a little house model made of cash sitting next to a set of house keys with the overlay text: The Financing Overview: Is the Money Still Out There?

Break Barriers in Real Estate: Unconventional Financing Methods Explored

Securing financing for real estate investments has always been a challenge for small and first-time investors. Strict requirements attached to traditional loans, such as high credit score thresholds, substantial down payments, and extensive documentation, can make it difficult for new investors to get their foot in the door.

As a result, many aspiring investors find themselves facing a catch-22 situation—they need financing to gain experience but struggle to obtain it as newcomers. And with the ever-changing landscape of the market, it's natural to wonder if the money is still out there. After all, mortgage credit availability has been tight since 2012[1] due to global interest rate hikes[2] – even as loan applications continue to grow[3] – leaving the funding of new projects in the air.

The good news is that money is definitely still out there if you take the time to dig for it a little bit. Unconventional financing options offer a ray of hope for small and first-time investors by providing alternative pathways to secure funding and kickstart investments. Each method offers its own advantages, such as flexibility, speed, and accessibility. Leveraging specialized loan products can help open financing opportunities for a wider range of people, their specific needs and circumstances.

Here are four unconventional financing methods that small and first-time real estate investors can use to overcome the challenges posed by traditional financing:

Pool resources with joint ventures and crowdfunding

Sometimes, it truly does take a village. Joint ventures, partnerships and crowdfunding all present avenues for collaboration and shared resources for cash-strapped small and first-time investors. By partnering with other investors, small and first-time investors can gain access to larger investments, share financial responsibilities, and leverage the combined expertise and networks of their partners. Joint ventures and partnerships also provide the means to tackle more substantial real estate projects and expand investment portfolios more quickly and efficiently.

Reach out to your peers

If you can’t find a few friends willing to chip into a property[4], look into peer-to-peer (P2P) lending[5], also known as social lending or crowd lending, which ranks among the most popular platforms for alternative financing options[6]. Connecting borrowers directly with individual investors, P2P lending platforms bypass traditional financial institutions and offer benefits like flexible terms, lower barriers to entry, faster approval processes, and a sense of community, enabling investors to engage with like-minded individuals and leverage their expertise.

That said, proceed with caution: some P2P lenders will include an origination fee of around 8% deducted from the total loan amount or charged upfront, plus hefty late fees for missed payments. Always check the lender’s terms and conditions for other hidden fees that can rapidly add up and reduce the value of the loan.

Check in with private money lenders

Found a great investment property but don’t have time, energy or credit score to buy it through a traditional mortgage loan? Private money lenders, often referred to as hard money lenders, specialize in short-term fix and flip loans and bridge loans based more on the property's value rather than the borrower themselves. DSCR (Debt Service Coverage Ratio) loans, or no-income mortgages, use the property’s value and outstanding debt ratio to determine an investor’s ability to repay the loan by comparing the property's net operating income (NOI) to its debt service, or the total amount of principal and interest payments.

It’s also a good opportunity to take a closer look at the investment in hand. These lenders often cater to investors pursuing fix and flip projects or properties requiring renovations, offering more speed and flexibility to seize opportunities quickly and overcome traditional lending obstacles. Single-family home and condominium rentals also presently have the most market potential for BRRRR strategy investments (buy, rehab, rent, refinance, repeat) where fix and flip/bridge loans can help investors gain leverage for the buy and rehab phases.

Among the benefits: no tax or personal income documents are required, and flexible qualification guidelines are based on rental property cash flow. However, be aware of the hard money loan red flags like unclear terms, data errors, and no collateral required. These can be signs of a disreputable lender or, worse, a bait-and-switch scammer.

Go direct with seller financing

Buyers ready to move quickly on a property paired with owners looking to get out of their mortgages fast to avoid foreclosure can each benefit from setting up a seller financing arrangement. Seller financing enables small investors to negotiate financing directly with property sellers. This arrangement can provide more flexible terms, lower down payment requirements, and faster closing times when compared with traditional lenders. Direct negotiations also allow investors to create tailored financing solutions that align with their investment strategy and financial capabilities. An assumable mortgage, when a buyer purchases a home by taking over the seller’s mortgage, is another type of deal to consider in this situation.

Advantages and unique opportunities presented by unconventional financing

Unconventional financing offers several advantages and unique opportunities for small and first-time investors. Among them:

  • Flexibility and Tailored Solutions: Unconventional financing allows investors to negotiate terms and create customized financing solutions that align with their investment strategy and financial capabilities versus adhering to strict traditional financing guidelines.
  • Speed and Accessibility: Peer-to-peer lending platforms and private money lenders offer faster approval processes and access to funding opportunities that may not be available through traditional channels with less red tape.
  • Community and Expertise: Peer-to-peer lending platforms foster a sense of community, enabling investors to engage with like-minded individuals and leverage their expertise. Joint ventures and partnerships provide the opportunity to combine resources and benefit from the collective knowledge and networks of partners. Because of this shared investment, it also opens the possibility of an expanded local presence.

At a time when access to funding is tighter than ever, embracing unconventional financing methods, such as fix and flip loans, bridge loans, peer-to-peer lending platforms, seller financing, private money lenders, and joint ventures, can help small and first-time real estate investors overcome the challenges associated with traditional financing. Along with increased flexibility and accessibility, unconventional financing allows investors to create tailored solutions that work for them. Using a strategic approach and tapping into the right resources can help investors get ahead of the crowd to navigate the financing landscape and jumpstart their real estate business.

1 Spencer Lee, "Mortgage credit availability falls to lowest point since 2013," National Mortgage News. October 11, 2022.
2 Kyle Campbell, "Fed's Brainard: Global rate hikes could threaten financial stability," National Mortgage News. September 30, 2022
3 Falen Taylor. "Mortgage Applications Increase in Latest MBA Weekly Survey,"MBA. June 21, 2023.
4 Laila Maidan. "An investor who started with $5,000 and built a 742-unit real-estate portfolio says a coming correction will be the next buying opportunity — and shares the financing method he's using to snag 2% interest rates." Business Insider. January 14, 2023.
5 Julia Kagan."What Is Peer-to-Peer (P2P) Lending? Definition and How It Works," Investopedia. May 13, 2023.
6 Daniela Andreevska. "7 BEST LOANS FOR INVESTMENT PROPERTY IN 2023," Mashvisor. December 17, 2022.


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