It is amazing how fast time goes.
I came across this realization as I recover from my ACL replacement surgery over the past few weeks. During the course of my recovery over the course of the past 5 weeks, I realized that 2014 marks my fifth year investing in real estate assets and my tenth year in the real estate business. This reflection brought me to a key question that I asked myself when I started:
“How do I become successful investing in real estate with a limited amount money?”
I started my real estate investment career trying to answer that question and work around that issue. A mentor of mine told me “Never Let Capital Stand in Your Way.”
I took those words to heart and as I worked my way through my first few transactions and used some creative techniques to locate downpayment and/or construction capital in my early investment days. I want to share my top three ideas:
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Idea 1: Cash Advance Credit Cards
The idea of utilizing credit card cash advance for downpayment funds came to me while I was reading arbitrage theory during my MBA days.
I used to get offers from credit card companies to borrow funds at 0% for 12 to 14 months with a small processing fee. I thought why not use this to my advantage to gander my initial downpayment funds. I remember opening up a United Card and getting a $15,000 credit limit. I borrowed $12,000 from that card to put the downpayment on a sheriff sale deal that I was able to wholesale within 30 days for a net profit of $5,000.
The deal generated a 50% profit yield and with less a 1% processing charge yielded me a 49% return on borrowed cash. Now this idea has the risk that the credit card teaser rate would expire and reset to 18% before the asset that I purchased with it would not be sold.
This is called a liability mismatch and is an important risk to understand for this type of arbitrage fund borrowing methodology. You can mitigate this risk by refinancing the asset with a mortgage company or getting capital from a syndicate capital investor.
Idea 2: Cash Value Life Insurance Policies
This is not an original idea from noggin rather I got the light bulb moment when I saw a buddy of mine borrowing against the cash value of his life insurance policy to pay for a new kitchen in his home.
I thought mhmm why can’t I do the same for real estate investments as I had a whole life insurance policy and it had built up a decent cash value. This idea only works if you have a whole life insurance policy that has built up cash value.
Life insurance policies that build cash value, such as whole or universal life, are more costly than pure insurance term policies because part of that additional cost goes into building cash value. Understanding cash value is vital to making an informed, effective decision on using this creative borrowing methodology.
Cash value is a portion of your policy’s death benefit which has become liquid. It grows at different rates for different insurers. This is referred to as the rate of accumulation – the ROA.
Unlike a bank loan, you are not obligated to pay back a loan against your cash value; the risk here is that the lack of a requirement to repay the loan means the loan never gets paid back. Interest on borrowed cash value will continue to accrue and eat away your death benefit, further reducing what will be there for your loved ones when you are gone.
Borrowing from the cash value of your life insurance does have some upsides, the biggest of which is the tax advantage. Withdrawals of any amount from the accumulated cash value of your whole or universal life policy is tax free up to the amount of the premiums you have paid. As a rule, withdrawals generally includes loans.
Idea 3: Borrowing Against Stock Portfolio Equity
The rally in the stock market for the past few years has created a unique situation where investors have excess “equity” over their stock basis value and want to pull out the capital but not take the tax hit.
The typical way investors access the equity has been to sell the stock, realize the gain,pay the tax and pocket the excess cash. This was the scenario I ran across when I was working with an investment partner.
I was scratching my head on how to solve this dilemma until I came across the Stock Secured Loan by Interactive Brokers which allow stock holder with a minimum stock capital balance typically $50,000 in securities to borrow a portion of their stock equity at a loan rate of 1.99%.
This became a creative solution for me when I worked with investment partner as the investor was able to continue exposure to the stock market and yet diversify in dividend yielding real estate investments without incurring a tax event through the sale of stock securities.
I hope to learn more arbitrage real estate capital ideas and I hope to share with everyone as I continue further down my real estate investment journey.
Do you have any to share?
Be sure to leave your comments below!