When it comes to real estate investing, pulling together enough money for a down payment is one of the biggest obstacles to buying.
We know it’s frustrating, but despite the high cash requirements required for buying investment properties, there are a number of ways to come up with the money.
Here are a few quick and clever ways to come up with that initial payment for your rental property purchase:
1. Personal Loans
Borrowing a personal loan from a reputable lender can be covered by the rent you receive on your property. The great thing about personal loans is that you can get a significant amount of money that can last years with a lower interest rate. Just make sure you borrow a large enough sum to cover a majority of your down payment — and with a solid rental rate, you can not only pay it off but make a profit as you do too.
2. Home Equity Line of Credit
If you have equity on your primary residence, one of the most effective ways to borrow money for a down payment on an investment property is to take out a home equity line of credit (HELOC). HELOCs are flexible and allow borrowers to use a line of credit like a credit card.
They typically have a 10-15 year draw period, and during this time, the borrower does not have to pay any money toward principal each month, only paying interest on the credit balance. You’ll then have a 15-20 year repayment period where you’ll no longer be able to pull money from the line of credit, and instead, must make regular monthly payments to pay off the remaining balance.
Cross-collateralization is another good option if you have equity on your home or other properties. But what exactly is cross-collateralization?
Cross-collateralization is when a borrower offers additional collateral to a lender by allowing them to put a lien against their primary home or other rental properties.
Here’s an example: Say you have a loan to buy a new rental property that requires 25% down payment (in addition to closing costs and cash reserves). You don’t have enough cash, but you do have another property with over $100,000 in equity in it. You tell the lender about this equity, and they allow you to use this property as additional collateral, enabling you to waive your down payment requirement.
Cross-collateralization basically gives both the borrower a loan and the lender the confidence that if it falls through, they’re covered by having two properties to foreclose on.
4. Pay Off Your Credit Card Debt
This may sound a little counterproductive, but paying off your credit card debt not only benefits you financially in the long run but frees up room when it comes to your monthly income for savings and investments.
Paying off your credit card over time is expensive, so it should be your first priority before you even think about investing in real estate. That being said, the sooner you pay it off, the sooner you increase your return on investments and lower the amount of interest you pay to credit card companies. If you do have any credit card debt, make sure to pay that off before investing so you have the ability to more aggressively — and more confidently — set aside money for a down payment.
5. Loans From Friends or Family
We know, asking your loved ones for money may seem risky, but it is an easy option if you’re borrowing a portfolio loan.
As long as you confirm that the portfolio lender you’re using allows it, your parents, siblings, or friends are a great way to accumulate money, and they’re not as likely to reprimand you on interest or fees, either. And if you or your family isn’t quite comfortable with lending you money, think about a co-investment. They can go in on the purchase with you — but make sure you negotiate all terms of the down payment, renovation logistics, and property management. You’ll also want a solid exit strategy so it doesn’t get messy when one of you wants out.
K Wealth Advisors There are plenty of other options to find the money for a down payment, but if you’re looking for personal guidance as you start searching possible real estate investment opportunities, contact K Wealth Advisors to schedule a GoodFit meeting. If you are looking for more general information on starting your real estate investing journey, try BiggerPockets.*
*K Wealth Advisors has no affiliation with BiggerPockets or its subsidiaries. It’s just a great website dedicated to Real-Estate investors of all types to help get you started.
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