When I bought my first property back in the 80’s you basically had to have about 20% down in cash and get a mortgage from the bank for the other 80%. Of coarse you could put more than 20$down if you had it but that was about the minimum banks and insurance companies would settle for.
Most people though couldn’t get the 20% down payment so lenders had to become a little more flexible over the years and so now things are quite different indeed.
Today, whether you’re going for your first home or looking at an investment property there are more creative options for buying real estate.
Flipping
If you’re strictly thinking investing for a quick profit, then the fastest method is a quick flip. This requires you hunting around for a great deal, buy it, get the contract and sell it immediately at fair market value. The profits will depend on how big of a discount you were able to get on it, but making $2,000 to $10,000 is doable in many markets.
Pre-construction
If you look at new developments such as planned communities and condos many builders will fund a loan for 5% of the total asking price. Here the deal isn’t in the price but in the financing.
Second mortgage
A more common method is to get yourself a second mortgage on your existing property. This way you can come up with 5% of a down payment and the bank lends you the other 15% using the equity on your property. This second mortgage will have a higher interest rate than your first.
Also keep in mind in this second mortgage case you need to buy private mortgage insurance since the 20% down payment was not all yours. This can be removed in the future when your second property goes up in value. This is called your loan-to-value ratio, meaning when you are at 80-20 again (you now would own 20% of the properties actual value because it’s market value increased over the last year or 2).
Subject-to
There’s many variations with a subject-to deal. In a typical one the seller deeds you the property leaving his existing mortgage in place, meaning you don’t legally assume the loan because it’s still in his name. Nevertheless, you are making payments and the property is in your name so this can work. He is covered too because if you default it’s not his house that will be foreclosed, it’s yours.
Limited partnership
Create more wealth for yourself by investing with someone else. Half of something is better than nothing, and for someone who may be struggling to get that first purchase a partnership may be the only way to get your foot in the door.
Government loan programs
There are various government loan programs the general public is not always aware about, but these are for low income families and military service people and are usually limited for families intending to use the property as their personal residence.
Credit
Secure a credit line from your bank. This is easy if you have built up some equity on your existing property. The interest rate on a credit line is usually much lower than a credit card.
It’s possible to buy a property with credit cards. The downside to this method is the substantially higher interest rates, lenders look at all outstanding debt when deciding to grant a loan on the remaining balance. Taking out a cash advance to cover a shortfall between the needed 5-20 percent down will usually get you turned down.
Family money
If you can get money from family members you will need to convince the bank that it’s a gift and not a loan, otherwise they view it as more debt, decreasing the amount they will qualify for you.
Interest only mortgage
A creative real estate investing mortgage idea that has become popular over the last few years is a interest only mortgage. There are some pro and cons with this one. Your payments are only covering the interest on the loan and nothing toward the principle. This can be great for short term situations.
By: John Ferreira