For many people, raising the money for a down payment is the most difficult part of the home buying process. Depending on your income and stage of life, thousands of dollars can seem like a daunting amount!

A down payment can range anywhere from about 3.5% to the full amount of a property’s value (this is called paying cash for a property.) It all depends on how the buyer wants to finance the home– how long they want to be paying it off and how much money in interest payments they want to accrue.

Note: if you’re relatively new to the home buying process and are looking for a simpler approach to saving for a down payment, check out the first three tips. If you’re an investor or are looking for more creative financing options, the last two tips might be more suited to you.

[Related: 3 Common Myths People Believe About Buying Their First Home]

Tips for first-time homebuyers / personal homeowners

• Create a Budget

The first thing you can do to raise a down payment is to establish a budget with that goal in mind. I recommend the 70/30 budgeting method. Simply put, you live off of 70% of your income, tithe 10%, and use the other 20% for investments. Investing in liquid and relatively safe assets is a quicker way to raise a down payment than saving alone.

Open a brokerage account at an investment bank and inform them of your goal to purchase a home. Tell them that you want to invest in low-risk, liquid assets (assets that can easily be converted into cash in a short amount of time.) Without having to do anything, your money will grow. When you have enough for a down payment, you can easily withdraw your money from the investment bank.

Another option is to put 20% of your income into a savings account that earns interest. This is a lower-risk, lower-reward option (but it’s better than a savings account that doesn’t grow at all!)

• Find Ways to Make Extra Money
  There are several creative ways to make a little extra money in today’s gig economy. Here’s a small sample size– remember, whatever extra cash you make from these ventures is best utilized when put into an account that grows interest! 

   

  • Downsize to a cheaper apartment or live at home. 
  • Get a part-time job or side hustle.
  • Stash away extra income. For instance, if you get a raise, pretend like it didn’t happen! Funnel the difference between your old and new paycheck straight into your down payment savings (after you reward yourself for your well-deserved recognition with a treat!) 
  • Save your tax refunds
  • Sell any unwanted clothes, furniture, decor, or appliances at a consignment store or online shop such as Facebook Marketplace

• Borrow Against Your Investment & Retirement Accounts

Another way to raise a down payment is through retirement accounts. A lot of people don’t know this, but you can now use your IRA or a simplified employee pension plan (SEP) to purchase a second home or to buy an investment property. In some cases, you can actually use a tax-deferred pension plan (Keogh plan). 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. Then you don’t have as many restrictions! First-time homebuyers can take up to $10,000 from a traditional or Roth IRA without the 10% early withdrawal penalty.

In addition, you can raise money from your own liquid assets. 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.

Tips for Real Estate Investors or Experienced Homeowners

• Use Lines of Credit

This is my favorite way to raise a down payment. There are two lines of credit from the banks. The first is a true line of credit where you can write a check for anything 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 to raise money is when a property is connected to what you’re borrowing. The bank will give you the preapproval 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%. Then you could use the $0.10, which would take you up to $0.80 on the dollar. With an 80% loan-to-value, the bank 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. They typically loan to builders.

You can get lines of credit that are connected to the property itself. This gives you tremendous leverage in acquiring the property. Most of those loans last for six to 12 months. I get mine for 12 months, and then I refinance that loan when it starts coming out. Because there is no seasoning requirement by local banks, you can refinance that loan in 60 days and get 100% of your money back in your pocket. For most properties that I have purchased with the banks, I refinance out in 60 to 90 days. I will put anywhere from $5,000 to $25,000 in my pocket and continue to make a positive cash flow on that property!

• Leverage Equity in a Property You Already Own

One of the greatest stagnant assets in America today is home equity. Your home equity is basically the value of the home minus the amount owed on any mortgages or liens. 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 with a cash-out refinance loan. With this loan, an appraiser will give you an appraisal on the new value of the home (it will be higher because it’s appreciated over time!) 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 use that money to begin investing in real estate.

[Related: How to Find Bargain Properties in Hot Markets]