Creative Financing

A lack of money is no reason to put off building substantial wealth via property.

You can easily create a nothing down deal when you harness the power of “OPM”, which is an acronym for Other People’s Money.

Most property investors already use OPM in the form of bank finance for the bulk of their property purchase.

However OPM can also be used for the deposit and closing costs too. Here are five creative financing strategies that you can use to buy property and create a low / no money down deal.

1. Redraw from Existing Equity

If you have equity in your own home or another investment property then you can borrow against this to fund the purchase of other investment properties.

You can increase your equity in two ways: either through capital appreciation and / or by paying off your mortgage.

The bottom line with this strategy, is that you don’t physically need money in the bank to fund further acquisitions, only an ability to access any equity that’s silently accumulating in the background.

2. Money Partners

Just because you don’t have money doesn’t mean that everyone else is short of funds too. If the deal is good enough then you might be able to attract money partners who will share the risks and rewards of the venture.

You might be surprised to learn that there are a lot of time-poor money-rich investors who are eagerly awaiting someone with enough time to find a deal and then put it together.

When finding money partners, start with friends and associates who are professionals. The name of the game is referrals, so even if they aren’t interested, seek recommendations of names of other people who may be.

Your success in terms of finding and negotiating money partners will increase if you can show evidence that you already have profitable deals under your belt.

A word of caution though, when using this creative financing idea…be mindful of the Australian Securities and Investment Commission laws relating to public offers, as well as State by State real estate agent licensing rules.

3. Vendor Finance / Second Mortgage

You can always ask the vendor to leave some money in the deal if you anticipate coming up short of the funds required.

This might be in the form of carrying a second mortgage, or maybe the vendor is happy to wrap the property to you.

The terms that you offer / accept are always flexible, but the real secret to make this creative financing idea work – is to work towards a win-win outcome.

You’d be surprised, especially in commercial deals, just how common vendor terms and second mortgages are.

All you can do is ask!

4. Long Settlements

If the market that you’re buying in is experiencing rapid growth, then an effective creative financing strategy is a long-settlement period with a view to refinancing before taking possession.

For example, let’s imagine that you purchased a property for $250,000 on the basis of a 90% lend. You don’t have the $25,000 + closing costs needed, so you negotiate settlement terms of nine months on a $5,000 deposit.

During that time the property increases in value to $300,000. The bank revalues the property and gives the green light to lend on the higher (current market) value.

You can access the equity of $45,000 (90% of $50,000), which pays for your deposit of $30,000 plus closing costs too.

Be careful though… the key here is to get the lender to finance you based on the higher property value. Most lenders require at least six months to have elapsed before they’ll look to do this.

5. Improve and refinance

A similar creative financing strategy is to gain early access, renovate and then revalue.

Renovation here doesn’t necessarily mean a full blown, knock down walls and add a second level job. Often minor updates and cosmetic alterations will suffice.

For example, let’s say you bought the same property as outlined in 4 above. Also included in your purchase terms was a clause saying that you had the right to early access to complete renovations.

You then carry out renovation works during this settlement period (without paying any interest since you don’t yet own the property) and then, when the job is completed, get the lender to value the property on the post-renovation status.

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.