The 2018 US housing market has been labeled as a seller’s market. Real estate investors considering buying an investment property are faced with high mortgage rates and few options in rental properties. Competition is high as well as income property prices. Now is the time for real estate investors to look for an alternative way of buying an investment property: creative real estate investing.
Real estate investors often make the mistake of overlooking creative real estate investing strategies. This is most likely because most real estate investors are simply unaware of the existence of these strategies and their advantages.
So, What Is Creative Real Estate Investing Anyway?
In any business, you’re often told to think outside the box or get creative. For some reason, this isn’t said often enough in the world of real estate investing. Real estate investors who do heed this advice, however, are the ones who are taking advantage of creative real estate investing. The easiest way to understand creative real estate investing is to understand what traditional real estate investing consists of.
Most property investors are familiar with traditional real estate investing, even if they don’t call it that. While the characteristics of traditional real estate investing are many, there are two things that make up its foundation:
- Financing income producing assets with a conventional bank mortgage
- Finding and buying an investment property using a real estate agent, MLS, house auctions, wholesaling, etc.
Basically, everything real estate investors would read in a “how to invest in real estate” guide. Creative real estate investing is essentially the opposite of this. It’s finding alternative ways of locating, financing, and buying an investment property. Creative real estate investors rarely turn to a bank for financing income producing assets nor do they enlist the help of real estate agents to find an income property or other traditional sources.
How is creative real estate investing achieved? Well, there are three real estate investment strategies that we will discuss in this guide.
But first, let’s take a look at the advantages and disadvantages of each type of real estate investing.
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Traditional vs. Creative Real Estate Investing
Both traditional and creative real estate investing have unique requirements for getting started. How difficult or easy it is to meet them depends on the property investor. For traditional real estate investing, property investors need a significant amount of cash for a 20-30% down payment.
Creative real estate investing, on the other hand, requires knowledge, a bit of experience, and even some form of a real estate network (unless real estate investors get even more creative for finding income producing assets in the real estate market).
Opportunities in the Real Estate Market
Because creative real estate investing relies heavily on finding “motivated sellers”, real estate investors can use this strategy whatever the state of the market. These sellers can’t make monthly mortgage payments, are close to foreclosure, or are desperate to sell the income property for one reason or another. Traditional real estate investment opportunities are aplenty when a real estate market is experiencing an upswing and are harder to come by in a downturn. This is not the case with creative real estate investing.
Return on Investment
Buying an investment property with creative real estate investing typically means paying the real estate market value or higher. This can automatically lower the return on investment. With traditional real estate investing, a real estate investor buying an investment property has more negotiating power (i.e., cash in hand). Rental properties bought in this way can usually be taken for lower than the real estate market value for a better return on investment.
This doesn’t mean creative real estate investors are wasting their time, all for a bad return on investment. The reality is they are using smaller amounts of cash to get a pretty good return on investment that they otherwise couldn’t get.
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Level of Difficulty
Creative real estate investing is, of course, more difficult to carry out. There’s no set “formula” for finding and buying an investment property with this strategy. With traditional real estate investing, a real estate agent can do all of the work and guide real estate investors about offers and such. Real estate investors can even learn how to go about buying an investment property traditionally without too much effort, unlike creative real estate investing. Still, creative real estate investing is only difficult in comparison, but it can be learned.
The competition in creative real estate investing is low in the real estate market. Most real estate investors either don’t know about it or would rather save up money for a real estate investment than learn about creative real estate investing.
Because the competition in traditional real estate investing is so high, creative real estate investors can use this to their advantage. Once they finish buying an investment property using creative real estate investment strategies, real estate investors can sell the income producing assets traditionally in the real estate market.
Which One Is Better?
Individual property investors must decide for themselves, based on their real estate investment strategies and goals. Both have their benefits, but if you are looking for ways to get into real estate investing with little to no money, creative real estate investing is the way.
Three Creative Real Estate Investing Strategies
While there are many different creative real estate investing strategies, some that real estate investors create on their own from special circumstances in the real estate market, here are three tried and true creative real estate investing strategies.
Owner financing is an option real estate investors have when buying an investment property. The motivated seller of the income property agrees to provide the financing to the buyer. The buyer receives a kind of credit (rather than cash like with a bank loan) and pays monthly mortgage payments on the income property.
A promissory note lays out all the conditions of the agreement. The amortization schedule is usually shorter than a conventional bank loan (3-5 years) and often there is a balloon payment at the end.
Besides not worrying about credit score or being approved for financing for an income property, there are a few other benefits to this creative real estate investing strategy: close on a house much faster, avoid closing costs, and oftentimes real estate investors can even negotiate a lower down payment.
Rent to Own Homes
Rent to own homes are a kind of income property that real estate investors can purchase with what is called a lease option, or a lease-to-own agreement. A real estate investor interested in buying an investment property rents the property for a certain time (usually 1-3 years). When the lease is up, the income property investor has the option to buy the house.
Instead of a 20% down payment on a mortgage loan, real estate investors can pay what is called an option fee (option money) for rent to own homes. This is usually 2.5-7% of the price of rent to own homes, much more affordable than a typical down payment.
In addition to the option fee, the two parties involved in the transactions of rent to own homes agree on a rent credit. A certain percentage of the rent paid each month goes towards the price of the income property, similar to monthly mortgage payments.
When the lease option is up, the real estate investor can buy the investment property. If he/she changes his/her mind, the income property investor forfeits the option fee and rent credit.
“Subject to” Existing Mortgage
When buying an investment property using “subject to” existing mortgage, an income property investor takes ownership of the deed. While the mortgage stays in the name of the motivated seller, the income property investor takes full responsibility for paying the monthly mortgage. Because the seller is still liable for the mortgage, he/she may be hesitant. However, the real estate investor stands to lose the income property and any equity, solidifying the buyer’s motivation to make the mortgage payments.
While some real estate investors think buying income producing assets in real estate with “subject to” is illegal, it’s not. As long as payments are made to the bank in a timely manner, the lender won’t care to get involved in the transaction.
Creative real estate investing is a way for real estate investors who can’t get approval for mortgage loans or don’t have a lot of money for a down payment to still go about buying an investment property. Many real estate investors start with creative real estate investing in their careers and move on to traditional real estate. Others fall in love with this path and stick to it, even when they can afford traditional real estate investing. In a seller’s market, creative real estate investing strategies might be the best way to find a real estate investment. Whatever the case, be sure that creative real estate investing can be just as rewarding as the traditional route.
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