Creative Financing Real Estate [Creative Financing For Investors]

Published on May 23, 2023

Creative Financing Real Estate

Creative Financing Real Estate

If you want to jumpstart your real estate investing career but don't have enough capital, you might want to look into different creative financing strategies. These strategies are ideal for investors who want to spend little to no money at all.

Some of the creative financing options of real estate investors include Cash-Out Refinance, Home Equity Line Of Credit or home equity loans, Seller Financing, Owner Financing, or Seller Carry-Back, Persona l Loan, Lease Option, Hard Money Loans, Private Money, FHA Loans, Self-Directed IRA, Cross Collateral, Crowdfunding, Subject To, Wraparound Mortgage, and BRRRR Method.

In this blog, we'll not only look into all your creative financing options but also what mistakes to avoid, how risky creative financing is, how to find creative finance deals, and more!

What is Creative Financing in Real Estate Investing?

What is Creative Financing in Real Estate Investing?

Creative financing is a type of financing that tries to avoid traditional lenders and limits the amount of hard money you need to provide out of pocket in every deal. These unique or unorthodox financing strategies are best suited for low income investors or investors who are just starting out. 

Historically, creative financing methods started and peaked in the 1970s when the interest rate of traditional financing went as high as 18%. Many buyers including simple homeowners and real estate investors found it hard to qualify for a traditional loan. 

As mentioned, creative financing is for real estate investors who do not have enough cash to fund the home sale. But it is also for investors who don't have good credit and the banks are refusing to provide them with conventional loans. 

Creative Financing vs. Traditional Real Estate Financing Strategies

Creative Financing vs. Traditional Real Estate Financing Strategies

Creative financing, as discussed above, is any unorthodox financing strategy that real estate investors use when they do not want to provide a large sum of cash out of their pockets. Typically, these creative financing ideas focus more on the terms rather on money.

Meanwhile, traditional financing strategies involve four parties, the seller or property owner, the buyer, the conventional mortgage lender or bank, and the closing real estate agent. Once the buyer and seller signs the sale agreement, the bank would finance the cost of the property not including the down payment which is usually 20% of the agreed upon price.

After the buyer and seller closes on the sale through the real estate agent and the money was already paid by the lender, the real estate transaction would be completed. The deed would be transferred to the buyer and the lender would be paid the required monthly mortgage payments.

Is Creative Financing Risky?

Is Creative Financing Risky?

Compared to conventional loans, creative financing is believed to be less risky. This is because they often don't bear any personal liability and the only collateral to the loan is the property. In other words, if you default on your creative financing loan, your other assets won't be collected. Unless, of course, it is included in the terms of your contract.

The same cannot be said for conventional financing since most mortgage lenders include a homeowner's other assets to their collateral. Your business assets, car, investment accounts, etc., would be at risk.

Is Creative Financing Legal?

Is Creative Financing Legal?

Creative financing is legal no matter what state you are in. Of course, the terms may vary depending on your location but they all comply with the tax laws and regulations of the government. Note, however, that there may be some creative financing companies that are illegal so you have to be very cautious. 

Benefits of Creative Financing

Benefits of Creative Financing

Creative financing can be beneficial to both investors and sellers. To assess whether you should take this route, check out this list of benefits. 

To Investors

  • Higher Returns: Through creative financing, you can limit the amount of money you pay through your own money for each real estate deal. Remember that there are two major ways to significantly increase your returns — minimizing the amount you spend or maximizing your income. Through creative financing, you can minimize your capital investment and reap a higher cash-on-cash return.
  • More Deals: In some cases, investors are not willing to pay in cash for houses especially if it has a lot of damages. This is understandable since they'll be spending lots of money on the repairs. However, doing this would not help them land more deals. Thankfully, creative financing allows buying on terms so you can process more deals.
  • Lower Interest Rates: Often, in creative financing, you pay the same interest rate as the original loan or primary loan. Interest rates are currently rising and taking out a new loan can significantly affect your income. What's more, interest rates for investment homes are higher than primary residences. Keeping the interest rate of the existing loan is really a big thing.

To Sellers

  • Higher Purchase Price: Since the investor won't need to pay cash outright, they may be willing to accept a higher purchase price. This will greatly benefit the seller since they're getting a good price from the property. Meanwhile, the buyer won't still be at a loss since they won't be paying full price for the property when they use creative financing. They would still have a high cash-on-cash return. 
  • Residual Income: Not only do sellers get paid a higher amount for purchase, but they can also receive monthly residual income. When combined, this results in a considerable amount of money.
  • Prevents Selling at a Loss: Many homeowners have a very low home equity so they end up selling at a loss. This is also true for those who can no longer pay their monthly mortgage dues. Through creative financing, you won't have to sell at a loss and there's a possibility that you can name a high purchase price.

Creative Financing Strategies

Creative Financing Strategies

You have numerous creative financing options whether you are new to real estate investing or already seasoned in the business. Check out the top 14 below!

Cash-Out Refinance

Cash-out refinance is one of the most common creative financing techniques that are used by many homeowners who don't want to go underwater. Essentially, this strategy means you tap into your home equity in order to settle your mortgage and keep enough money to pay for your other investments or whatever you need money for. 

Unlike securing a HELOC or home equity line of credit to get a second mortgage for your investment property, cash out refinance has more favorable interest terms. This interest is also tax deductible unlike other traditional loan forms. 

However, as is with any loan type, this may be risky since it resets your mortgage completely. Even if you have already paid 5 years out of 30 years in mortgage, taking this loan makes your mortgage loan still payable in 30 years. 

Home Equity Line Of Credit

A Home Equity Line of Credit or HELOC is typically used when you don't need a large sum of money as this cannot be used to pay off your mortgage loan. Instead, this loan can be used for repairs or upgrades to your home.

A HELOC or home equity loan works by borrowing money from up to 80% of the value of your home exclusive of the mortgage amount. In other words, you are borrowing from your home's equity. The repayment period for a HELOC or home equity loan is typically 15 years and its interest is also tax deductible. However, only up to $100,000 will be honored for this deduction. 

Overall, a HELOC or home equity loan is ideal if you only need a small amount of money. You can use this to repair or renovate both your primary home and rental investment property. 

Seller Financing or Seller Carry-Back

Seller financing, owner financing, or seller carry-back works when the homeowner or seller owns the property free and clear. In other words, the rental property is already fully paid.

Instead of getting a mortgage loan from a conventional lender to finance the purchase of the property, a loan agreement will be created between only the seller and the buyer in seller financing. The seller would deed the property to the buyer when the latter provided them with a promissory note stating how they plan to pay the property's principal price and its interest in the seller financing agreement. 

The homeowner does not have to provide the funds for the purchase. All they have to do is to create the deed and expect payment from the buyer in seller financing. The great thing about this financing strategy is that the terms are completely negotiable including balloon payment unlike when you get a new mortgage loan. 

Personal Loan

There are many loan companies that provide cash for any purpose including creative real estate investing. Personal loan is your best option if you are looking for a fast cash for your home needs. For instance, if you are behind on mortgage payments or are planning to make repairs.

Note, however, that unlike cash out refinance, HELOC, and other creative financing strategies, personal loans won't have any tax benefits. There may also be a loan limit depending on your credit score. But the good news is you won't be asked to provide your house as a collateral to the loan. Most personal loan providers do not even ask for a collateral at all. 

What's more, the repayment plan is shorter compared to other conventional and traditional loan types. In short, you can pay interest rate that is lower. Just expect that your monthly payments would be relatively higher. 

Lease Option

Instead of buying a rental property outright, entering a lease agreement real estate financing strategy may be wise and effective in the long run. In a lease option, a lease agreement is combined with a purchase and sale agreement. To put simply, the buyer becomes the tenant and leases the property and agrees to purchase real estate at a certain time. Note that this may be the option but not the obligation.

Depending on the terms of the contract and the negotiation between the landlord/seller and the tenant/buyer, a portion of the monthly lease payment may count as down payment for the property.

This is ideal for investors who doesn't have enough capital in full and for landlords or homeowners who wants to earn money aside from the outright purchase price of their home. 

Hard Money Loans

Hard money loans are given out by private hard money lenders and companies. Unlike personal loans, you can use hard money loans taken from private money lenders to actually purchase a property. 

Typically, a hard money lender does not have a stringent application process so even if you have a bad credit score, you can still get this loan. Note, though, that this may require high monthly payments and interests. It's also short term so you need to have a game plan in order to pay fast. 

Hard money lenders usually look at a real estate investor's rehab blueprint, ARV or after repair value of the property they plan to buy, and their portfolio. Rarely do hard money private lenders look at the credit score of creative real estate investors.

If you wish to use this creative financing option, make sure to have an exit strategy. 

Private Money

Although technically, the private money strategy means borrowing hard money for the down payment or full purchase of a real estate, it is still very much different from a hard money loan. A hard money loan is taken out from a private money lender. Meanwhile, private loans are taken from someone you personally know and have a relationship with you.

For example, your parents, siblings, friends, colleagues, relatives, and other people you can easily borrow from. Generally, you can easily negotiate with these people because you know them personally. You can talk to them about a certain repayment plan and how much interest they can get. 

The only problem with this creative financing method is that not many people you know would allow you to borrow large amounts of money especially if you are borrowing to pay the full price of a property. Unlike traditional mortgage where you can loan a maximum amount.

FHA Loans

FHA loans from the Federal Housing Administration are for first-time homebuyers who did not qualify for conventional loans because they have low credit score. Technically, FHA loan is still a conventional loan, however, you won't be required to pay a high creative financing down payment amount which is typically 20% of the property value.

FHA loans allow home buyers with a credit score of 580 and above to pay 3.5% down payment. A very small amount compared to the usual down payment of homes. 

The only downside with this loan is that it requires an upfront mandatory mortgage insurance premium of 1.75% or your loan balance. Meanwhile, you will also be required to pay an annual insurance premium amounting to 0.85% of your remaining loan balance until you paid off the whole loan.

Self-Directed IRA

Another way to purchase real estate without paying outright and maintaining a good cash flow is through a self-directed IRA, that is if the real estate investor already has existing retirement funds or retirement savings.

The process of buying a house through a self-directed IRA is very much similar to any other real estate purchase. However, the income from the investment property bought will go back to the IRA funds or retirement savings. 

To buy a house using the IRA funds, you have to identify the property first and inform the IRA custodian so they can make the transaction happen. The purchase contract will be made but it will be in the name of the IRA. All the expenses of the home purchase will be paid by the IRA and you don't have to pay any taxes on the property income. 

Cross Collateral

If you want to buy another property to grow your real estate portfolio but you don't want to get another loan or pay a large down payment, you may want to use the cross-collateral strategy.

The idea behind this is that you don't borrow from the equity of your existing property. Instead, you would use it as collateral when you apply for a loan. Put more simply, not only will you have a mortgage on the new property you'll buy, but you also have a lien on your existing property.

We only recommend taking this route if you are a hundred percent sure you can settle on a loan. Otherwise, you are at risk of losing two properties at the same time. 


Crowdfunding is a new creative financing strategy that many risk-takers use to fund the sale of a property. Through this method of real estate financing, you can practically raise money for any investment you want. Ordinary individuals can invest a certain amount to your deal and in return, all parties will earn in this creative real estate online strategy. 

Two of the most well-known sites for crowdfunding are Kickstarter and GoFundMe. But if you like a platform that is centered on real estate funding, opt for Feather the Nest and Hatch My House. All you have to do is make an account on these platforms, inform the public about your real estate investment project, and wait for other people's money to come in. 

Subject To

The subject to creative financing strategy means you enter into an agreement with the seller that you will continue paying his or her mortgage payments. In a subject to deal, the real estate investor pays off the principal amount of the property minus its remaining mortgage balance.

Home buyers typically do this to avoid taking out new mortgage loan which can be a long and stressful process. Moreover, getting a new loan can be more expensive since interest rates keep on rising.

Through a subject to deal, you retain the original mortgage and interest rates of the property and you avoid so many complications. On the part of the seller, this can be beneficial especially if they want to avoid defaulting on their mortgage and going under foreclosure. However, it is also risky on a seller's part because they are still named in the mortgage. 

Wraparound Mortgage

A wraparound mortgage is a new mortgage between the seller and the buyer, but unlike a second mortgage when taking a HELOC or traditional home equity loan, the terms are more flexible because there are no other parties involved.

Essentially, a wraparound mortgage "wraps around" the existing mortgage in the sense that it is more expensive than the original. This includes both the interest and principal amount of the property value. Since the amount paid by the buyer is larger than the existing principal and mortgage, the seller can pay off the mortgage, pocket what was left, and generally have a better real estate cash flow. 

If for instance, the buyer or real estate investor sells the real estate property, some of the proceeds will be used to pay the principal amount the buyer owes to the seller.

BRRRR Method

The BRRRR (Buy, Rehab, Rent, Refinance, and Repeat) method is used by successful real estate investors and flippers who want a steady stream of income out of flipping properties. 

As suggested by its name, this entails buying a real estate property at a discounted price, making repairs to increase its real estate market value, renting it out, selling it through refinancing, and using the profit from the sale to purchase another real estate property again. 

How to Find Creative Finance Deals

How to Find Creative Finance Deals

When you start your search for homeowners who are willing to enter creative finance deals to avoid a bank loan, you'll probably face a few roadblocks because not many are aware about other unconventional financing options. They won't come looking for you unless you are well-known for making creative finance real estate deals.

What this means is that you really have to put in the work if you want to find home sellers who will be willing to sell their homes to you. Your best options would be houses in pre-foreclosure, houses with low equity, absentee owners, vacant properties, and expired listings in the MLS.

Thankfully, these leads can be bought through pay-per-lead platforms like Property Leads. There are also other property data providers that you can subscribe to if you want an unlimited amount of leads.

Of course, before making any offers, ensure that you fully understand the creative financing deals you are offering the seller to avoid any problems in the long run.

Related Questions

How to Buy a House Without Taking Out a Loan

If you want to buy a house without taking out a loan or traditional mortgages, you have four major options. The first, and ultimately the most common, is to pay in cash if you have enough money. Meanwhile, if your credit score is low, you may want to opt for unconventional loans from private money lenders. 

Your third option would be seller financing, which means the monthly mortgage payments are paid to the seller and not on the bank. Finally, you may also agree with a rent-to-own arrangement. This means, you are renting their property and paying monthly rent payments monthly in order to buy it from the owner.

Can You Buy a House with Bad Credit?

Although it is challenging to purchase property with bad credit (ex. an owner with a credit score that is lower than 500) in the real estate market, you still have a few options aside from traditional financing. This may include FHA loan or Federal Housing Administration Loan, USDA loans, VA loans, and other creative financing methods from a private lender. 

If you still can't get a mortgage from these options, consider increasing your credit score first. You can do this by paying for deletions, adding new accounts, finding a co-signer, and staying away from hard credit loans. 

Summary: Creative Financing For Investors (What is Creative Financing?)

Creative financing is the lifeline of many real estate investors who don't have enough capital to buy a house in cash or have a bad credit score. Through different creative financing options, it is possible to spend less money outright and still get a decent property.

All the creative financing options we listed in this blog can be maximized to purchase a property. However, you should exhibit due diligence to avoid sketchy deals. 

Once you are done securing a creative financing provider, check us out at Property Leads to get your first investment deal. We offer the most motivated leads in the industry and we sell them exclusively to lessen your competitors.

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