Creative vs. Traditional Real Estate Investing

[Andrew Karpman]

My wife and I are just starting out in our education in real estate investing, and are trying to understand and ultimately decide whether we should be Traditional or Creative investors. Can anyone offer the pros and cons of both, what method of investing you prefer and why, and any other relevant information?

From what I was able to find, it seems like for Traditional investing you have to have either a lot of money or be able to get loans, and that it's not as easy as told to find people who are willing to provide you with their hard earned money. For Creative investing, it seems like you only have to have money to pay education and a mentor, which I understand may cost thousands but is still much cheaper than Traditional investing. I also found a source that stated that Creative investing is much more stable than Traditional because Traditional investors now more than ever have much more competition because of Hedge Funds and other institutions that heavily invest in real estate while the Creative approach is driven only by motivated sellers. 

Do bigger pockets experts prefer one method over another?

Thanks,

Andrew

[Bill Gulley]

From Merriam-Webster Dictionary

1creative

adjective creative \krē-ˈā-tiv, ˈkrē-ˌ\

: having or showing an ability to make new things or think of new ideas

: using the ability to make or think of new things : involving the process by which new ideas, stories, etc., are created

: done in an unusual and often dishonest way

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Same Source:

tradition

noun tradition \trə-ˈdi-shən\

: a way of thinking, behaving, or doing something that has been used by the people in a particular group, family, society, etc., for a long time

: the stories, beliefs, etc., that have been part of the culture of a group of people for a long time

—used to say that someone has qualities which are like the qualities of another well-known person or group of people from the past

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With that in mind, I'd like to hear why folks seem to think that seller financing or an installment contract, like a contract for deed, or a wrap mortgage or a Subject-To transaction or a Lease and Option To Buy comes close to being "creative" financing. These have been done for more than fifty years, some over a hundred years. There is nothing new or creative about non-traditional financing or unconventional financing or sub-prime financing.

No, I'm not really being picky, because there is such a thing as "creative financing" which is almost another unknown world to real estate investors or operators.

Creative financing is the use of existing assets or newly acquired assets being leveraged or pledged for a debt arrangement. Cross-collateralized assets, using existing equity without having to refinance, creating a secondary stream of financing unrelated to the subject transaction financed, for example, borrowing or selling a partial interest in a promissory note to finance a down payment.  Just as a day trader might borrow against the box (his portfolio) to purchase more stock, (which is common but you get the idea).

Mixing conventional and non-conventional or traditional techniques can become creative, or different types of financing methods. For example, taking out a second mortgage with a lease-option to purchase following that covers the first and second mortgage, that provides cash from the deal. 

What's the issue? Education, you can't think outside the box not knowing what's in the box! 

Most all creatively financed transactions ultimately lead to conventional financing requirements, that's because in real estate we are talking about larger sums of money and sellers usually don't want to wait for 30 years to get their money. Conventional methods or programs are also cheaper in the long run. 

Learn the conventional financing rules, in general, you don't need to be a loan officer but you do need to understand loan terms, loan-to-value, collateral and valuation aspects.

Then learn the non-conventional, traditional strategies originally mentioned. After knowing these two areas you can then broaden your financing knowledge into other techniques to combined assets, mix terms to fit a situation or circumstance, this is creative financing. 

There is a whole other world of financing "tricks" in the bag that you're missing out on by referring to an option as being creative, you don't need to be a Chief Financial Officer to employ creative methods, you do have to understand applicable financing laws and conventional methods before you can get there. :)