Coach Carson

  • About
    • About Coach
    • Start Here
    • Contact
    • Charitable Mission of Coach Carson
  • Learn
    • Archive
    • Getting Started
    • Rentals & Landlording
    • Financial Independence & Early Retirement
    • Do More Deals
    • Investor Profiles
    • Entrepreneurship & Business
    • Personal Productivity & Growth
    • Travel & Life
  • Listen
  • Courses
  • Top Tools
    • Cash Back Reward Cards
  • Free Toolkit

My Creative Financing Toolbox
(And Why You Need It Too)

By Chad Carson 4 Comments Filed Under: Financing & Loans

0shares

In my last article, I gave 6 Reasons I Prefer Creative Financing to Bank Financing.  

Bank financing isn’t bad, of course.  There are many times when it’s very appropriate.

My main problem with bank financing is that it can be limiting when depended upon too much. Instead, I like to have a large, flexible, creative toolbox of many ways to finance both my purchases and my sales.

What is my creative financing toolbox? Let me unpack it for you.

CREATIVE TOOLBOX FOR SELLING REAL ESTATE

Here are just a few of the creative financing tools I keep handy to sell properties faster and for higher prices:

1. Lease Options

This is a great tool to help tenants become homeowners. Basically, you lease the property to a tenant while also giving them a right to buy it within a certain period of time.  This allows the tenant time to control a property’s price while working on their loan qualifications (credit, down payment, income, etc).

A lease option is beneficial to you as a seller because you often get top price without expensive commissions. You also fill up your property quickly and receive rent while waiting on your buyer to qualify for a loan.  This is financially much more pleasant than the normal process of sitting on a vacant house and paying interest, taxes, insurance, and utilities for months until you find a buyer.

There is a risk that some tenant-buyers may not qualify or may choose not to buy the house, but heavily prescreening prospects and requiring large option deposits can reduce this risk significantly.

Rental Property Analysis

A course by Coach Carson that teaches you how to run the numbers so that you can confidently analyze and buy profitable rental properties. It also includes Coach’s rental analysis spreadsheet.

Get the Course

2. Seller Carry-Back Financing – 1st Mortgage

If you want to create passive, profitable income streams, selling and carrying back the financing is a great tool.

This tool just means that you become the bank for your buyer.  Usually the buyer pays 10-20% down, they get the deed, and you “carry-back” the remaining purchase price as a promissory note and mortgage (or deed of trust).

As “the bank” you receive interest on your outstanding principal.  The rates are usually higher than conventional bank loans, so your returns can be very attractive.

This tool is especially beneficial for retiring landlords who want to transition out of the rental business without losing the income.  For landlords with big profits (capital gains), seller carry-back financing also lets them defer and save on taxes using the installment sale method.

Once you own these seller-financing notes, you can also use them as currency for trades and you can raise cash by selling part or all of your note to other investors.

3. Seller Carry-Back Financing – 2nd Mortgage

This tool is like #2, except that the buyer gets a bank mortgage for 70-80% of the purchase price and you as the seller carry-back a 2nd mortgage for the balance.

This process is often done in commercial real estate transactions, but it can also be very beneficial when selling residential real estate.  It opens up a much larger pool of buyers who have good credit but small down payments.

A friend of mine once developed 25 lots, built houses, and then sold-out the entire subdivision using this method.  He advertised “Brand New Houses – 100% Financing.”  His phone rang off the hook.

The buyers were prescreened for good credit through a local bank where my friend had a good relationship. If their credit was approved, the bank financed 80% and my friend financed 20%.  The cash from the bank loan was more than enough to get all of my friend’s invested capital back, so these 2nd mortgages were all profit.

My friend usually kept his interest rate low or even let it accrue to keep payments affordable.  After five years, the house owners began refinancing or selling the houses.  My friend got paid off and received periodic big chunks of cash for years.

4. Contract-for-Deed (aka Bond for Title or Land Contract)

This tool is very similar to #2, seller carry-back financing.  The main difference is that the deed (title) to the property is not transferred until the buyer has paid all principal and interest payments.

The benefits of selling with this tool vs seller carry-back financing vary from state to state, so as always you should consult with a local attorney.

I have used a contract-for-deed to sell many properties in my state of South Carolina.  My primary reason for using a Contract-for-Deed was that it preserved the integrity of the title when compared to seller carry-back financing.

This benefit only matters if the buyer goes into default and I want to give them cash-for-keys to get the property back. Because the legal title is still in my name, any judgements or liens in their name would not attach to the property.  So they could just cancel their contract and deed their interest back to me without a problem.

If, instead, I had a carry-back mortgage, I could not do cash-for-keys because of the other liens. I would have to foreclose to clean up the title, and this could take months and thousands of dollars in attorneys fees.

5.  Wrap-around Mortgages (aka All-Inclusive Trust Deeds)

Have you noticed that banks and insurance companies have the most expensive buildings on busy corners in towns and cities across America.  It’s not a coincidence. They have made BIG profits for a long time.

Do you want to know their “secret” profit model?

     1. Leverage other people’s money (i.e. checking accounts, CDs, insurance premiums, etc)

     2. Lock in a low cost to use that money (interest)

     3. Invest that money at a higher return than the cost

Warren Buffett’s billions of dollars came in large part from this exact strategy (Forbes article explains Buffett’s secret to success).

Wrap-around mortgages are a creative financing tool that uses the same profit model employed by banks, insurance companies, and Buffett.

Essentially, you borrow on a mortgage at a low interest rate and then “wrap” this mortgage, i.e. keep it in place, while selling with carry-back financing at a higher interest rate.

Here’s an example for illustration:

  • I buy a house for $100,000, put $10,000 down, and get seller carry-back financing for $90,000 at 3% for 20 years at $500/month

  • I then sell for $100,000, get $10,000 down, and provide seller carry-back financing for $90,000 at 8% for 20 years at $753/month

  • The 3% mortgage stay in control in first position

  • My 8% mortgage is in second position and wraps the first mortgage.

    • A wrap second mortgage is different from a normal second because my buyer only owes $90,000 and not $90,000 + $90,000 = $180,000.  The terms of the first mortgage are wrapped into the terms of the second.

  • I (or a servicing company) collect $753/month, pay out $500/month, and keep $253/month as profit.

Using a wrap, I have basically built a $253/month profit out of thin air by leveraging the financing of my original seller.  This is analogous to the bank paying you 3% on a $90,000 CD and loaning someone else $90,000 at 8%.  We are both making money on a margin.

As always, there are caveats.

This is not a beginner strategy. Good paperwork, education, and cash reserves are key to successful wrap deals.

PURCHASING REAL ESTATE

I have just explained my favorite creative financing tools when selling properties.  But, some of those same tools and more can also be used when purchasing properties.

Here are 5 creative financing tools I pull out of the toolbox most for purchases.

  1. Seller carry-back financing

  2. Lease Options

  3. Self-directed IRA loans

  4. Credit partners

  5. Subject-to purchases

I don’t want this article to turn into a book, so instead I’ll unpack each of these purchase creative financing tools in much more detail in my next 5 articles. So stay tuned.

Thank you for letting me be your coach for a few minutes today. It’s a privilege.

Enthusiastically,

Chad signature - cursive

Get My Free Real Estate Investing Toolkit!

Enter your email address and click "Get Toolkit"

Success! Now check your email to confirm your subscription.

There was an error submitting your subscription. Please try again.

NO Spam. Unsubscribe anytime with 1 click. Powered by ConvertKit
0shares

Tagged With: creative financing, lease options, self-directed IRA, seller financing, wrap mortgage

Comments

  1. Michael Mitchem says

    March 18, 2014 at 4:54 pm

    Hello Chad
    I want to thank you for explaining the tools you use for financing your deals in plain English for years I have watched people make it seem like all this is a big mystery or secrete that only the greatest of GuRu’s are privileged to know. by explaining the facts you are removing the fear of which most new investors have about doing deals or approaching a seller
    As a coach I know feel you are doing a great job.

    Thank you
    Michael Mitchem P H P
    11 years investing

    Reply
    • Chad Carson says

      March 24, 2014 at 8:38 pm

      Michael, that’s a big compliment. Thank you! I agree that these concepts are made more complicated than they need be. I hope I can do my part to simplify them a little bit for others, so that like you said – some of the fear is removed so people can try these tools out.

      Reply

Trackbacks

  1. How to Create a Private "IRA-Bank" For Your Deals | Coach Carson | Real Estate, Money, & Life says:
    March 25, 2014 at 9:11 pm

    […] My Creative Financing Toolbox (And Why You Need It Too) […]

    Reply
  2. Lease Options - How to Profit Without Ownership | Coach Carson | Real Estate, Money, & Life says:
    April 2, 2014 at 10:25 am

    […] My Creative Financing Toolbox (And Why You Need It Too). […]

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Search box

Guide to Financial Independence


ABOUT COACH

Chad Coach Carson
About Me


How Can I Help You?


GET STARTED

RETIRE EARLY

DO MORE DEALS

TOOLS OF TRADE

HOUSE HACKING

LANDLORDING

FINANCING

BE YOUR BEST

Let’s Get Social!

  • Facebook
  • Instagram
  • LinkedIn
  • Pinterest
  • Twitter
  • YouTube

Products I Like

May contain affiliate links (Disclosure)

Use personal or business spending to earn cash back or travel rewards. Here are my favorite deals.


Online management software that I use. Useful when you scale your self-management to more properties.


 

Free software to track your net worth & portfolio in real time. Fun & intuitive to use.

Top Posts

  • The Best Real Estate Investing Strategy
  • How to Pick the Ideal Location For Investment Properties – a Comprehensive Guide
  • How to Run the Numbers For Rental Properties – Back-of-the-Envelope Analysis
  • The 35 Best Niches For Real Estate Investing (& How to Choose Yours)
  • Enroll in Free 7-Day Course – How to Get Started (or Restarted) With Real Estate Investing
  • The Baby Steps to Your First Rental, Flip, or Wholesale Property (6 Case Studies)

Top Resources

I have 85 recommended tools for you to become better as a real estate investor. My first priority is helping you, my reader, to learn and improve. These tools and resources helped me and I'm hopeful they will help you too.

Check out these tools and resources here: 85+ Recommended Tools & Resources For Real Estate Investors

Affiliate Disclosure

I recommend books, tools, and other resources from time to time using links within my articles. In some cases these links are affiliate links. This means that if you click through and purchase, my company will receive a commission on the sale. These commissions help pay the bills around here (and avoid the need for spammy ads). But keep in mind that I only recommend a product or service if I’ve used it and personally believe in it. And I’ll recommend something that’s good whether it has an affiliate link or not. My first priority is helping you, my reader, to learn and improve.

  • About
  • Learn
  • Listen
  • Courses
  • Top Tools
  • Free Toolkit

Contact·Copyright © 2021 · Disclaimer & Privacy·