The D.C. Real Estate Investor’s Guide to Creative Financing

Table of Contents

What is Creative Financing?

Creative financing for real estate is a non-traditional approach that real estate investors use to fund the purchase of a property. The aim is to create an agreement that works for both the buyer and the seller, and that’s outside of the typical lending requirements.

Creative financing methods can help get your next project off the ground

Key Takeaways:

  • Investors aren’t always able to find the necessary funds from traditional lenders
  • Out-of-the-box thinking can lead to new funding opportunities
  • Creative financing options include crowdfunding, cash-out refinancing, FHA loans, and more

Today’s dynamic economy has left many investors needing more capital for the real estate projects they want to get involved in. Many traditional lenders aren’t offering as many opportunities as they did before the pandemic began, interest rates have risen, and funding options are often limited. The good news is that, with a little creativity, investors still have options.

It doesn’t matter if you’re a real estate investment newbie or a seasoned pro; creative financial options are everywhere. This guide walks through several unconventional funding techniques you may want to consider. 

Innovative Ideas for Real Estate Acquisition

Securing financing for real estate can be difficult for many, and if you’re looking for new ideas, you’re not alone. The good news is that an out-of-the-box approach to funding has many benefits (such as dodging substantial interest rates) for those needing help finding funding. 

One great way to close a real estate deal is to approach it with more than one financing option. Don’t let a “no” from one person or lender stand in your way. Here are several creative financing options to consider:

Crowdfunding

The bare-bones definition of crowdfunding is using money from the public to finance your purchase. GoFundMe and Kickstarter are two of the most well-known crowdfunding platforms that allow people to post their projects and request financial support. Feather the Nest is another crowdfunding platform, only it’s designed specifically for buying and renovating homes. 

Cross Collateral

This option can work well when you’re trying to expand your real estate investment portfolio. The gist is that you tap into the existing equity in another property and use it for financing your new project. This becomes additional collateral, so you don’t have to borrow against your equity, and you can then finance the new project without a loan.

Seller Financing

The phrase “on terms” is often used when discussing seller financing. This is another example of using other people’s money for your investments. The property seller agrees to hold the purchase note, and the buyer pays them monthly until the note is paid in full.

This method will only work with sellers who own unmortgaged homes and don’t mind relinquishing short-term cash for long-term passive income streams. When you find the perfect investment prospect and realize you will probably refinance soon anyway, seller financing can be the solution you need.

Lease Options

A lease option as a financing mechanism means it’s a rent-to-own situation. Renting allows you to build equity with steady monthly rent payments. This is one of the easiest ways to become a property owner, but keep in mind that it can sometimes be hard to find a reputable seller interested in the arrangement. 

Self-Directed IRA

Tapping into retirement savings is another unconventional way to get capital for a real estate deal. It offers a few significant tax breaks and more control than other retirement options. It’s worth noting, however, that returns must go directly to the self-directed IRA instead of the investor with this option, which is a disadvantage to some.

Hard Money

Hard money is what most people think of when discussing creative financing. It is essentially just borrowing money from a business instead of a bank or other financial institute. This can be an attractive option for some investors because the requirements are typically much less stringent than you would find with a traditional lender.

One example is that this type of loan rarely requires a specific credit score.

Private Money

Private money means you are borrowing funds from friends, family, and other people in your life. Investing entrepreneurs can negotiate more accommodating loan terms with this type of lender because the transaction tends to be personal. Private lenders seldom receive additional revenue based on equity other than the designated interest rate. 

FHA Loan

Federal Housing Administration (FHA) loans are ideal for first-time homebuyers who don’t qualify for traditional funding. Investors are still strictly borrowing from a conventional lender in this case, but an FHA loan allows those with credit scores of at least 580 to pay as little as a 3.5% down payment.

This type of loan does require an upfront mortgage insurance premium of approximately 1.75%, as well as a yearly insurance premium that depends on the loan amount. New investors who are looking to get a foot in the door may find it easier to get an FHA loan.

Cash-Out Refinance

A cash-out refinance for real estate transactions is when investors tap into their home equity (borrow enough to pay off the home’s mortgage and then pocket the difference). This can produce cash to invest elsewhere. 

This type of refinancing transaction differs from a simple line of credit. You typically add a second mortgage in order to take out cash with a line of credit. The interest terms for a cash-out refinance tend to be more advantageous than you can find with a traditional home equity loan. This interest is also tax-deductible, unlike a loan from a conventional financial institution or hard money lender.

There are risks to consider with a cash-out refinance, however. The most significant is that mortgage terms are reset, and the term of your loan period starts again. This may not be a problem, depending on an investor’s financial situation.

Think through your long-term plans before jumping into a refinance, as some property owners find the payments become tough to make when something unexpected happens, like a death, illness, job loss, or other financial hardship.

The economy has been going through a chaotic period over the last few years, and without a crystal ball, it’s impossible to say what will happen in the near future regarding lending and financing options. The good news is that a little bit of ingenuity and unconventional thinking can lead investors to great opportunities when it comes to creative financing for real estate.

Final Key Facts about Creative Financing

Here are some important points to keep in mind.
  • Creative financing is a form of real estate investing. Investors use it to pay for properties without relying on traditional mortgages or loans.
  • Creative financing can take many forms, including owner financing, lease-purchase agreements, and partnerships.
  • Owner financing is a common form of creative financing. It works by having the seller act as the lender and carrying the note on the property for the buyer.
  • Investors can use lease-purchase agreements to acquire properties. They rent the property from the seller with the option to buy it after a set date. The rent paid goes towards the purchase price.
  • Partnerships are another way to use creative financing in real estate deals. Multiple investors can come together to buy a property, sharing the costs and profits.
  • A key benefit of creative financing is the flexibility it offers. Investors can create agreements that aren’t bound by traditional lending requirements and can be customized to fit the specific needs of the buyer and seller.
  • Creative financing can be a good option for investors who may not qualify for traditional loans or who want to avoid the rigorous lending requirements and fees that come with them.

Get Help With Property Management

Juggling property management and new investment opportunities can be a major time commitment, but you don’t have to do it alone. Nomadic Real Estate offers property management services in Washington, D.C., Maryland, and Northern Virginia.

We know how to de-escalate problems between tenants and understand both landlord and renters’ rights, ensuring we don’t breach any laws as we manage your properties. Contact Nomadic Real Estate today to learn how our professional management team can minimize your stress as a landlord.

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Enhanced Reporting

Your portal includes a selection of extremely useful reports. Reports are available in the “Reports” section, and are distinct from the financial statements. Unlike financial statements which are static records, Reports are dynamic real-time records that will update with current data every time you view them. 

Scroll down to learn more about Reports:

Navigate to the "Reports" module in your portal:

Owner Portal Reports
  • Keep in mind, these reports are dynamic records. They will refresh to display current information every time you view them. 

Enhanced Rent Roll Report:

Enhanced Rent Roll Report
  • The Enhanced Rent Roll Report will show the rent amount, last payment date, move-in date, lease expiration date, and security deposit amount for each of your tenants. 
  • It will also show a portfolio summary with occupancy percentage, vacancy loss, and more!

Unit Comparison Report:

Unit Comparison Report
  • If you own multiple units (or buildings) with Nomadic, you’ll get access to the Unit Comparison Report. 
  • This report enables you to quickly compare financial performance between your units at a glance without toggling between individual reports. 

Income Statement Month-Over-Month:

Income Statement by Month Report
  • The Income Statement Detail – Monthly Report serves as a month-over-month record of portfolio performance. You’ll see itemized income and expense categories and can track monthly. This report will update with fresh data every time you view it. 

Financial Statements

Financial statements will be published to your portal on a monthly basis. The statements are found in your Documents library, and provide a historical record of all financial performance. The statements serve as a snapshot of financial performance over a given period, and are static documents (unlike Reports, the statements do not update/change in real-time). 

Scroll down for more info about the Financial Statements in your Documents library:

The Documents area contains monthly financial statements:

Owner Portal Documents
  • The statements in the Documents are are static documents. They are posted to the portal once a month to serve as a historical record of financial performance. 

Download a statement to see month and YTD financials:

Owner Portal Property Statement

You'll also find a month-over-month operating statement:

Month over Month Statement

Portal Communication Tool

You can use your owner portal to communicate with our team. Any messages you send through the portal will go straight to your Account Manager. When we reply, you’ll get an email notification and you’ll also see the message in your portal next time you log in. 

Here’s an overview of using the communication platform:

Click "Communications" and navigate to "Conversations":

Commincation Dashboard Screenshot
  • The communications module will contain a record of all messages that you create through the portal. 

Click the "New Message" button and send your message:

Owner Portal New Message Screenshot

Responses will show up in the conversation ticket:

Portal Conversation Response Screenshot
  • You’ll get an email notification whenever you get a response, and you’ll also see the message in your portal next time you log in. 

You can reply in-line using the comment box:

Owner Portal Comment

Each conversation will be logged in its entirety:

Portal Conversation Snapshot

Understanding the Ledger

Your portal includes a ledger with all transactions. The ledger is populated with data in real-time as transactions flow through our accounting software. Much of this information is also available in the Reports area, as well as the Statements in your Documents library, but the ledger is the most comprehensive resource for diving into the details. 

Please scroll through the sections below to get a better understanding of how to interpret the ledger. 

By default, transactions are sorted chronologically:

Owner Ledger Dates
  • The date reflected in the lefthand column is the actual transaction date, not the “bill date”. This is the date the transaction was actually processed. 

If you have multiple properties with Nomadic, you'll see the address for each transaction in the "Location" column:

Ledger Property Column
  • You can filter the ledger to look at just one property, all properties, or specific sets of properties. 
  • If you only have one property with us, you’ll just see the ledger for that property. 

The Description column displays the transaction type:

Owner Ledger Description Column
  • BILL: this is an expense transaction, such as for repair costs or management fees.
  • CHARGE: this is a transaction  billed to the tenant, most typically a rent payment. 
  • NACHA EXPORT: this is a credit we processed to your distribution account. This type of transaction is how you get paid! 

The Amount column shows the dollar value of each transaction:

Owner Ledger Amount Column
  • Positive Amounts: if an amount is positive, it reflects a transaction that is payable to you. Typically, this will be a rent payment that we collected from your tenants. On occasion, a positive number could also signify a journal entry or credit adjustment. 
  • Negative Amounts:  if an amount is negative, this is a transaction that is either payable to Nomadic or is an amount that has already been paid to you. Typically this will be for repair costs or management/leasing fees. Owner draws (net distributions into your checking/savings account) also reflect as negative amounts, since they have already been paid to you. 

The Account Balance column shows a sum of positive/negative transactions at a given point in time:

Owner Ledger Account Balance Column
  • Account Balance should always equal zero after a net distribution has been processed. When the balance is zero, this means that all expenses have been paid and you’ve received the remainder as net operating income, leaving a balance of zero (meaning: no one is due any money, as all funds have been distributed appropriately). 

Navigating the Propertyware Owner Portal

Your portal includes some extremely useful features that help you understand your property’s financial performance at a new level, with real-time transparency into every transaction.

Scroll through the snapshots below for an overview of portal navigation! If you need more help or have specific questions about using the portal, you can reach out to your Account Manager any time for a screen share. 

You can filter all info by date range or property:

PW Portal Filters

View a snapshot of income and expenses on your dashboard:

PW Owner Dashboard View

See every transaction in real-time on your ledger:

Owner Portal Ledger View

Statements and forms will be posted to your documents library:

Owner Portal Document Library

View a suite of real-time financial reports:

Portal Reports View

See a running list of all bills, and drill down for more detail:

Owner Portal Bills View

Under Bill Details, you'll find dates/descriptions/amounts and more:

Portal Bill Details

You can also communicate with your Account Manager through the portal:

Owner Portal Communication Tools

How do net distributions work?

Net distributions keep your accounting clean and simple. Each month we’ll collect rent from the tenants, deduct any repair expenses for the previous month and any management/leasing fees for the current month, and credit the remaining net operating income to your account. 

Net Distribution

You’ll receive a statement via email each time a net distribution is processed, and can view all transaction details in your Propertyware owner portal.