Owning your own home provides your first source of creative financing via a home equity line of credit.
When Greg first thought of investing in real estate, his first business order was to buy a home. Greg knew this was a huge first step in unlocking his investment potential. He found a home that he knew had great rental cash flow potential. Because he intended to use this home as his primary residence until he found the next one, Greg could lock in a great financing rate. He then took out a home equity line of credit for $10,000 and used that money as a down payment on his next real estate investment. He moved into the new one and then rented his original home. Greg continued this process repeatedly, and in two short years, his rentals were cash-flowing over $2,800 a month.
Even though traditional lenders disapprove of using Borrowed Funds as down payments, using credit card funds works well with seller financing or lease options.
A Lease Option agreement can allow you to sublet the property and realize instant cash flow. When you sign a lease option agreement, ensure the contract doesn’t restrict you from subletting the property. Because you have signed the lease, you are the lessee or the renter. By re-renting the property, you are subletting.
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Terry could not obtain bank financing due to the unpaid credit obligations on his credit report. He was determined not to let his poor credit stop him from investing in real estate. Instead of offering to purchase a seller’s property immediately, he asked the sellers to agree to a lease option. He obtained lease options on five properties in two years. It was a good deal for the property sellers because they didn’t have to worry about the costs of owning the homes, and they knew that they would have a buyer for the property at the end of the agreed term. It was a good deal for Terry because he could cash flow $200 per month from each property. He applied this money to his unpaid credit obligations until they were paid in full. By the end of the lease option term, Terry’s credit was in good standing. He purchased the properties with bank financing for the previously agreed-upon amounts. The real estate market had risen since he first initiated the lease options, so he also earned some additional equity due to the appreciation.
Luke saved up $5,000 as a down payment to purchase one of Don’s rental properties. The seller financed the remainder at a 7 percent interest rate. Luke ran the property well, and cash flowed $300 monthly from it. Because Don did not realize all of his profit from the sale immediately, his capital gains tax burden was lessened. He also enjoyed the monthly cash flow the properties still produced for him without the ownership obligations. Don also owned ten other rental properties that he wanted to sell with seller financing. Because his experience selling to Luke had been positive, he offered her first properties. He was interested in purchasing all properties but did not have an additional $5,000 per property for a down payment. Because Luke had already established a track record with Don, he decided to sell the properties to her with no down payment and seller financing at 7 percent. Luke averaged another $300 per property per month in positive cash flow.
Not all loans permit a seller to sell his property without paying off the existing financing. Most loans have a Due on Sale Clause that gives the lender the right to call the loan due if the seller sells his property. Be careful to understand the terms of the existing financing when buying a property “subject to” the current lines. If the lender calls the property due, you usually have 30 days to obtain new funding. You want to ensure you would be prepared if this were to happen.
Todd was interested in purchasing a property, but the current interest rates were so high that he realized the property would produce a negative cash flow after analyzing the property’s expenses and income. Todd knew that the seller had a loan on the property with an interest rate of only 6 percent. With a rate this low, the property would produce a positive cash flow of $300 per month. He made an offer to the seller to purchase the property subject to the existing financing. The loan balance was $20,000 less than what the seller was asking for, and Todd only had $10,000 cash that he got from an equity loan on his primary residence. He also offered to use this $10,000 as a down payment and for the seller to carry a second mortgage on the property for the remaining $10,000 at 6 percent interest. The seller preferred to sell his home outright, but he knew it would be hard due to the current interest rates. He agreed to Todd’s offer for a term of 10 years. This gave Todd ten years to obtain new financing to pay off the first and second mortgages. Three years later, interest rates had decreased dramatically. Todd refinanced his property, and the seller was paid off in full.
One-hundred-percent financing can easily be obtained when you combine two loans to purchase a primary residence. However, lenders usually want to see at least 5 percent of the investor’s funds when purchasing a non-owner-occupied property. An investor’s funds do not need to be cash savings; they can come from an equity loan on another investor’s property.
Gary wanted to start investing in real estate by purchasing his first home. He had good credit but no cash for a down payment. Gary’s loan officer helped him find 100 percent financing without private mortgage insurance obligations. The loan officer combined an 80 percent LTV first mortgage with a 20 percent LTV second mortgage. Because neither of the loans was solely above 80 percent LTV, their lenders did not require Gary to take out private mortgage insurance. He could also avoid coming into the close with extra cash for the bank fees and closing costs by negotiating these fees with the seller through the sales contract.
The principal is not being paid off with interest-only loans. However, the investor may still be building equity due to appreciation.
Our team’s diverse backgrounds and investing experiences include a high school teacher, a college dropout, an MBA graduate, a writer, a secretary, a real estate agent, a banker, and a stay-at-home mom. Despite our diverse backgrounds, we all decided to change our lives truly. Although our starting points couldn’t have been any more different, we each discovered that our journey toward financial freedom began with real estate.