperwork, get approved, get an appraisal done, and provide a large down payment. The seller can go from “owner” to “lender” and start receiving monthly passive checks in the mail that are secured by real estate.
I purchased my 24-unit apartment complex just after I turned 25 using seller financing. I put down a $15,000 down payment and the sellers financed the $550,000 purchase. A few years later, the property appraised for $900,000, and I was able to get a new loan for $650,000 through a local bank, keeping the $100,000 difference.
This has helped me get into even more properties while still owning the 24-unit one. And it was made possible through seller financing!
This article is an excerpt from Brandon Turner’s The Book on Rental Property Investing. For the full read, visit biggerpockets.com/rentalbook.