Real estate has always been the fastest and safest investment vehicle to acquire wealth and reach millionaire status. But without a down payment your real estate investment goals will be difficult to achieve.
Every year that you don't invest will cost you money in lost opportunity. So where do you get your down payment? How do you do it?
Most lenders prefer a 20% down payment because it provides them a level of comfort in case you default on your mortgage loan. It also happens to be the minimum down payment required to avoid the addition of mortgage insurance premiums.
Although a 20% down payment is considered by many to be “ideal”, investors often look to increase their leverage in purchasing real estate by lowering their down payment. This minimizes their upfront cash requirement but increases their monthly carrying costs through higher mortgage payments and mortgage insurance.
Here are some sources to help fund your next real estate investment:
Tap Into Your 401(k)
To get that down payment, you can tap into your 401(k), which you will have to pay back over a period of five years or more, with interest. This method, however, has both advantages and disadvantages.
One of the advantages of getting a loan from your 401(k) is that it is not considered a debt by lenders when they assess your debt-to-income ratio.
A major disadvantage of borrowing from your 401(k), however, is that should you leave your current job for whatever reason, you will have to pay the loan in full 90 days before you quit or you are officially terminated.
Self Directed IRAs
Self directed IRAs are an excellent source of down payment funds. They can provide you the ability to build your retirement nest egg using real estate's excellent long-term rates of return, and depending on the type of IRA you can do it tax free.
Using a self-directed IRA is rather simple but it's important that you do it properly to avoid any unwanted tax consequence. Therefore, consulting a tax advisor experienced on the subject is highly recommended. You can also educate yourself with several good books on the subject, such as IRA Wealth by Patrick Rice.
Business Lines of Credit
Using business lines of credit can be a great source for your down payment needs. Each line of credit can range from $25,000 to $100,000 or more, and are available at very competitive interest rates.
Business lines of credit make sense in situations where the property's cash-flow can support the additional monthly payments. You will need to run the numbers to determine if your cash-flow is positive or negative when financing part or all of your down-payment. If your numbers are positive you can effectively purchase with no out-of-pocket down payment.
Control Your Budget
If you plan to take the save-until-I-have-enough route, then here is a very helpful tip on how you can save more effectively for that down payment.
Write down everything you spend money on. Don't leave anything out, even if it's a small candy bar that cost you a dollar. Assess your spending habits and see what you can improve and what expenses you can avoid.
This may be a slowest path to saving what you need but it will eventually get you there.
The fastest way to get into real estate investing is to find a cash partner. A cash partner is anyone who shares the same investing goals as you and has the funds for the down payment. You would be the credit partner and any profits and losses would be split between partners.
Partnerships are easy to form and can be tweaked in any way you feel is mutually beneficial. You can contact Norada Real Estate Investments for more information on their new real estate partner program.
With determination and clear goals you will be investing in real estate much sooner than you think.