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.
- 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.
- 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.
- 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!