How to obtain a down payment
Anyone planning to purchase a property should have cash reserves saved for the down payment, closing costs, initial repairs, and other transactional fees or expenses that come with buying a house. If you do not have cash on hand or maybe you want some supplemental cash to fund a new deal, here are some ways to acquire the necessary funds.
Work another job and save more money
This is the most common sense solution for how to get more cash for a down payment. If you are struggling to stash away cash in the short term, you can drive for Uber, tutor someone, work at a restaurant or do some freelance gigs to save faster. This is not a forever job, only to save enough money for the first or next property.
Seller Finance the Deal
Sometimes when someone is selling a house, they will finance the property rather than having a bank loan you the money. The buyer and seller will draft a contract where the new buyer pays a monthly mortgage bill to the seller rather than to a bank. The seller vacates the property and the new buyer occupies it and starts making payments to the seller over the agreed upon terms. This is appealing to some sellers since they can earn interest on the loan and reduce their tax bill by avoiding the cash influx from selling the house outright.
Home Equity Line of Credit HELOC
A HELOC or Home Equity Line of Credit allows a homeowner to borrow against their home. The HELOC uses the equity in the house like a credit card. Borrowers can withdraw an amount and make monthly payments to pay it back. One advantage is that the draw period lasts 10 years, meaning you only need to pay interest payments for the first 10 years before the principal payments are due. For most HELOCs to work, the applicant needs to be residing in the home when opening the credit line and 20% of the property equity must remain in the home. Some banks will allow you to borrow more but check with your local banks and credit unions for specific details.
Cash Out Refinance
A cash out refinance is similar to a HELOC in that you are pulling money from your home’s equity to put it to use. As long as 20% equity remains in the house, equity can be withdrawn in cash and a new mortgage will start from that point forward. A home can be refinanced sooner if its value has increased significantly from appreciation or renovations.
Hard Money Loan
A hard money loan involves taking out a loan for a set amount of money that you need to pay back in a shorter period of time. These loans have high interest so many opt to pay them off as soon as possible. Hard money loans are offered by individuals and private capital firms. Although they are higher risk, they offer a way for investors to acquire properties faster. Typically, a hard money loan is used to purchase a home that is in physical distress. The investor will then renovate the home, increase its value, and then either finance the home with a standard mortgage or sell it and keep the profit after paying the lender back.
Borrow From Someone You Know
We all may know someone who trusts us enough to lend us money. Maybe they are an investor looking for a decent return or a friend/family member that is willing to help fund a deal. These individuals can be good sources of funding. It is important to work out all agreements with a written contract and have all parties accept the risks that go along with lending money to others. If you do a great job and make the person money, it will gain their trust to do more deals. A positive reputation will then encourage others to invest with you as you grow your network.
Partner With Others
Sometimes it can be too big of a challenge to fund a deal by yourself. Rather than not buying a property, it is better to buy one with others who have equal skin in the game. Multiple incomes pooled together will allow for increased financing options. Projects that are too big for one person may allow multiple investors to all reap the benefits of a syndicated deal.
Real estate is one investment vehicle where one can get creative with financing. I hope this post provides some inspiration while trying to purchase your first or next property. Please contribute to the comments and join the discussion!
