7 Ways To Fund Your Real Estate Investments You May Not Have Thought About
Real estate is one of the best and most reliable investment vehicles to grow your wealth over time. Many people have realized that but feel they lack the means to get started investing in real estate. Either they don’t have the money or they can’t find the deals to invest in. In this article we talk about the money – we go over several ways to fund your real estate investments that you may not have thought about. Whether you are an active or passive investor you will be able to find one that works for you!
Retirement Plans and Self Directed IRA
As investors are becoming more savvy about preparing for their retirement they have begun to understand the benefits of diversifying their retirement nest egg and moving away from the conventional wall street focused model of putting all your retirement funds into the stock market. Self Directed IRAs (SD-IRAs) allow an investor to make passive investments into alternative investments such as real estate, precious metals, tax lien certificates etc.
SD-IRAs are typically opened using a certified IRA custodian and the owner of the SD-IRA can not be actively involved in the operation of the property – i.e they must remain passive investors. An investor can open a completely new account or roll over funds from an existing retirement account. There are many benefits to owning real estate in a SD-IRA such as tax free gains.
Investors should educate themselves and or use the guidance of an adviser so that purchases will be made appropriately to prevent unwanted loss of tax benefits or potential Unrelated Business Income Tax (UBIT) when using a mortgage to purchase investment property.
Bonus Tip: If you are not yet ready to open up a self-directed IRA you may be able to borrow against your current retirement account. As we follow the guidance of responsible leverage you should, with this and all other approaches mentioned in this article, take a look at the big picture of your overall financial health and ensure that you do not over-leverage yourself when taking out loans to make real estate investments.
Home Equity Line Of Credit
For those that already own a home you may have more to invest than you realize. As you already may know one of the benefits of investing in real estate is the built up equity that you receive from the combination of paying down the principal on your loan and the appreciation in value of the home. A lot of people know about return on investments “ROI” – the percentage of return you make on money invested into a project. There is not as much talk however, about “ROE” Return On Equity – the amount of return you could be making if you were to properly invest the equity you have built up in contrast to leaving it trapped in your current investment vehicle (in this case your house).
A Home Equity Line of Credit “HELOC” will help you access this trapped equity. Typically you can access up to 85% of the value of your home minus the amount that you own on the home loan. Depending on the bank you use you may be able to access a fixed or variable rate loan. It is important to consider the interest you would be paying on this loan and the related payback period in comparison with the expected returns of your real estate investment.
Bonus Tip: If you have owned your house for a long time and have a low loan balance you may want to consider whether it would be better to do a cash out refinance instead of a HELOC. Cash out refinances are great as you get access to a lump sum of cash tax free. As a word of precaution, cash out refinances will reset the clock on your loan term and may increase your monthly mortgage payments depending on amount that you obtain in the refinance, current loan balance and current interest rate environment. The best of both worlds would be a situation where you are able to access more cash and your mortgage payment decreases.
Life Insurance Policy
Life insurance policies were initially created to be a financial resource in the event of the policy holder’s death. Today there are several life insurance policies that provide cash values that can be borrowed against such as Whole Life and Universal Life insurance. One of the biggest benefits of a policy loan is that you don’t have to pay back the loan however if the unpaid interest adds up over time you may be at risk of losing your insurance policy. You should discuss with your life insurance adviser to weigh the pros and cons of borrowing from your life insurance policy. If you have concerns about being able to pay back this loan then you should reconsider if pursuing this option makes sense for you.
Tax Refund
Tax refunds provide a great way to begin to store up a piggy bank of funds to invest in real estate. Many people view this money as a windfall and spend it instead of investing it to see more returns. In today’s market you can invest in real estate without having large sums of money via REITS, ETFs and crowdfunding platforms dedicated to real estate. You may even find that the amount you received in your tax refund may be enough to invest in a real estate partnership or syndication with other investors you know.
Side Business or Other Investments
If you are not earning enough from your W2 job to be able to invest in real estate then one approach you may consider is starting a side business (if you don’t already have one) that can provide you the capital to invest in real estate. Some people look to do things such as wholesaling real estate but a better option may be monetizing something that you are already passionate about. This would provide a benefit of leaving you with a new stream of income, time to grow your passion and also (assuming you don’t want to jam pack your schedule) passive income from your real estate investments. You may also consider liquidating some of your other investments to take advantage of the higher returns provided in real estate.
Seller Financing
Seller financing refers to when the owner of the real estate asset acts as the bank and provides a loan to the buyer. Sellers are typically able to do this when they have no or a low outstanding loan on the property. One of the benefits of seller financing is that you are often able to provide no or a low amount of cash to purchase the property. Additionally since you are working with an individual instead of an organization you may be able to negotiate some attractive terms for the purchase of the property.
Debt Loans (Conventional,Private Money, Hard Money)
Conventional loans, private money and hard money loans are more commonly known methods of finding funds to complete real estate deals.
Conventional loans are typically provided by banks and come in both variable and fixed rate
varieties with a set period of when you have to pay these loans back. Conventional loans typically have lower interest rates than private or hard money.
Private money loans come from individuals who you are connected to who have access to capital (either their own or that they control on the behalf of others) and are able to provide loans for investment purchases. Private loans can be more flexible than other types as you are dealing with an individual as oppose to an organization.
Hard money loans typically are the priciest as they tend to have a higher interest rate and shorter payback period than other loans. One benefit however is that these loans are typically interest only and hard money lenders will often provide funding for deals that do not meet the banks standards or may be too risky for private lenders.
7 Ways To Fund Your Real Estate Investments You May Not Have Thought About Are:
Retirement Plans and Self Directed IRA
Home Equity Line Of Credit
Life Insurance Policy
Tax Refund
Side Business or Other Investments
Seller Financing
Debt Loans (Conventional,Private Money, Hard Money)
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DISCLAIMER: InvestUp! and it's affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own personal tax, legal and accounting advisers before engaging in any transaction.
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