About This Episode
Episode #263 – Interest rates on mortgage have SKYROCKETED🚀and it’s changed the game for real estate investors. This video teaches you how to adapt quickly so that you can profit while others are still complaining. Learn five different creative financing strategies that allow you to still make deals happen in today’s market.
Interest rates on mortgages have skyrocketed to levels we haven’t seen in a long time. And this has definitely changed the game for us as real estate investors. On the plus side, the market has slowed down and there are a lot more opportunities to buy good deals as a real estate investor. But on the negative side, those same high interest rates have made it much more difficult to make positive cash flow on a property. So I want to help you solve this problem.
And instead of being one of the investors who’s complaining about interest rates and sitting on the sidelines, I want to give you some tools and techniques that can help you move and change and adapt with the times so you can take advantage of the opportunities. And the key here is something called creative financing.
So in this video, I’m going to share five different creative financing techniques that I’ve used in my own real estate investing business over the last 20 years that you can implement today to still buy investment properties and still make them make sense even with higher interest rates. The first creative financing technique I want to share is something called private money. So typically you go to the bank or you go to a lender and you get a traditional mortgage. But there’s a whole universe of private lenders. These are individuals who either have enough money to sitting in the bank or maybe they have something called a selfdirected retirement account where they can direct that money and they can loan it to you to make interest.
Now, why can this help you as an investor in a high interest rate market? Well, the benefit is that it’s very flexible and everything is negotiable when you’re sitting there talking to an individual. When you go to a bank, they say, here’s our interest rate, take it or leave it. This is what it is. Whereas an individual might have different goals, they might have different criteria.
And what you’ll find with many of them is that money sitting in the bank making a very low interest rate. It’s a little bit higher today with CDs. Or they might have the money in the stock market and they don’t want to have all their money in the stock market. Going through the ups and downs of the stock market, you can often get a reasonable interest rate that makes sense. Now, let me show you an example of how that could work.
So let’s say you’re out there hunting for deals and because there’s better buying opportunities. Now, you find a property that has a full value of $240,000, but you get a really good deal and buy it for $200,000. And let’s say that if you rented that property out, you could get about one $600 per month. After paying all of your operating expenses, taxes, insurance management, maintenance, those kinds of things, you have about $1,000 per month leftover. So remember our example earlier.
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If you were to get a $160,000 loan. So you put 20% down after buying it for $200,000 and you did a 7% interest rate for 30 years. That is about 1065 per month. So you have a negative cash flow if you just went to the traditional lender. Let’s say you talk to a private lender who had $160,000 they’re willing to loan and let’s say you negotiated a 6% interest rate but you also negotiated an interest only payment to your private lender.
The payment on that would be $800 per month. So you’re just paying the interest on the mortgage, but you have a $200 per month cash flow to get you a little bit of breathing room. And as you probably know watching this channel, I’m a fan of eventually paying properties off. So yes, you pay interest only. You never pay that loan off, but you could save that cash flow for a period of time and maybe do a debt snowball and pay off one of your properties at a time.
You could also sell this property later on. The main point is you’re able to buy the property, make it a reasonable cash flow for now. Your private lender, if they’re happy with 6% interest rate, which many of the lenders I views have been, because maybe they’re retired and they just need to live off that money. Maybe they’re not investors like you who go out and find good deals. The 6% is a reasonable interest rate for them.
There’s a lot of reasons people might do that. Don’t just put yourself in your head and say I wouldn’t do that. There are other investors who would. And that is the key is finding private lenders who could then loan you the money and then negotiate the interest rate plus the terms of that interest rate like the payment, so that you can have a positive cash flow. If you’d like to go into more depth about the mechanics of how a private money loan actually works, check out the link above.
I have a video where I go into much more detail about different forms of using private money and how the details of an actual loan works. The second creative financing technique that can help you in a high interest rate environment is using a partner. So let a partner either put up the money and also maybe use their credit to help you buy a deal. Now why would that help you? Remember in example number one, the creative financing technique number one, you had a private lender loan you all of the money.
But let’s say you don’t have somebody who can loan you 100% of the money. But maybe you have a friend or somebody who wants to get into real estate investing you’ve met. They don’t have the time to go out and find the deals like you do, but they do have some cash and maybe they have good credit and they’re willing to to be a passive investor with you, they’re kind of willing to go along for the ride. How can you structure a deal that can make sense? So there’s lots of different ways to structure it.
But I want to show one specific example of how you could use their money and maybe their credit to do a deal that you might not be able to do otherwise. So let’s go back to our prior example where we found that $240,000 house. We found it for $200,000. And typically we might put a 20% down payment, gets $160,000 loan that’s no longer working because it’s 7% interest. We have a negative cash flow.
So what could we do? We could go to that private lender and maybe they have a larger down payment than we do. Or maybe we’ll let them put all the down payment. And let’s say that they could put an $80,000 down payment. They have that money set aside and can get a $120,000 a loan.
So it’s 7% interest. This is still we’re going to a traditional lender to do that. Maybe our partner does that. They could get that 7% 30 year loan and the payment would be around $800 per month. So using our prior numbers, remember that $240,000 property rents for one $600.
And after all the expenses are taken out, we have about $1,000 per month leftover. So by using a money partner with a larger down payment, we’ve reduced the amount of money we’ve borrowed. And even with that higher interest rate, our mortgage payment is a lot lower. Now you might be thinking and correctly thinking that, yeah, you put more money down, but now you’re making a small amount of cash flow on a much larger down payment. But the point of this deal might be that you found a deal in a good location, you bought it below value.
And maybe your goal between the two partners is to hold this deal until it doubles in value. Now when is it going to double in value? It’s going to depend on how much the market grows in the future. There’s no way to predict the future, but maybe that takes ten years, maybe it takes 15 years. And so the two of you would find a way to split the profits on that deal.
You split the cash flow today, maybe you manage the property and they put up the money. And so you split it 50 50. And then you split the proceeds of the resale and also all the loan reduction that happens on that property down the road. So it could be a way to share in the profits to still get a deal done safely. And if later on, five years from now, let’s say interest rates have lowered, you could also refinance that mortgage to get a lower interest rate and increase your cash flow.
So all of this though, the key is using a money partner. And there’s a lot more to say about this money credit partner relationship and actually have another video I’ve done in the past showing the details of how you can use lease options and other structures to make this credit partner money partnership work. So check out the link above and also in the video description for more details on how that partnership works.
The third creative financing technique that can help you in a high interest rate environment is buying a property with owner financing, also known as seller financing. So typically you go to a third party, either a bank or a traditional lender, or as we talked about, a private money lender. But did you know that you can also negotiate with the owner of the property and ask them to essentially be your bank? And the way that works is you would make, for example, a down payment to the seller at closing and then the balance of whatever you owed on the rest of the purchase price. They would accept that in monthly payments.
Typically, just like you would with a bank. You pay them principal and interest and you negotiate all the terms, the interest rate, the payments and all of that. But over time that owner financing is paid off just like you would pay off a debt to the bank. You might be thinking that’s just an anomaly. No one would ever do that.
No one owns a property free and clear. So they could actually finance the property to you and you’d actually be wrong about that. Yet not every seller is going to own or finance the property to you. But it’s been my experience if you look in the right places with the right type of sellers, there are plenty of opportunities out there and typically in markets that are in fluctuation where things are changing very quickly. That’s your best opportunity to find owner financing.
If you want to find more details of how it works, the mechanics of it, how to find deals, how to negotiate them, I have a video on that called how to Buy Properties with Owner Financing. You can check that out. There’ll be a link above and also in the video description below. But I should just give you a real brief example of how that could work. So let’s go back to the same example we’ve been using before.
You find a property that’s worth $240,000. In this case, let’s say you’re able to negotiate a purchase price of $220,000, but because it’s seller financing, you offer to make a $40,000 down payment to the seller. And so you would still owe them $180,000. But instead of going out and getting a loan, you ask them to finance that balance. And let’s say in this case you asked for a 3.4% interest rate, which means over a 30 year period you’d be paying them about $800 per month.
So similar payments, I’m using the same payments as we use in other examples just to show you different ways to accomplish the same goal. But the point here is, if you really like this property, it’s a quality location, it’s a good longterm investment. You’re able to get a little bit of a discount and now you’re able to make a little bit of a positive cash flow a couple of month. You’re now in a good position to hold this property through over the long run. I’m a buy and hold investor.
Good things happen in good locations. You can just afford to hold on. And the financing is the key to being able to hold on. And with seller financing over a longer period of time, it can allow you to hold through those storms and benefit from the growth of that property over the long run. The fourth creative financing technique that will help you in a high interest rate environment is something called master leasing.
It’s also known as subleasing. This is a close cousin of the prior technique of seller financing because we’re not going to go buy the property and get a third party loan either from a private lender or from a bank. Instead we’re going to work with the seller. But instead of getting seller financing and buying the property, we’re actually just going to rent the property in this case. Now, why would we want to rent the property?
We want to rent it because we’re going to try to make a profit, a cash flow between what we rent the property from what we pay the seller and what we can get from a tenant. So we’re going to rent the property with permission, with the right to sub lease it to somebody else who’s going to live in the property. Let me show you an example just to try to make this a real concept. The exact same property we’ve been looking at, the $240,000 house. Let’s say you’re able to negotiate with the owner to get a $1,200 rent payment.
Now why would the owner do that? They might do that because you agree to pay all of the ordinary maintenance on the property, like the turnover, the painting, any little small kind of toilet repairs, things like that. You’re going to handle that as part of your deal. But maybe they handle all the big stuff, like if the roof needs to be replaced, if there’s a heating and air needs to be replaced, there’s a lot of ways to negotiate that. But the point is you’re going to handle the ordinary, everyday maintenance.
You’re also going to handle any vacancies. So if the property is empty, you’re going to keep making them that $200 payment no matter what. And the reason you’re doing that, the benefit for you is that if you can rent it for one $600 per month, that’s 1600 minus 1200, that’s $400 that you have to pay for the maintenance. But also to earn a profit. Maybe you make a two or $300 profit per month with very little of your money upfront and without having to go get leverage and borrow money and get the 7% interest rates and all that.
So that’s one way just to make the cash flow. But you can make this deal even better by also negotiating an option to buy the property. So let’s say this is a good location and you think it has a good chance of going up in the next four or five years, going up in price. So maybe you can negotiate an option to buy the property. So in addition to the lease, you can also negotiate an option.
Maybe you have to give a deposit up front, maybe a $5,000, a $3,000 or $10,000 option deposit. That’s all negotiable with the seller and they give you the right to buy that property for $240,000 for the next five years. So you’ve essentially got a contract where they have to sell it to you and you have the option to buy it. If you want to walk away from your $5,000, if the property went down in value, you could do that. This is called an option contract.
There’s nothing new about this. These have been around for a long time, they’ve been used in stocks all the time, but you can also use them in real estate. And so the way this master lease and option works is to allow you to buy a property to negotiate a payment that still makes sense even in a higher interest rate environment. And then down the road five years from now, maybe you refinance it, maybe you go out and get a loan to buy the property if you want to keep it and own it as a longterm rental. Just like the other creative financing techniques.
I’ve got another video that goes into more depth about master lease options and how to buy properties and how to negotiate those. So check out the link above in the video description below as well if you want to go into more depth about that. And it’s an older video, so bear with me. It’s a little bad on the quality, but hopefully the content is pretty good. The fifth and final creative financing technique that can help you in a high interest rate environment is something called buying subject to the mortgage.
Now this technique is very similar. It’s a close cousin of seller financing. But you remember how we talked about in the seller financing example that that owner had paid the property off, that they owned it free and clear of any debt. So that gave them a lot of flexibility to do any kind of owner financing they want. But think about all of the people out there who are in situations where maybe they still have a mortgage on the property, but they might want to sell it to you and they’re willing to do something more creative with it.
That’s where a buying subject to the mortgage might come in. So let me explain just in simple terms what it is, but also give you an example. So buying subject to the mortgage means you go to a closing. You actually buy the property. You, as the investor, get the deed to the property.
But instead of paying the mortgage off the owner’s mortgage, you leave that mortgage in place. That’s where buying it subject to the mortgage comes in. That’s the name of it. And you start making payments on their existing mortgage. Let me give you an example of how that could work.
So let’s say that the same exact example we’ve been looking at. A $240,000 house. Let’s say an owner had a situation, a life situation came up. Maybe it’s a divorce, maybe it’s a change of jobs or a loss of jobs. Maybe it’s a health issue.
But the point is they got behind on their mortgage payment and they owed $160,000 on this $240,000 house. So they’re in the situation where they want to move pretty quickly. They don’t want to let this thing go into foreclosure. But they also, and they don’t want to lose their equity that they’ve built up in the house. They paid down the loan.
The house has gone up in value since they bought it. And this $160,000 loan has a 4% interest rate. So remember the very beginning I mentioned that you can’t get those today, but their interest rate is 4% and the payment is $765 per month, principal and interest. So how might you structure that? You might talk to them and negotiate, let’s say, a purchase price of $200,000 total to buy the property.
But out of that $260,000 would be taking over payments on their mortgage. So you’re going to buy it and start making payments on it. But then there’s still some other equity there, right? And maybe they have $5,000 in back payments. So 5000 of your 200,000 is making that back payments to them.
You give them cash at closing so they can use that to make their back payments. And then the balance of that 35,000 they could take back as a seller financing mortgage. So you owe that to them at some point in the future. In this example, just so we can make a cash flow, you have $765 payment on the mortgage that you’re taking over payments on. And then let’s just say you negotiate no payments, no interest on that $35,000.
They might be willing to do that just to make sure they don’t lose that 35,000. You’re willing to pay it back seven years from now, or maybe ten years from now, or once you sell the property, you have to pay them back that money. So it’s just a way to secure that equity. They get the payments made to sell the property to you. There’s a couple of things I want to mention here.
The positive for you is that you’ve been able to control this good property where 240,000 and a good location without a lot of your money for $5,000 upfront and without having to go to the bank and get a loan and you’re able to use a 4% mortgage. So that’s the positive. That’s why you’re able to do it. That’s why and the seller is willing to do it to save the property from going to foreclosure, to save some of their equity. So all of that is we’ve talked about.
There’s something to know though, the disclaimer on a subject to deal, the reason this isn’t done every day there’s a due on sale clause in almost every single mortgage out there on the market. And what that means is that clause in the mortgage says if you were to sell the property without paying it off, which we’re doing in this case, then the lender, the bank could call the loan due. Meaning they could tell you, hey, you’ve got to pay this entire mortgage off. They could ask you to do that. Now, do they always do that?
Do they have to do it? No. So investors for many years have been buying properties, taking over the payments and just saying, hey, if the bank calls a loan due, we’ll deal with that. And in most cases they haven’t. So the disclaimer is that’s the risk of doing a deal like this and you’ll see a lot of subject to videos out there, it’s a technique that I think has merit, but you’ll see a lot of people kind of being sneaky with us.
Let’s hide the fact. Let’s put it in a trust, put it in some kind of weird vehicle so that the bank will never know about it, so nobody knows about it. You should do the opposite of that if you want to do a subject to deal, if it’s good enough to do and you heard these numbers, then you should be upfront with everyone, including the bank, letting them know you’re buying the property. And the seller is aware of this, they’re aware of their risk, everybody is being transparent about it. And then you still do the deal knowing they could call the loan due and you’d have to deal with that if they do call the loan due.
So there’s a lot more to that. There’s a lot more to subject to deals. I have a link to another video where I go into details about that exact situation and how maybe to structure a subject to deal. Check that out. It’s another old video but a goodie but if you can learn to use techniques like buying subject to the mortgage, there are a lot of opportunities to buy properties like this in today’s market.
So as real estate investors, we have to be honest with ourselves and we have to acknowledge the reality that markets change, things change all the time and today interest rates have gone up, has made it more challenging to make cash flow and to make deals work. That worked six months ago. But I hope these five creative financing techniques will be like a toolbox for you to help you go out there confidently and put deals together when other investors are still complaining and wondering, how am I going to do this? You’re going to have some tools that can now work. And another thing you want to do today, even with interest rates going up, is to really sharpen your tools on how to analyze deals, how to run the numbers, how to make sure the numbers and the cash flow really work.
And in my next video, I go through a case study, a real property where I go step by step through how I analyze a deal every single step, whether using creative financing, traditional financing. Check this out. This is a real duplex in my market. And I go through and explain it all to you. You can get a link to that above, somewhere above me here and also in the video description below.
If this is your first time watching the channel, my name is Chad Carson. You can also call me Coach. I hope you stick around and watch more videos. This is a channel all about helping you get out financial grind so you can do more of what matters. See in the next video.
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