Author: David Armenta
Date: 4-30-2023
Essentially, there needs to be enough equity in the property acquired to fuel the next one. One way is to acquire the property at a discount by negotiating or buying distressed property. However, it needs to be substantial, because lender has a Loan-To-Value (LTV) percentage to manage risk on the property, so keep that percentage in mind, because it'll determine how much cash can be refinanced out and applied towards the new acquisition. Additionally, you'll need reserves too, because now there are several loans that need to be serviced and the lender needs to determine your solvency. Rental income might not cut it.
If someone has purchased a property and does not have enough cash for a down payment on another property, they may consider alternative financing options such as taking out a loan or seeking out creative financing methods.
One creative financing method that can be used in real estate is known as "leveraging." This involves using the equity in a current property as collateral to obtain financing for another property. For example, an individual may take out a home equity loan or line of credit on their existing property to use as a down payment on a new property.
Another option is to partner with other investors or individuals to pool resources and funds for a down payment on a property.
Now, let's dive into the three financing options:
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Lease Options: A lease option, also known as a lease purchase, is a contract that allows a tenant to lease a property with the option to purchase it at a later date, usually within a specified time frame. The tenant pays an upfront fee or option fee, which is typically a percentage of the property's value, in exchange for the option to purchase the property. During the lease period, the tenant pays rent and may also pay an additional amount towards the purchase price. If the tenant decides to exercise the option to purchase, the option fee and any additional payments made towards the purchase price are applied towards the purchase price.
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Seller Carryback Financing: Seller carryback financing, also known as owner financing or seller financing, is a financing arrangement where the seller of a property provides financing to the buyer instead of the buyer obtaining a loan from a traditional lender. In this arrangement, the seller essentially becomes the lender and the buyer makes payments directly to the seller over a specified period of time. The terms of the financing, such as the interest rate and repayment schedule, are negotiated between the buyer and seller.
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Subject-To Transactions: A subject-to transaction is a type of seller financing where the buyer takes over the seller's existing mortgage payments without obtaining a new loan. The buyer essentially takes ownership of the property "subject to" the existing mortgage. In this arrangement, the seller retains the original mortgage and the buyer makes payments to the seller, who then uses the funds to pay the mortgage. The buyer takes over the property's title and assumes all responsibility for the property, but the original mortgage remains in the seller's name. This type of financing can be risky for the buyer if the seller defaults on the mortgage payments, as the property could potentially be foreclosed upon by the lender.
Overall, each of these financing methods provides a way for individuals to purchase real estate without relying solely on traditional lending sources. However, it is important to carefully consider the terms and potential risks of each method before entering into any type of financing agreement.
