In the old days, real estate investors had to choose between two investing strategies: buy-and-hold or fix-and-flip. However, these days, those are only two of the options available, thanks to the new creative real estate investing strategies that have hit the market. With that in mind, check out our guide to creative real estate investing below. We'll cover what it is, how these methods are different than traditional ones, and what strategies you can use to start making money.
What is creative real estate investing?
When most people think about real estate investing, they usually think about following one of the two major investing strategies. They either picture a buy-and-hold strategy, where they buy a rental property and do their best to find a long-term tenant to rent it out, or they picture a fix-and-flip strategy, where they buy a run-down property, fix it up, and try to sell it for a profit. While these two options are definitely the most popular investing strategies out there, they are not the only choices that investors have at their disposal.
Instead, for investors who like to think outside of the box, there's the option of investigating creative real estate investing techniques. Though there's a lot of variance on what exactly the definition of "creative real estate investing" entails, in general, it involves any investing technique that falls outside of those two traditional options.
Differentiating creative investing from traditional investing techniques
Before we can get into the specific strategies that a creative real estate investor might employ, it's important to make sure you understand the different ways in which creative investing differs from traditional investing techniques. Typically, the differences emerge in at least one of the three major aspects of the transaction. We've laid each of them out below for your consideration. Read them over so you'll have a solid understanding of how these outside-of-the-box real estate deals work.
Prior to purchasing an investment property, the first step every investor must take is locating the right investment opportunities. Traditionally, this is done by hiring a real estate agent. Once your real estate agent has a feel for what you're looking for in a property, they'll set you up on an MLS search. From there, you'll make note of the specific properties that spark your interest and you'll go on showings until you find one worthy of submitting an offer.
With creative investing, it's rare to see a real estate agent acting as the middleman for your property search. In this case, it's much more common to see investors turning to wholesalers, working with the seller directly, or using alternative sourcing methods, like self-directed apps, in order to get the job done.
Financing the purchase
Financing is another area in which creative and traditional real estate investment methods tend to split. In this case, traditional financing often involves saving up money to go towards a down payment and going through a bank to apply for a 15-year or 30-year loan. It also involves submitting all the traditional documentation to a lender, including two years of W-2s or tax returns, pay stubs, and asset statements.
As you might be able to guess, creative real estate financing functions a little bit differently. Here, it's not uncommon for the buyer to receive financing from the seller directly or to turn to alternative lending channels, like a private money lender or transactional funding. Usually, the paperwork needed to be approved for creative financing is different, too, and is very dependent on the individual lender.
Buying the property
Lastly, the difference between creative real estate investing and traditional real estate investing could come from the method used to purchase the property. In a traditional scenario, a singular person or family unit purchases the property and the process is mostly led by the real estate agent.
However, with creative investing methods, it's possible to see a group of people go in together to purchase a single property. It's also possible that the investing process won't actually involve the transfer of property ownership at all, as is the case with investing in a REIT.
6 Types of creative real estate investing
Now that you have a little bit of background on how creative real estate investing differs from traditional methods, it's time to get into the specific creative investing strategies you can employ to grow your net worth. We've listed six of them below. Take a moment to consider each one to help you find the method that looks like the best fit for you.
As the name suggests, owner financing -- also known as seller financing -- involves the buyer working with a motivated seller to arrange financing to buy the home rather than going through a bank and getting a loan. Here, the buyer will likely make a down payment towards the home and then continue to make regular payments to the seller in exchange for additional equity in the property.
The biggest advantage of this method is that since you won't be going through a financial institution for your loan, the lending requirements will likely be a lot more flexible. This can be a good route to go if you don't qualify for a traditional bank loan. That said, admittedly, few sellers are willing to take on the responsibility of acting like a bank, so if you need to use seller financing, your buying options could be few and far between.
Investing in rent-to-own homes works similarly to doing a buy-and-hold strategy, but with a twist at the end. Here, you would work to find a tenant buyer, or someone willing to rent from you for a few years before buying the home outright.
This strategy allows you to charge a premium on rent, along with a lease option fee, and to free up your capital to invest in a new rental property every few years. That said, it also involves taking on the responsibilities of a property manager and taking a leap of faith that your tenant will be able to qualify for traditional financing a few years down the road.
Though the term "house hacking" is relatively new, this investing strategy has been around since the concept of owning rental property was invented. House hacking involves buying a multi-unit property, living in one of the units, and renting the other ones out to tenants. In this case, the hope is you'll be able to charge enough rent to allow your rental income to cover your mortgage payment.
In this scenario, the advantage is -- as long as you can charge enough rent -- you'll be able to live without having to worry about making a mortgage payment. However, on the other hand, you also need to consider the added responsibility. Unless you hire a property manager, you'll be responsible for overseeing the maintenance and upkeep of a multi-unit property.
In real estate, wholesaling involves buying property from a motivated seller at a discount. Then, you turn around and sell the property to a motivated buyer at a premium. In this scenario, you would be entitled to keep the difference between whatever you and the end buyer paid for the property as a profit.
The upside to wholesaling: Since the property is usually bought and sold fairly quickly, it's possible to make a decent amount of money in a short period of time. However, you need to invest a lot of time into searching for off-market properties, and you need to grow a big network of interested buyers and sellers in order to pull this off.
Crowdfunding involves using an established real estate investment platform to invest in current projects being run by an experienced real estate developer. With this concept, multiple people can invest small amounts of money in order to provide the developer with the funds they need to complete the project. In exchange for the funding, the investors earn interest on the amount that they contributed to the loan.
The good thing about crowdfunding is that you don't need to be a real estate professional in order to participate, and it doesn't come with the ongoing responsibility of being a landlord. In fact, all you really need is a little bit of start-up capital to invest. However, since you're less involved in the process, the returns often aren't as great as with other investing methods.
A real estate investment trust (REIT) is a legal entity that manages properties and provides capital to its investors in exchange. Like crowdfunding, you don't have to be able to finance an entire property in order to invest in a REIT. Instead, investing in REITs is similar to investing in the stock market, where investors can buy shares of the entity.
Again, like crowdfunding, the advantage of investing in a REIT is that it's relatively easy to do, you don't need a lot of income to get started, and you don't have any long-term responsibilities. The downside is that, like stocks, a REIT can lose value.
The bottom line
These days, thanks to technology, there are more ways to invest in real estate than ever before. No longer are interested investors forced to choose between the two major investment strategies. Instead, it's possible to earn money while sitting behind your computer.
If you think creative real estate investing could be an option for you, use this as a guide to the different strategies available. With a little capital and hard work, you could use one of them to become a successful real estate investor.