You’ve found a property, analyzed the numbers, looked at the cash flow. Everything looks good and you want to buy. But one thing is holding you back: no cash.
Buying investment real estate requires many things (good credit, employment); it also usually requires cash. If you want to buy your first property or you’ve used up your available capital and still want to grow your property portfolio, here are some tips on how to finance the deal or come up with money for the down payment:
HELOC on your home
If you’ve got equity in your primary residence, you can use a Home Equity Line of Credit (HELOC) for a down payment or to make repairs, and then refinance it and get your money back. Once you’re done, do it all again. This is a tactic of many investment property owners.
HELOC on investment properties
If you thought that banks don’t offer HELOC’s on investment properties, think again. Although not all banks offer them, some banks and credit unions do. It pays to do your research. Often, small community banks or local credit unions will provide a line of credit on a rental property. You may have to make 100 calls to find a financial institution who does it, but once you do, you realize it was well worth the effort.
Seller financing is golden goose of investment property financing. This is what every investor looks for but knows it’s hard to get. Although seller financing is a great opportunity for the seller to make a (usually) higher-than-stock-market return, many sellers either don’t understand it or are scared to do it. Their own real estate agents may be advising them against it. If you find an investor-friendly agent who understands how to work these deals and will work hard to find the opportunities you seek, hold onto him/her. Good investor-friendly realtors are hard to find.
Did you know that the funds sitting in your Roth can be used to buy property? You can pull out the funds you put into a Roth at anytime without penalty. However, you can only take out the earnings at age 59.5 without incurring IRS penalties. Some people setup Self-Directed Roth IRA’s, allowing them to buy real estate directly through the IRA.
Before you start yelling about the dangers of using credit cards for down payment or renovation funds, consider that if used in the short term, cash withdrawals from credit cards can help people get started on the path to owning real estate who otherwise could not afford it. Conventional loans do not allow credit card borrowing for down payments so talk to your lender before you do it.
To house hack is to buy a property with the intention of living there for a year and then renting it out, moving on to your next deal. House hacking a duplex, triplex or quadplex can mean that your tenants cover the cost of your mortgage and you live there for free. That will let you quickly save up money for your next purchase, or refinance it and get cash out, moving on to the next deal.
Other ideas for building cash or conserving cash flow are:
- Loans from family and friends
- Financial partners with equity or profit sharing
- Seller credits towards closing costs (typically a cap is placed on this)
- 401K loan
- Side business / side hustle to earn extra income