As you do more investing, you will want to master creative financing. Your ability to construct creative financial Terms might get you into deals you might not otherwise be able to do. In some markets, as I experienced in the late 1970s and again in the late 1980s, creative financing may be the only way to get transactions done. There comes a time when conventional and institutional financing can be overly expensive or not available. This situation may be caused by general economic conditions or your personal financial position. Once you have a number of properties, institutional lenders may place limits on what they will lend you as an investor. You may have to wait until you have the equity in or positive cash flow from your properties that they require in order to lend you more. Finally, sometimes sellers have specific situations that may require or allow creative financing. This presents a unique opportunity to construct a creative transaction that meets the seller’s goals and still works for you.

Creative financing also can help you get into properties with less of your own money used as a down payment and lower your monthly debt service. Thus, you will want to master such concepts as:

1)Owner financing—where the seller carries the mortgage for you,
2)Assumptions—taking responsibility for the seller’s mortgage when this is allowed by the seller’s   mortgage lender.
3)Wraps—where the owner offers you a new loan while keeping and paying down their original loan (the   new loan “wraps” the original).
4)Lease options—leasing the property from the seller until you have the equity or cash to buy it.
5)Private seconds—where you obtain a second loan lo cover your down payment on a primary mortgage   loan.
6)Syndications—where you involve other investors and partners in your acquisitions.

It is important you understand that a private second loan can come also come from the seller. Just know that secondary liens in general carry less favorable terms for the buyer—it’s about collateral. First hens are generally secured against the property and first in line if the deal goes sour and the property must be liquidated to pay back the loan. Secondary lenders account for this in the terms they offer.

Your ability to borrow the money will go through three stages: Credit, Equity, and Cash Flow. At first lenders will look to your credit worthiness as reflected in your credit score. Therefore, having little or no credit card debit, paying your bills on time, and having a history of paying back loans (mortgage, auto, student, etc.) in a timely, responsible way will contribute to a strong credit rating. It also matters that you have some savings available for down payments. Although you may be able to purchase your own residence with little or no money down, when it comes to conventional financing for Buy & Hold investment real estate, you usually will need to put your own money into it. The lenders will expect it, and it gives you instant equity.

At some point you will need credibility as well as a credit rating. The lender will need to see that you have made wise investments. The first measure of this will be your equity position in the properties you own. Sometimes you can access this money by getting a home equity loan and using it to make your down payment. In fact, you may become your own “lender of choice”—the interest rate is right, the approvals are easy, and you have all the control. Beyond self-financing, many of our Millionaire Real Estate Investors took advantage of private lending or established a line of credit, using the equity in one or more of their investment properties as collateral. In any case, if you have reached a lender’s limit on borrowing, that lender will consider you for more only if you have a very strong, provable equity position in your current holdings.

Finally, particularly for larger multifamily acquisitions, the amount of the loan will be based strictly on the Cash Flow of the property. An institutional lender will require a detailed analysis based on recent and verifiable financial reports of the rental income, expenses, vacancies, and net cash flow of the property. Those lenders are looking to minimize their risks, and so they will be very cautious when considering a large loan on an income property. Your track record and reputation will be as important as the specific numbers on the building.

At this stage of your investing you are likely to be the major factor in people’s willingness to lend you money. In a sense your creditability is always with you, and it can be one of your most valuable assets.