3 Creative Real Estate Investing Options

Should Real Estate Investors (REIers) acquire properties using their own funds, or borrowed capital (debt) or bring in partners (equity, joint venture, etc.)? Then, after you have owned the property for a while, and built up some equity, how can you pull out some cash in order to finance your next acquisition? The answer to these questions depends on the circumstances/facts of the situation. NOTE: Before you acquire or refi a property (especially your first acquisition, be it a buy & hold or a quick wholesale flip) you should consult a CPA or real estate attorney to be sure you make the best decisions.

I. Joint Mortgages

Just because two investors apply for a commercial loan together doesn't mean both of them share equal ownership of the property. The opposite can also be true: a property may have co-owners, where one party is not listed on the loan docs. It is important that all parties understand the difference between joint ownership and a joint property loan.

With a joint mortgage, both investment partners are financially equally responsible for the property investment, but that doesn't mean both partners have equal ownership rights to the real estate. For example, a friend could enter into a joint mortgage to help with the initial purchase of the investment property, for say a share of the profits from renting it out to tenants. Still, the friend is not automatically listed on the deed. Only individuals listed on the title and deed have ownership of the property.

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Alternatively, a couple could marry after one person owns an investment property. The owner might add their (new) spouse to the deed. This would make the spouse a joint owner, but they wouldn't be a party in a joint mortgage, and thus and they have no legally financial responsibility for the rental property.

So, in simple terms, a joint mortgage is a loan that's granted to multiple people. The lender thus considers the FICO score, income and job status of all of the applicants. All (borrowing) parties provide their personal information and sign all the final loan docs.

Joint mortgages are not limited to married couples. For instance, two or more roommates could take out a joint mortgage on an investment property. Or parents could take out a joint mortgage with their child, or siblings with other siblings, etc.

Pros & Cons of joint mortgages, include:

A. PROS

1. Financial responsibility for the loan is shared between multiple parties.

2. The loan is based on two or more incomes, increasing the odds of approval.

3. You may qualify for a larger loan amount.

B. CONS

1. The mortgage application considers the FICO score, etc. of all the buyers (The Good, The Bad & The Ugly). This could potentially lead to a higher interest rate if one or more of the investors has a less-than-stellar credit history.

2. If one or more co-borrower(s) fails to pay their portion, other partners could be on the hook for the entire purchase price as well as any credit and legal problems that can arise when bills are not paid on time.

To reiterate, a joint mortgage is NOT the same thing as joint ownership. In a worst-case scenario, this can lead to disagreements, confusion, lawsuits, ruined friendships and uncomfortable family reunions.

II. Joint Venture

The REIer brings the deal; the “money guys” bring the cash; profits are split 50/50 at the end. This is a variation on an equity-type investment. See below for specific JV funding details.

III. Equity Sharing

Also known as an equity investment, it allows REIers (who already own an investment property) the opportunity to access the equity they have built up in the property without taking on more debt. A sum of money is provided to the REIer by equity investors in exchange for a minority stake in the future value of the property and/or a share of the cash flow or net profit. Unlike a mortgage lender, equity investors can provide REIers with debt-free cash with no interest or monthly payments.

For some REIers, equity investments can be a good alternative to traditional, debt-based property financing options such as HELOCS (home equity lines of credit) and cash-out refinances.

3 Creative REI Funding Options

by Tod Snodgrass

What We Do: Provide 100% Joint Venture Funding, nationwide, to real estate investors: wholesalers, for fix/flips as well as NPNs. Contact info: Tod Snodgrass, emdfunding1@gmail.com, 310-408-7015