6 Ways to Raise a Down Payment: Part 1

6 Ways to Raise a Down Payment: Part 1

At the end of last week’s blog, I mentioned two ways of raising a down payment: Liquid Assets (Cash, Stocks, Bonds, Insurance) and your Relatives/Friends. A part of negotiating strongly in real estate–which I would argue is extremely important to success in real estate as investment–is being able to show up with the cash. And a big part of that is being able to negotiate with a great down payment prepared.

So how do you come up with the down payment? Well, this week I’ll go over three big ways, and then I’ll cover the other three next Tuesday.

  1. Home equity (Refi/HELOC): One of the greatest stagnant assets in America is home equity. As you learn how to invest in real estate, you’ll realize that this is not a risk. You can pull money from the equity you have in your home by doing a cash out refinance loan, where you actually cash out your house. You do this by getting an appraisal of the new value of the home. Because it’s appreciated over time, and you have that equity in there, you can have the bank loan you 80-90% on the new value of your home. Then you can take that money and invest it in real estate.

    When I do seminars, I often hear people say that they won’t cash out their equity, because they want it. So often I see people putting their equity on a credit loan, where they go out and buy a huge TV.

    The problem is that this TV is worth a third of what they paid for the moment they leave the store. Instead, you should put the money into an asset that will appreciate in value. The risk is much less! I’m strongly support using home equity to help you get started in real estate.

  2. Retirement Accounts (IRA): A lot of people don’t know this, but you can now use your IRA to purchase a second home or to buy an investment property. The property needs to be in your retirement accounts. Typically the property would be tied on the trustee of the plan.

    Mortgage companies are OK with this. You can literally go get a mortgage on the property using your IRA to put the downpayment down and to make the monthly mortgage payments. Just remember that the payments must be made on the plan. You can also just borrow against your plan if that suits you better. And I don’t think a lot of people realize that.

  3. Lines of Credit (Local Banks): With true line of credit, you can write a check off for anything you want: buy a pair of shoes or buy a house. I use lines of credit that way–not on my actual credit card though. Quite often, I have used lines of credit for rehabbing properties and the property is not connected to the line of credit. The secondary line of credit is where the a property is connected to what you’re borrowing.

    For example, a while back the bank I was with said I can be out buying properties up to a million dollars. For single-family homes, that really gives you an advantage on going in and buying the property! The bank has already given you the pre-approval letter.

    Now, the bank will have certain ratios. Typically, a bank will not loan more than 80% of the appraised value of the house–and that includes rehab. So what that means is this: if you pay 70 cents on the dollar for the property, the bank would loan you 100% of the 70%. And then if you were going to use the ten cents on the dollar, they would loan you that extra ten percent to do the rehab.

    Some banks don’t require you to put any of your money in that deal. There is tremendous leverage to go in and buy a property. Don’t be concerned about talking to a hundred banks–some banks simply don’t work this way. It might not be in their lending portfolio. Instead, look for local banks who are more aggressive and who loan to builders, other investors, etc. Ask your attorney, your CPA, your real estate agents.

    You can get lines of credit that are connected to the property itself and that gives you tremendous leverage in acquiring property. Most of those loans last for 6-12 months. I’ll get mine for 12 months and then I will re-finance that loan when it starts coming out in 12 months. And in some cases, because there’s no seasoning requirement by local banks, you literally can refinance that loan in 60 days. Get 100% of your money back and put that money in your pocket. Banks have no problem with this because they’re loaning against an appraised value.

Let me know if you have any questions about these three methods in the comment section below!

Join me next Thursday to discuss three more ways to raise a downpayment! 

 

Billy Epperhart
5 Comments
  • Jason
    Posted at 09:51h, 10 March Reply

    Mr. Epperhart

    I have 20k heloc. The lady I usually do my lending through said I could get approved for another 40k for an investment. But she doesn’t do loans that low. My wife has not ever bought a house and she can get up to 70k FHA. The problem I guess that I’m having is the house we are looking at are not going to pass FHA because they need work. I read that most banks do up to 70 of appraised value is that current market or what it will do after the updates? This is where I need help. I have seen you in person at the gate church in Oklahoma City. Thank you in advance for your time.

    Thanks
    Jason vanhoutan

    • Billy
      Posted at 14:57h, 24 March Reply

      Jason,
      Thanks for reaching out! I would need some more information to completely answer, but here’s my response as a friend. When the lady says she doesn’t do loans that low, I know they’ll do helocs like that, but I’m sure you’re talking about first mortgage loan because they don’t do those that low. With FHA you can get, many times, an as-repaired appraisal and they will escrow the repair money. I think they still have the program. Basically, they will allow a certain amount to be used for repairs. You should check into that.
      A lot of banks will actually loan up to 80% loan-to-value on investment property. And that would have to include purchase and repairs, but they would go up to 80% as long as the property would carry the price. For example, if you buy a house for 100k and you put 120k in it, the 120k has to be 80% of 160k. In other words, if you bought the house for 100k, and you did 20k of improvements, that means the house would have to appraise for 160k.

      I hope this helps.

      Blessings,
      Billy

  • Andy Hudson
    Posted at 20:19h, 08 April Reply

    I’m enjoying this post except I’m struggling with the paragraph about the lending organization giving 70% then 100%. I understand that most banks will loan you up to 70% of the appraised value. Are you basically saying that you then approach a second bank for the extra cash for a down payment or fix up costs?

    • Billy
      Posted at 14:51h, 15 May Reply

      Andy,
      It would actually be the same bank because then your total investment would be an 80% loan-to-value. Many times the same bank would do it. Thhn what happens is on the first four mortgages, those banks can sell that loan. They can get their money back. That loan is sellable because it still shows it as only an 80% loan-to-value on the property. So if they make the loan properly and underwrite it, they will make the loan out of their construction loan or interim financing loan and then they’ll convert it to a long-term mortgage loan. Then they’ll sell the paper of that loan to Fannie Mae or Freddie Mac.

      Hope that helps!
      Billy

  • Christine Clinton
    Posted at 00:04h, 27 May Reply

    Hi Billy – it was a pleasure to meet you at Money Mastery! I’m looking forward to attending RE Mastery in September (I think you said it was happening again then) and be a part of your Money Mastery Coordinators plan you’re putting together. I just finished 1st year Charis and I am returning to Seattle for a year while my husband finishes his 1st year Charis on line and keeps working with Boeing until he’s ready to make the perm. move so we can get back to Charis. We have started and LLC to make our WP home a rental and buying a MH at a nice 55+ Community in the heart of Sea Tac. I have two questions. One per property. I started to get our EIN # today, but came upon the statement like,”with only 2 in your LLC, we will classify this LLC as a Partnership – Is this OK?” Otherwise they offered a couple forms to make it a Corp or S Corp. Do I just move forward allowing the classification of “Partnership”? This in no way changes the LLC designation, correct? (We have lease renters already beginning 8/1 and are getting enough to cover umbrella insurance and 25% maint and repairs with a little profit – we will open checking acct and keep all monies in and out of that).

    And on second home, I was concerned about buying a HUD Manufactured Home to live in the next year or two but it is mandatory per the community – they have already ordered the homes to fill their empty lots. however we are purchasing a good 6 yr Warranty that covers the quality of the build, etc…and we made a few quality upgrades also. We feel good that with the warranty and upgrades we will resale and get our money back in just a year or two max. My question is regarding your comments regarding #2 – Retirement Accounts – we are not taking deposit and a little extra from a personal IRA but from my husbands 401K. We are going to live in the home and are putting it under our personal names. Should we/could we be putting under the LLC for some reason? This thought only came to me because you said….”the property needs to be in your retirement account” – Possibly the available benefits re: IRA and 401K are two different animals? Anyway, new to this game, thanks for any thoughts.

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