3 Non-Traditional Ways to Finance an Investment Property

Not many of us are able to plunk down a large enough pile of cash to finance an investment property without borrowing a little and, even if you have that kind of coin, there are more profitable endeavors to use it for than buying a piece of real estate outright. That means you’re going to need financing. The usual approach is to comb your hair, put on your best suit, and trot down to the nearest friendly bank or mortgage company with your hand out. If your credit is good, debt is low, income stable, and you can put 20-25% down on the property, you might be in luck. Unfortunately, the sub-prime housing crisis has caused lenders to be a little gun shy about lending – they’ve tightened their criteria, often requiring at least a 680 credit score or better.

Maybe you qualify for that and maybe you don’t. If the answer is the latter, the good news is that there is more than one way to finance an investment property. Here are a few.

1. Seller Carry Back: With this scenario, the seller agrees to carry the note on the property for a set period of time, usually 1 to 5 years, after which the remaining balance is due in full. Meanwhile, the buyer makes monthly payments and, when the time is up, applies for a refinance loan, which is much easier to qualify for than a purchase loan. You then pay the balance to the seller and begin making mortgage payments to the bank. A seller who owns the property outright and simply wants to unload it might be amenable to a seller carry back arrangement.

2. Subject-To: The phrasing “subject to” comes from the idea that the house will be purchased with the existing financing in place. The loan stays in the seller’s name but the buyer takes over mortgage payments. Obviously, this is not a long term solution because no seller in his right mind is going to be comfortable allowing his name to be used on someone else’s deal forever. If you can get a seller to agree to it for six months, you’ve got it made and never have to make a down payment because you can obtain a refinance loan after that time period, pay off the seller and make your payments to the bank.

3. Seller Second: – This is another way to get around coming up with a down payment. Say the bank agrees to finance your deal with the caveat that you put down 20%. In asking for a seller second arrangement, you get the seller to agree to accept a second mortgage large enough to cover the down payment. He gets the bulk of his equity and carries the note for the rest. In return, you don’t tie up any money in the deal.

These are only a few examples of non-traditional ways to finance an investment property. If you are having trouble securing financing through a bank or mortgage company, you should at least be aware that the three strategies listed here could be suitable options, and there are many more; one might be appropriate to your financial situation.

The Bonus Commissions Team

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