Buying an investment property is a great way to put your money to work and generate passive income. However, there is one major obstacle that stops many would-be investors in their track: cash. and convincing a lender to give a mortgage for a property that may have a lot of potential but is not in the best of shapes is even trickier. Most investments properties do not qualify for down payment assistance programs unless you are planning to use it as your primary residence and do not accept gifts from friends or family members as a way to fund the down payment.
Not only most lenders will require a hefty down payment (usually between 25% and 30% for an investment property), but they may also require proof that you can support your investment property for at least six months even if it stands empty. If you are like most people and do not have tens of thousands of dollars in cash ready to invest, getting the down payment to buy an investment property might seem too great of an obstacle to overcome.
However, there are some ways you can get access to cash to invest in a real estate property and realize your dream of becoming a landlord.
Use the equity on your primary residence
If you have built a reasonable amount of equity on your house (at least 20%, 30% or more being preferable), you might be able to use that money without having to sell it. Taping into the equity another property is a very popular way to get considerable amounts of cash. There are two different ways to access this equity:
- Do a cash-out refinance: this secondary mortgage allows you to borrow more on your home than what you currently owe and to receive the remaining amount as a lump sum of cash you can use as you see fit. They typically have relatively low-interest rates and a fixed interest rate for the life of the loan.
- Get a Home Equity Line of Credit (HELOC): a HELOC essentially allows you to use your home as a credit card. You can borrow as little or as much as you need over a draw period (usually five to ten years) while paying interest only in a first time, then repay both interests and principal during a repayment period which lasts ten to 20 years. The interest rate is typically adjustable.
For both loans, you will have to pay closing costs – higher on a cash-out refi than on a HELOC. The amount of money you will have access to depends on how much equity you have on your home.
Use your retirement fund.
If you are not planning to retire within a short time, you can use the funds of your 401(k) plan or IRA account as a source for a down payment. There are usually penalties for doing so, and you will need to pay interest on the money you borrow, but as you repay the loan with interest, that interest typically goes back into your retirement account.
Use your life insurance.
Using your life insurance to put money as a down payment for an investment property is another way to get cash without involving a third party. There are several options, some riskier than others, that allow you to withdraw money from your life insurance policy
You can withdraw limited sums of cash, which are non-taxable as long as you stay within the amount of premiums you’ve paid into the policy. However, your death benefit will be reduced based on the amount you withdraw.
You can also borrow from your life insurance issuer using your policy as collateral. The loan is typically subject to interest, which is added to your loan balance unless you pay out of pocket.
Bring in a partner
If you do not have enough cash by yourself, it can be a good idea to bring in a business partner in a joint venture to share the cash burden and the risks. The parties usually all contribute a set amount of cash for the down payment and get a bank loan together for the remainder.
Contract a private loan
Finally, you can contract a private loan from a friend, a family member, or an acquaintance based on your established relationship. The interest rate and terms of the loan must be negotiated directly with them, and they assume a position similar to a hard money lender.
Raising money for a down payment is a necessary first step when planning on purchasing an investment property. Establishing a trustworthy team, from a lenders to real estate agents and property management company, will determine the success of your venture.