What is Creative Finance? Creative financing 101

Hey YouTube, this is Cody. I'm here with Christian today and we are breaking down what is creative finance because this game is so ridiculously simple that anybody can play it. Mm-hmm. I'd like to put a misnomer out there. There's a lot of people that say, oh, I bought this deal with creative financing. Like, no, you didn't. Creative financing is a genre. It's a topic. It's not a strategy. There's a lot of strategies that can fall into the creative box, but in the simplest and most ridiculously simple form, Creative finance is just an umbrella and everything that falls outside of the traditional conventional box is under creative financing. So if you're going out, you're buying real estate, you're not buying it creatively financed, you're buying, you are buying it seller financed with contract for deed. There's a bunch of strategies that fall inside that category.

Now to put some framework around this, the conventional box is you go to a bank, you get a loan, you buy the property. Outright, just a transaction.

Yep.

Title goes from one person to another through purchase. Anything outside of that box is creative. If this is your box, you could be here, you could be here. We have a tendency to be over here, but no matter where you are in that box, it's just general creativity. So what does creativity in finance mean, Cody?

Well, I mean, it really just comes down to you going out, you're finding a deal, and then you're finding debt. And if you need equity, you got to find that piece. That's it. Now the traditional box, you're going to go get a bank loan. That's going to be your debt. And then you're going to have to put X amount down, 20, 25%. In the creative category, under that umbrella, well, you can buy stuff 100% leveraged, but you're probably not going to do that with a bank. And this is where the creative piece comes into. We just have to solve for how do we buy it and how do we never lose it. And then that how do we buy it category, it really comes down to just deal debt and equity.

It's as simple as that. And there's a whole bunch of different ways you can structure it. The fun thing with creative finance, it means that absolutely everything is made up. The price is made up, the terms are made up. So is it interest only, or is it fully, uh, on a full amortization schedule? Do you have a 5-year balloon, a 10-year balloon? Is there no balloon at all? It just pays itself off over the life of the loan. Do we just have mysterious other clauses that we make up to get more creative? All of it is creative, but the fun thing is, when you get into the creative space, there's more levers you can pull to make a deal work. So if you're looking at deals the same way everyone else is within the bank box, there's a lot of deals that don't work. About half of what we've purchased is on market, everyone can see it, it's on LoopNet, it's online, your broker can show it to you, but people did not buy that deal because they didn't know how to apply creative principles, which is why we wanted to share. Creative financing is just a general genre. It's saying, how do I buy instead of, oh, I can't buy this because the bank won't lend on it.

And that's it. We're not talking about using bank loans. We're not talking about lease options because leases are not financing. Yeah, if you want to lease a place, that's great, but that's not financing. A lot of people mistake these terms and there's a place for lease option. However, that's just not a form of financing. It actually doesn't fall under this umbrella. Mm-hmm.

When you're creatively financing, it means you're financing a purchase. Think of buying a car, furniture, whatever, outside of that conventional loan.

It's just different than the conventional norm, the standard that most people operate in. And so contract for deed is one way to do it where you're making installment payments. You go as a buddy on title with the owner. There's other ways with seller financing, wraps, but just saying you're buying stuff with creative financing, you can break it down a little further. And when you look at all the little strategies underneath the big umbrella, all of a sudden you realize that it is actually quite simple. And that is why we're able to go so quickly, because a lot of people break it down just as, oh, I'm just going to buy with creative financing. Well, what does that actually mean?

And to us it means how do we buy it, which is your actual structure. That's the creative piece, right? Yeah. What does the debt look like? What do the terms look like? How do we find two parties that can agree on what they want to do? Come together. That's it for how do you buy it. Before that, you should decide where you want to buy, but besides that, it's as simple as that. The next question we ask is how do we never lose it? So all that means is that those terms that you made up, you just have to make sure they work for you so that you know you never have to sell that property. That doesn't mean you hold it forever. It means you have the ability to hold it forever. For us, that means long-term fixed-rate debt.

It's also not just seller financing. That's one means to play this game. You can take it private. Christian went private on his second duplex ever. He had 101% financing, and he ended up getting that in a position where it was cash flowing off of one unit.

Yeah, talk about practical application. That was my second duplex ever, so I had next to no experience. The first one I purchased was a conventional purchase. Absolutely no creativity. It was the easiest thing ever. I had money. They they had a property. Went to the bank, qualified, I traded said money for said property. That was easy. Deal number 2, I didn't have as much money. There was a lot of rehab needed for this property. I found a private lender who gave me a 1-year note. I believe it was 10% interest or 9.99.

It was expensive.

Expensive money, but it was so short-term. I refinanced out of that in 3 months. They loved the deal so much that they gave me 101% of the purchase price as a combined construction budget, and acquisition budget. Now, I had to spend a little bit of money to rehab, and that did come out of pocket. It's not free real estate, it's low-down real estate, and we got low down because we got creative. When we went to refinance it, now that was conventional. I was already talking to the bank, we hit all the metrics they needed to see. I didn't have to put more money in to get it to finance because we built enough equity in the property. Very simple creative financing.

Now your question might be, okay, well, where do I find a private lender? Because we're not always talking about hard money lenders. There's a lot of ways to find private lenders, and it's exactly the same way we find deals. We're calling up property owners all the time, and right now, you know, we're making maybe 1, 2 calls a day. We're meeting with 1 to 2 people a week. Well, those owners are also investors, and we've had investors that we call, we've bought from, some we haven't bought from, that have offered to lend us money in first position or second position to where they're acting as a— it's almost like seller financing except for they're— it's just private financing for another acquisition from sellers that we bought from. You can go meet with owners. If you build out that relationship, it doesn't mean that you're just going to buy real estate. If you learn their story, you learn where they're at in their life cycle, and they really buy into who you are and what you're trying to accomplish, you can move incredibly quickly because they may not seller finance you their deals, but they may actually finance your acquisitions just as a lender? Mm-hmm.

All you're trying to do is figure out what works for all parties. Will the lawyers all sign off on it? Which I absolutely recommend that you have all parties use their own lawyer.

And you should use attorneys, people that want to play the game and try and get around the objection of, oh, I want to see an attorney. I mean, there's, there's people in this space, gurus out there that are saying that you shouldn't do that. You should make sure there's legal representation because if you're trying to get around that, That's shady for one, and two, it's like, why wouldn't you want them to be represented if you're doing good deals?

Practical application: bringing 3 parties together who all have different objectives. We bought 3 side-by-side duplexes. I tend to screw that up and say triplexes. 6 total units, 3 buildings, side by side. The seller we had a relationship with, so they let us buy very low down. This is a deal that we actually did no money out of pocket.

It was 10% down to them though.

So we used seller financing where we met all their requirements and they did, they financed 90% of the purchase. That means we had to find the last 10. The particular property, huge potential to cash flow. Day one it was written where it didn't cash flow very much, which means if we raised as debt, that service would eat into the property and would violate our question, how do we never lose it? Turns out if you have a property that loses money every month, very hard to keep, especially if the market turns on you. So how did we cash flow this day one? We found one more investor who had a very simple goal. What was that goal, Cody?

He wanted to double his money every 5 years in real estate. And we never called him just to try and borrow money from him. Christian had called him in a call center when he used to work at one, and it was just to offer property management service. We were trying to get in, learn about how he built his portfolio, and it turned into where he actually gave us money to go purchase stuff.

We had a relationship where we met one time for coffee. He had mentioned that, and we thought of him when we were putting together this deal. We were on a Zoom call, and I actually came up with the structure just top of my head in the call. He's like, I want to double my money every 2 or every 5 years. I'm like, okay, what if we wrote a note that doubles your money in 5 years, or you get all the properties? But at today's value on an excellent deal.

And it was structured not just— it wasn't a note, he was actually a little equity partner in the deal with a buyout agreement. And in case we couldn't meet the obligation, he got 100% of the ownership.

Creative finance, the easiest I can define it for myself, and hopefully this is transferable to you, is instead of saying can I buy the deal or can't I buy the deal, it's asking the question how do I buy the deal. And that is what creative finance as a genre is and how do you do it?

Just keep it that simple. Most people say, I'm buying with creative financing. If you can break it down, identify, okay, seller finance, contract for deed, XYZ, you know, there's different ways to structure it. If you just identify all the little creative ways to buy real estate and you get rid of the rest that people usually throw into this box, like Airbnb arbitrage, lease option, those are not creative finance deals. That's It's just a different business model. You just identify it, isolate it, you can study it and simplify the game to where anybody can repeat it. And that's our goal to help you guys out with.

So, so if you have any friends who are trying to get in the creative finance space and are having trouble defining it, if you got value out of this video, if you can do us a favor and just hit the share, text it to them, send them over whatever social media you prefer, share this video with more people because we would like to get the simplicity of real estate out to more people. This, while it's not super easy, it can be super simple, and that is what we're all about. So if you found this valuable, please give it a share. If you have questions, post below in the comments. We actually answer every week for Whiteboard Wednesday. We go live, we answer the questions, and we start with the questions from the comments. So until we see you again, like, subscribe, and we will see you all soon.