Four Creative Ways to Raise Money for Your First Investment Property
For as many reasons as there are to get started in real estate investing, there are an equal number of reasons for why people don’t.
One of the most common justifications is: I just don’t have the money.
Which, to be fair, is a valid excuse. Money is a prerequisite for acquiring real estate.
It’s important, though, to realize one of the foundational reasons why real estate is such a powerful investment vehicle:
You can use other people’s money.
In other words, leverage.
When you go to the bank and ask for a mortgage, that’s a form of leverage. In exchange for 20% of the purchase price, the bank finances the acquisition of an asset orders of magnitude larger than the amount you’ve invested.
The power of leverage means that for relatively small amounts of money you can acquire incredibly valuable pieces of property.
But that does leave the question, Where do we come up with the 20% downpayment?
When we’re talking about big acquisitions that run up into the millions of dollars, that 20% is a real mountain to overcome.
Fear not, intrepid investing adventurer! There are hundreds of creative ways to summon the necessary funds to take down your first (or next) deal. The key, and this pertains to all areas of your life, is to not get so fixated staring at the problem that you close yourself off to possible solutions.
Put another way, Don’t look for why you can’t do a thing. Look for the reasons why you can. Or, more importantly, how you can.
Okay, so now that you’re all fired up and ready to go find that money, let’s explore 4 lesser known locations where the money might be hiding out, but wait, wait, wait… before we dive in, a quick reminder that none of this should be construed as tax advice, and you should definitely speak with your tax professional before exploring any of these options.
Most people don’t really understand life insurance. I admit, I might be one of those people.
Life insurance often gets a bad wrap because there are some real swindlers out there. We definitely recommend doing your homework if you’re looking to open a new account.
But, if you already have an account, then this might be a great option to explore.
Most people don’t realize it, but you can actually borrow against the equity you’ve accumulated in your life insurance plan.
Likely, there won’t be much money in the account if you only just opened it, but if you’ve had an account open for a number of years, or you were the lucky recipient of a policy handed down to you when you were a wee-child, then there could be serious amounts of capital just waiting for you to utilize.
This is exactly how Dan got his start in real estate. He leveraged his wife’s life insurance plan to acquire his first 6 unit building which he then refinanced 9 months later, pulled that capital out and redeployed it in the next property.
A powerful strategy that required only a bit of savvy on Dan’s part to properly exploit.
The Roth IRA is one of my absolute favorite investment vehicles because of the powerful tax-deferred advantages. Then again, it’s a bit limited in its typical configuration because there are limited investment vehicles you can deploy the funds (ie: the stock market).
We love the risk-adjusted-returns afforded by real estate, so that’s where we want the majority of our investment funds to go. So what are we to do?
Should we just write off any money we maybe have in an IRA that money and let it ride in the stock market?
There are ways you can invest your IRA funds into real estate, but there are a couple caveats.
First, you have to move your funds over into a Self-Directed IRA. This is actually pretty easy. We recommend THESE GUYS.
It takes a couple weeks, but once the funds are set-up, you can redeploy your monies into a whole variety of investment vehicles, including real estate.
The second caveat of using the Self-Directed IRA, and this can be a big one, is that you can’t use the funds for your own deal. That means, you can’t pull the money out yourself and buy a house.
The money has to be deployed in somebody else’s deal.
This is where an operator like Invictus comes in.
Many of the investors that participate in our offerings do so through their Self-Directed IRA. This can be a powerful investment strategy as all the cashflow and distributions are rolled right back into the IRA tax-free.
The long-term, tax-free compounded growth can be extraordinary and the amount of logistics to set-up and fund a deal through your Self-Directed IRA is relatively simple.
Another lesser-known source of capital for funding a real estate transaction comes from another retirement account most working professionals likely have sitting around: The 401(k).
If you have a 401(k) with an old-employer, you can do some pretty interesting things with those funds, such as taking out a loan against a percentage of the equity in the account.
The fundamentals of the transaction are similar to that of using your Life Insurance Policy and you’ll want to take to your tax adviser about the implications of utilizing this tactic, but in a pinch, this can be a great way to summon a little extra capital that you may never have realized was at your disposal.
If you really want to dive in with both feet, you can follow in Dan’s footsteps and cashout all your retirement accounts, but beware, you’ll get hit with significant fees and penalties that not make this a great option all-told.
You’ll have to run the numbers on that for yourself and in conjunction with your CPA. It made sense for Dan because he understood the opportunity cost of not jumping into real estate and deemed the rewards were far superior to the potential losses.
So far, it seems he wasn’t wrong.
Last, but not least, in the list 4 places you might find some extra capital to put into your first real estate deal is the all-mighty HELOC or Home Equity Line of Credit.
A significant portion of most American’s net worth lives in the equity they’ve established in their primary residence. This makes sense. If you’ve been living in your primary residence for a couple years, then there’s probably been some significant appreciation coupled with some healthy debt paydown.
Many newer investors we speak to are on a mission to pay-down the entirety of their mortgage ala the Dave Ramsey plan. More sophisticated investors, however, realize that one of the primary powers of real estate investing is the leverage in utilizing other people’s money (aka the bank).
If you remove leverage from the equation, then real estate is still an investment on par with the stock market, but you’ve really taken a lot of the wind out of the sails of why this vehicle is so darn powerful.
The key is to establish a healthy relationship with debt and to not over-leverage yourself. Many people during 2008-2010 weren’t so cautious. They were floating up to their eyeballs in debt and when that final storm came, it completely sank them.
So we’re not suggesting you should go leverage yourself to the hilt.
But it might be worth your while to take a look at your current financial situation and, if you’re sitting on a significant amount of equity on your primary residence, you might ask yourself: What is my ROE?
What’s ROE? Well, that’s Return on Equity, the lesser-known cousin of Return on Investment, and it’s a more sophisticated way of looking at all the capital you currently have deployed in the world.
If you have hundreds of thousands of dollars worth of equity in your primary residence, is that really the highest and best use of that money? Could that capital, if redeployed elsewhere, generate a better return than what it’s currently earning?
In many cases, the answer is yes.
Investors who keep one eye on ROI and another on ROE, understand a concept known as The Velocity of Capital, which is a much deeper concept we’ll explore in-depth in a future article/video.
A HELOC can be a great short-term capital option as the interest rate are typically between 1—2% over prime with an interest only payment structure over the term of the loan.
I don’t personally recommend you utilize a HELOC for long-term debt, but it can be a great way to put some capital to work on a short-term basis, say 6 months - 1 year. Based on that timespan, a HELOC might be a great option for a fix-n-flip or some other short term project.
If you’re eyeballing something longer than 1 year, you might be better off considering a Home Equity Loan, where the terms can be a bit less painful over the long-term.
Making It Rain
There you have it, four lesser-known places you can find capital for your first real estate deal.
Now, your situation is unique and perhaps some of these options aren’t available to you. If so, that’s no problem. Hopefully, this article has served to open your eyes to a slew of alternative sources of capital and at the end of the day, that’s what separates the successful real estate investors from the ones that never get started.
Life, and this business, will constantly throw obstacles in your way. It’s up to you to find a way around, under, or over those hurdles.