Creative Financing Pt.2: Why you need to know this in 2023

A while back we did creative finance part 1. We talked a lot about subject-to and what actually defined creative finance. What we want to do in this video is go in and define what are the actual pieces and what are the inputs that you can adjust when putting together your seller-financed opportunities.

Welcome back to the channel. This is Cody and Christian, and today we're talking about part 2 in reference to our "What is creative finance?" video. Now Christian, what the heck is creative finance?

So creative finance is anything that comes out of the bank box. So if conventional is, hey, I'm going to find a property, I'm going to negotiate on price so that I can get through the underwriting for a bank. I'm going to get a bank loan and I'm going to close it. That's what we're calling the conventional box. That's what most people do.

Okay.

So creative is going to be anything that is outside of that. Now we shared a while back, what is creative finance? It was one of our earlier videos. It had a lot of watches on our channel, which is why we wanted to go deeper. Now, creative finance is anything out of the box. What inputs can we actually adjust as we're putting together our creative finance deal? What are the components?

Well, I mean, you could do interest rate. You could adjust the interest rate if you're working directly with the seller on a real estate contract or on a seller finance note. There's no bank telling you what it is. There's no Fed funds rate. None of that exists here. You can just adjust that. You could also adjust the down payment. You could finance more than the conventional box. You could put 1% down, you could put 5% down, 10% down. On an investment property as big as you want. You can do a 100-unit, a 10-unit, a 1-unit. You could just buy a house. There's so many ways to play this game. However, you can adjust the leverage points, you can adjust the interest rate. You can also have future down payments to do less money down, and you can adjust your terms.

So you can do all sorts of things. It all follows the deal though. Whatever the opportunity is, then you figure out what is my debt and what is my equity, if any equity is needed. Or if any destiny, I mean, you can figure out just about anything. If you bought it 100% cash, you're just figuring out what is my equity stack. If it's 100% debt, it's what is my debt. Now in there, you listed a ton of inputs that we can move up and down. One of the key ones is interest rate. While the whole world negotiates on price, you can be the one who goes, okay, well, if this property is yielding 10%, can I borrow at 5% and make a spread? You can move those inputs up and down. Now, a deal that has a whole lot of cash flow day one, you have a lot more capacity to raise debt because debt— not always, because you can get as creative as you want, but typically is going to include monthly payments. If you don't have a lot of monthly cash flow, probably not going to be the input that you adjust, right?

Right.

If we're working with equity, why would we give equity in our deal, and how would we manage that long term?

Yeah, so when I got started, I actually partnered with Christian, and we've done some deals together now where he's written me a check to be part of my deals. I needed cash. If a property doesn't cash flow as much, you could bring in an equity partner because if there's no dividends, there's no dividends. However, if I borrowed money from Christian, he's my lender. I have to make payments to him regardless. As Dave would always say, borrower is slave to the lender. I have to make my payments regardless of how that asset does. So if there's not a lot of cash flow, I still got to make my payments. If there's not a lot of cash flow and I have a partner, there's no money to distribute, there's no money. So there's no obligation there.

Mm-hmm. Now, one thing I always hear about the equity is, well, I don't want to be partnered forever. How do I actually manage this partnership? And I want to be very clear, neither do we. Now, I'll be partnered with Cody on everything forever. You do not want a lot of variables, and there is no bigger variable in creative finance than people.

Yeah, that's one reason we don't like subject-to. We don't like having that extra person in the game. So we have buyout agreements. We have written and notarized buyout agreements that say I can give you this amount of money and make you go away. So if he gives me $100 grand, I give him a check for $150 at any point in the negotiated period, and he's gone. He's off the LLC, and now it's just my property. I can use their money for a little bit, get the cash flow up, get a whole bunch of cash, whether it's from another venture or from this venture, write a check, and now it's mine again.

So the equity's a lot like debt, where there's a fixed period of time and there's a fixed amount of money at the end of your note that is due. In equity, a buyout agreement is effectively the same thing if you structure it that way.

And that's where you get the idea. And this is the fun part about creative finance. We come up with an idea and we instantly can send it to our attorney. Their job is to put it on a piece of paper because I don't know how to do that. I know what some of the docs look like because I've done them, but in the beginning I had absolutely no idea. You can play this game as creative as you want. Just know that there are some rules, and your attorney's job is to make sure you hit those rules, you follow them to its farthest legal extent. It's just that simple. Mm-hmm.

Now, practical application. There is a property bought just outside of Seattle. The deal is in a market that I didn't really want to be in, which for me meant I had to get price. And we usually don't negotiate on price, but that is one of your variables, probably the least creative of all of them. The next thing is it needed to cash flow while we were doing renovations, which meant even though all 7 units were leased, We knew there's always going to be 1 or 2 vacancies through the first year. So we got 3% interest and a custom amortization schedule where we were able to have low enough payments where we can take 1 or 2 people out, start doing renovations, and still cash flow the building. Now that is writing a deal for how do you own it, how do you never lose it. Now, 3 years was our estimated full renovation to slowly go through and do this out of cash flow. So what do we do for terms? If you think it's going to be 3 years is your projection, you better have more than 3 years on the term, right?

Yeah.

That one, how long of a term do we do on that deal?

We did half a decade. We got 5 years on our loan. Now some people are like, 5 years? I want a 30-year fixed rate mortgage. And that's great. However, we got such a good price on that asset that we are able to get enough value add to where our loan to value is going to be close to 50% in 5 years on today's numbers.

Now, if you've operated a property and we keep excellent bookkeeping, if you've operated a property for 2 or more years and you have an excellent set of books for a full documentation of this is what the property has done, and you have 50% equity in the building, you're in a great place for a bank to lend. I am extremely comfortable that we have answered the question, how do we own it, which was we need to get our price and our terms, and how do we never lose it? Well, we know that before year 5, between 3 and 5, we're going to restructure the debt, which is either a refinance, or if you want to get really creative, a lot of our deals we do a seller refinance. What does that strategy look like?

Well, we go back to a seller, and if we're making our payments every month, think about this as building a relationship. If you want to build a relationship, send someone money every single month for 5 years and see if they like you more or less than when you first met them. We go back to them and say, look, we've been making our payments. We'd love to extend this with you. We're doing that on a duplex right now. We bought actually a row of duplexes. We had a 5-year balloon on it, and they actually brought it to us like, hey, we'd like to extend it in the future if you guys are open to it. To which we said yes. And they're also potentially open to doing a lender cash-out. So they're going to do a seller refinance cash-out where they potentially give us some money, increase the loan because they like the interest rate. I think they're at 5% on that one.

Yes.

And they'll just extend the term. Everything's negotiable. It's not like once it's done, it's done. In real estate, you can get whatever you negotiate. You don't get what's fair, but you do get what you negotiate. So keep that relationship going. That's why we're relationship-based guys, because in the creative finance space, that's all it takes.

So on a deal like that, do you actually get paid to buy the deal? If you do a seller refinance, you get the value up in the property, you can actually have a seller in the future pay you more than you put down?

Oh yeah, 100%.

So it's better than free real estate?

Oh, it's better than free real estate because your tenants are going to pay down the debt and then they could write you a check so you get more money to buy more real estate that cash flows more.

And the real estate buys the real estate. That is how creative you can be. I'm sure we'll shoot more videos on this, but we just wanted to highlight some of the different variables and different ways you structure these. Because when you are outside of the box, you train yourself to think creatively and just what would make this deal work for me. It could be as ridiculous as you want. Last example I'm going to use, Caleb and Chuck on our channel all the time, link below to their channel. They didn't have enough cash for reserves. What did they negotiate? 6 months of no mortgage payment, not deferred payments, no payments. Interest won't accrue for them for 6 total months, which built a full reserve for them to start the renovations on their building. And the numbers already cash flow day one. Just not enough to build the reserve they wanted.

If you can imagine it, and you and the other owner can agree, and you can get an attorney to get it on a piece of paper, you're there.

You've done it. That's what we have for today. Like and subscribe if you haven't already. We're gonna be sharing a lot more about this on our channel. Till next week, see you then.

Mm-hmm.