Down payments are necessary in real estate investing. Most lenders will not lend you 100% of the purchase price. They expect a down payment. I recommend you buy a property with 10% down, but there are some lenders that will let you only have 5% down. So, how do I raise a down payment for real estate investing?
There are two simple ways to raise a down payment. One way is through liquid assets such as cash, stocks, bonds or insurance. Having money in a bank account or cashing out stocks and bonds makes the finances liquid and available. Or, you can raise a down payment by asking your friends or relatives. So, if those are not good options for you, here are some other ways:
Home Equity Refinance or Home Equity Line of Credit
One of the greatest stagnant assets in America is home equity. As you learn how to invest in real estate, you will 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 some equity in there, you can have the bank loan you 80-90% on the new value of the home. Then, you can take that money and invest it in real estate.
Some people do not know, but you can now use your IRA to purchase a second home or buy an investment property. The property needs to be in your retirement accounts. Mortgage companies are okay with this. You can literally go get a mortgage on the property using your IRA to make the down payment 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. Most people don’t realize this is an option. You would want to check with the company that holds your retirement accounts.
Lines of Credit
With a true line of credit, you can write a check for anything you want—buy a pair of shoes or buy a house. 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 property is connected to what you are borrowing. Ask your attorney, CPA or real estate agents to help you find lenders that give lines of credit.
Credit Cards (Cash Advances)
Now to be completely honest, I am not a big fan of this method. But I know investors that make this plan work. That said, I would only recommend this if you really understand how to invest in real estate. Personally, I prefer to build relationships with a local bank. You can get cash advances on your credit card depending on what your interest rate is. If that is something you are prepared to manage carefully, it might be worth a try.
Another way to raise a down payment is to find a partner. A lot of real estate investors miss this one. While you handle the real estate part, your partner puts the money up. Put the mortgage in your name or the partner’s and split the profits or rents. Basically, you bring the knowledge in how to invest and the deals and you oversee the rehab. You also set up the manager if you buy and hold or you handle selling the property. And your partner is the one that is making it all possible by financing this endeavor.
Raising a down payment is necessary to purchasing real estate. You will be in a stronger negotiating position when you bring some of the finances to the table.
If you are interested in learning more about Real Estate Investing, check out the Real Estate Workshop in Denver this September!