Get Free Access to Rental Income Analyzer Fix-N-Flip Analyzer Move InOut Checklist Tenant

How do I get down payment money for an investment property?




When investing in real estate and to be successful, somtimes you have to think outside the box to get started. Below is a list of some outside the box methods of obtaining a down payment for an investment property. You can choose one or all of these methods to get funds for investing on properties. Each method has its own pros and cons. So go through each option before choosing the one most suitable for you.


  1. Credit Cards

  2. HELOC

  3. Personal Loan

  4. 401K Loan


Using Credit Cards for an Investment Property Down Payment.

If you don’t have enough funds for a down payment on an investment property you could use credit cards to obtain the funds. Now with that being said there are risks involved. Before I go over this method of funding your deal let’s go over some pros and cons of using this strategy.


Pros

● If you don’t have enough money for the down payment, this option could help close the gap.

● Getting access to the funds quickly.

● You may be able to build points or get cash back quickly depending on the type of credit card that is used.

● The money from the credit card can have a very low or zero percent introductory interest rate.


Cons

● Financing 100% of an investment property purchase can be very risky.

● This can negatively impact your credit score.

● You can be subjected to very high interest rates.

● You must meet the credit score requirements.


Now let’s get into methods for extracting cash from a credit card. There are three popular methods:


Cash Advances

Most credit cards will allow you to take a cash advance on a portion of the credit line. Usually, this method has extremely high interest rates.


Cash Loans on Outstanding Balance

Recently credit cards are offering low interest (compared to cash advance interest rates) loans based on credit available on a credit card.


Peer to Peer Apps

Peer to Peer funds transfer services allow you to transfer money to someone (including yourself) using a credit or debit card. The interest rate you will be charged using this method of transferring funds may be similar to interest rates charged for purchases. However, you should review the terms and conditions of your credit card to confirm this. Some credit card issuers are now charging the rates that are very similar to cash advance transactions when this method is used.



Using HELOC for Investment Property Down Payment

A HELOC can be a great source of funds for investing in real estate. But before we get into how this can be used to fund your next deal let's briefly talk about what a HELOC is.


A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line. A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible.


Now with that out of the way let’s talk about how this can be used to invest in real estate. The first thing you need to do is open HELOC with a financial institution. Most people use their primary residences as collateral when opening a HELOC. Some financial institutions will allow an investment property as collateral, but the interest rates may not be the same. Either way it usually takes about 30 to 45 days to close on this type of loan.


As with most things in life, shop around for the best rates and terms when choosing to open a HELOC. Now that you have opened a HELOC you can use the available credit as a down payment by simply writing a check when closing on your investment property.


Let’s look at some pros and cons of using this method for purchasing real estate.


Pros

● Little to no restrictions on what the funds can be used for.

● Interest only payments usually during the draw period (usually 10 years).

● Interest rates are usually lower than obtaining a personal loan or using credit cards.

● Interest portion of payments made may be tax deductible. Please consult your tax advisor regarding interest deductibility as tax rules may have changed.

● Banks may consider available credit in a HELOC as cash on hand when applying for a loan on an investment property.


Cons

● Increases risk of foreclosure. If you can't pay the loan, the lender can take your collateral/home via a foreclosure process.

● This method requires that you have a home with sufficient equity that can be used as collateral.

● This type of account may have an impact on your credit score (similar to a credit card). For example, you have a HELOC with a credit limit of 50K. Of the 50K you have an outstanding balance of 40K which means your debt to credit limit ratio is 80%. In general, this scenario will have a negative impact on your credit score.



Using Personal Loan for an Investment Property Down Payment.

Funds from a personal loan can be used as a down payment for an investment property. Now with that being said there are risks involved. Let’s go over some pros and cons of using this strategy.


Pros

● If you don’t have enough money for the down payment this could help close the gap.

● Getting the funds can be relatively quick (two weeks or less).

● Can have a very low or zero percent introductory interest rate.


Cons

● Financing 100% of an investment property purchase can be very risky.

● This can negatively impact your credit score.

● You can be subject to high interest rates.

● Must meet the credit score requirements.

● The outstanding balance / monthly payment amount will be used in a banks DTI (debt to income) calculation.


Moreover, If you chose this method for funding your real estate deal you should keep in mind that a lender may not allow you to use the funds until they are “seasoned”.

So, what's considered “seasoned” funds? Well, in general lenders want to see funds in your account for at least two banking statement cycles at the time you apply for a loan. If you take out a personal loan and deposit into your bank account in April. A bank may not consider the funds seasoned until June. You should check with potential lenders to find out what their criteria is before applying for a loan.


Using 401K Loan for Investment Property Down Payment

If your employer allows, you can take out a loan against your 401K. When you take out a loan against your 401K the financial institution that manages the 401K will loan you a percentage of your 401K balance. Usually up to 50% of the total 401K asset balance.


The process is much easier than taking out any other type of loan and can be used for pretty much anything (car, tuition, purchasing a property, etc). The reason for this is due to the assets in your 401K being used as collateral.


Pros

● This loan will not show on your credit report.

● In general, the process is fast, you may receive the money within two weeks or less.

● There will be no inquiries on your credit report for taking out this type of loan.

● Interest rates are usually very low. Also, any interest paid may apply to your 401K balance.


Cons

● High penalties and taxes may be assessed if the loan is not paid back before you leave your job.

● Generally, you have up to 5 years to pay back the loan. There is an exception to this if you choose to use the money for a down payment to purchase a primary residence.

● You may not receive dividend payments related to the stock used as collateral for the loan.

Get Free Access to Rental Income Analyzer Fix-N-Flip Analyzer Move InOut Checklist Tenant