Creative financing refers to a set of practices in real estate financing which do not fall under the usual and accepted practices. The main objective of this is, as the term suggests, to provide financing for the purchase of a piece of property, but with the smallest possible percentage of the entire amount coming from the buyer.
In order to do this, the buyer or investor may borrow money, and therefore make use of a method known as leveraging. Doing this enables investors to barely use their own money to buy several pieces of property.
Buyers who wish to take advantage of creative financing may try to find hard money lenders, who grant short-term loans and impose high interest rates.
At first, turning to hard money lenders may seem like an unwise decision, but they can actually provide advantages, depending on the buyer’s situation. If the purchased property is to be sold immediately and there is a lot of profit to be made from the resale, the money spent on interest payments may be quickly recovered.
There are also some financial institutions and banks which are willing to issue loans without requiring much documentation. There are limits set as to the percentage of the total cost of the property which may be borrowed, but turning to these lenders may be necessary, especially if the buyer is in a rush or does not have the usual documentation requirements readily available.
Another method, among many others, is taking out a loan on another property. If a loan has been issued for another purpose but the borrower is unable to use the money for the original purpose, the money can still be used to pay for the new property being purchased. This can still be considered a form of creative financing because the money paid for the property did not actually come from the buyer’s pockets.