One of the biggest challenges for first time home buyers and investors is raising a down payment. How much should you put down? Does it change whether you’re buying to live in or rent out? How can you raise a down payment on limited income? I’m going to answer those questions and more in today’s blog post! Before we get started, I want to know what challenges you’ve faced or wondered about in real estate. Leave some questions you wish I’d answer in the comments below, and you might see it featured in a blog post next week!
4 Tips to Raise a Down Payment
Use Home Equity
As you understand how to invest in real estate, you can pull money from the equity you have in your home. You can do this by either doing a “cash-out refinance loan” where an appraiser comes in to give you an appraisal on the new value of the home because it’s appreciated over time. Then, you can cash out the equity you have in your home and then a bank will loan you 80-90% on the new value. You can take that money and use it to begin investing in real estate.
Use a Retirement Account
A lot of people don’t know this, but you can now use your IRA or a SEP to purchase a second home or to buy an investment property. In some cases, you can actually use a KIO account. There are some criteria, but it is a good option to look into. Instead of using the money out of the retirement account to purchase real estate, you can also just borrow against your plan and then you don’t have as many restrictions.
Use Liquid Assets
You can raise money from your own liquid assets as well. You can use or borrow against the cash, stocks, bonds, insurance policies, etc., that you already have and use that for a down payment to get started in real estate.
Additionally, the classic way to raise a down payment is to save or use the money you already have in an account. If you are purchasing the first home that you plan to live in, this is a great place to start. However, there are many options for raising a down payment when building a real estate portfolio, and this isn’t my preferred way for that.
Use Lines of Credit
My favorite way is to use lines of credit from local banks. There are two lines of credits from the banks. One is a true line of credit where you can write a check for anything that you want. You can go buy a pair of shoes or buy a house. I have used those for rehabbing properties quite often.
The second way is where a property is connected to what you’re borrowing. The bank will give you the pre-approval letter, but they have certain ratios. Typically, a bank will not loan more than 80% of the value of the house, and that includes rehab. That means if you paid $0.70 on the dollar for the property, the bank would loan you 100% of the 70% and then you were going to use the $0.10 which would take you up to $0.80 on the dollar, 80% loan to value, they would loan you that extra 10% in order to do the rehab. Some banks don’t require you to put any of your own money in that deal. Don’t be concerned about having to talk to a lot of banks. Look around for community type banks and local banks.
Don’t forget to let me know in the comments which questions you have about investing in real estate! As always, if you’re interested in diving deeper and you want more content, resources, and help, check out my real estate products!