All About Creative Finance
Finance is a widely used concept in business that deals with the decision making for wealth. It differs from accounting in that accounting deals with the book keeping and recording of financial activities. Finance deals more with more logic & vision for making financial decisions which result in financial activity.
Creative finance basically deals with financial decision making, which differ from conventional decision making. There are certain techniques that are being practiced by businessmen under the umbrella of creative financing. The basic goal of creative financing is to just finance the property. The financing of property through creative financing means you never have to step into a bank for its purchase.
One of the major things to ponder with regards to creative financing is the fact that the purchaser uses money which does not really belong to him. This technique is also known as leveraging and has its benefits for real estate investors. By not having to use their own money, the real estate investors are able to purchase several properties at the same time. This increases their profits without having to include hardly any of their own money.
A mortgage is a loan that is backed by an asset. This means that the purchaser does not use his own money. Instead he borrows money to buy a real estate property. The security of the lender’s money is backed by the asset. This is common in conventional & private lending practices and is used to balance things in case of bankruptcy of any sort. Should that be the case, the lender is paid back in full with money gotten from the sale of the asset. Such lending that is made by private money lender’s, is called a private mortgage. Traditional lenders, financial institutions and government institutions are not supposed to finance this type of property purchase. The risk involved in financing a property is directly related to the amount of equity the property possesses. There is typically higher risk involved with the lender in case of private mortgage in creative finance, so the rate of interest can be higher than a typical conventional loan.
Hard Money Loans
Hard money loans are identical to private mortgages, but the difference lies with the lenders. The lender in this case is a small business or financial institution. Hard money leanders loan money to a purchaser to buy property. The interest rates in hard money loans are even higher than private mortgages. This is so because the hard money lender also keeps his margin of 3% or so in the lending and borrowing as his profit. Hard money loans have a lot of attraction for the borrowers who do not enjoy a very healthy credit score. Real estate investors who are either bankrupted or have a bad credit history do not qualify to borrow from the traditional lenders like banks. Many investors that fit into these categories use hard money loans to acquire and flip property. The bad side to these types of loans is that they are short term financing. That means you have to sell the property within 6 months or risk getting the property taken back by the lender. Also, hard money lenders charge origination points, what this means is; often 5-8% of your loan (5-8 points) is charged to your purchase price as soon as you close on the deal. If you haven’t fixed and sold after 6 months, you once again accrue another 5-8% origination for a second 6 month term. There is a reason why hard money is called hard money. Maybe it should be called stressful money instead?
Unlike the traditional methods of borrowing and lending money, creative finance is the best way to borrow money and use it to buy real estate property. This is beneficial for the real estate investors who do not want to involve their own money in the purchase of property. Given the fact that you can obtain creative financing with little or no money down and never set foot into a bank again, it’s truly the BEST way to stretch your investing dollar! Creative financing eliminates such hassles as closing costs, costly down payments, jumping through hoops for lenders, AND speeds-up the time it takes to purchase and flip real estate. Since there are no 30-60 day closing dates, investors can acquire far more properties using creative financing than can by involving convention lenders and their slow, cumbersome, expensive practices. Creative financing is also the last borrowing resort for investors that have less than perfect credit.
I know, I was able to create a massive multi-million dollar real estate portfolio starting with less than perfect credit. To learn more about how you can build massive wealth and create a portfolio you can be proud of using creative financing, join me now at my website. To get over 100 free real estate investor training videos, register at my site; www.robertwoodruffinvesting.com