There are 5 ways to finance a house
- All Cash
- Lease Option
- Subject 2
- Terms from Seller
OPM or using a bank or private lender is a very popular technique and it's how most people invest in real estate. Using a bank loan for some percentage of the purchase price, utilizes leverage which is one of the key benefits to real estate. In other words, you don't have to put all cash into a property, you can use leverage (of a bank loan) and maybe only put down 10-20%. One of the hidden downsides of using a bank are the fees and closing costs. Sometimes this can be very expensive. One transaction I heard recently was charging 15% transaction cost, on a $200k property, it was close to $30k just for the bankers fee. Ouch.
Buying on a Lease Option is a great way to acquire a home and one of my favorites. In this method you as the buyer, are also playing the role as tenant. You then use your master-lease and sublet to your tenant. You don't have to sell on a lease option, but with the purchase of a lease option you gain control of the home and lock in a future purchase price. It's really a great technique for the right situation, and a great solution for the seller.
Buying Subject 2 is a great way to get into a home without qualifying for a loan. This is short for buying Subject to the existing financing. There are nuances to this technique that will be explained in future articles. Keeping this technique in your back pocket for the right circumstance will make you a lot of money, and give the seller a real solution at the right time.
Working out terms with the seller, sometimes called a Purchase Money Loan, is a great way to find a win-win with both seller and buyer. The buyer acquires a home usually for small initial investment and the seller often times gets the price their seeking and sometimes a premium on the home. It's a great alternative for both parties. There are also tax benefits for the seller if they're facing depreciation recapture or capital gains.