Down payment suggestions
When first time property investors feel they are truly ready to jump into the property investment game, they tend to find they don’t have enough for their initial down payment on a piece of investment property. Typically, mortgages on non-owner occupied investment real estate require 20% down for single family properties, and 25% down for multifamily properties (typically two to four family houses). This assumes you’re buying using standard residential lenders. For commercial mortgages (for residential real estate, over five family properties, or non-residential investments), mortgages can typically require down payments between twenty to thirty-five percent. The actual amount of the down payment will depend upon many factors, including your credit, the cash flow of the property, and what lender you’re utilizing for the loan. So how best to acquire the funding for a down payment on your initial piece of investment real estate? Consider these possibilities to get the mortgage down payment required by your lender…
If you don’t mind living in the same home as your tenants, consider this particular option. If you purchase a multifamily investment property and owner-occupy it, you can apply for an FHA loan with a low down payment of 3.5%, or a conventional loan with 5% down. Naturally, you’ll need impeccable credit, as well as be willing to submit more paperwork on these types of mortgages, but the rewards can be great…especially when you’re utilizing mostly lender funds for your leverage of this type of investment property. The key component here, especially when considering making offers on owner-occupied properties, is that you get pre-approved first. This may take a month or so, especially with an FHA loan – but it’s an imperative when you start placing offers. Making an offer on a property with an FHA contingency will not be taken seriously by any seller – unless you submit your pre-approval letter with your offer!
You can also choose to do some self-borrowing. If you already own your own home, consider utilizing a home equity loan or line of credit on it. You can then use the ample equity in your home to good use, tapping into it for a down payment on a piece of investment property. It’s a great, low-cost use of your equity as leverage for property investing acquisition. Also consider using retirement savings for down payments. There are some types of retirement savings plans available that will allow you to utilize your retirement savings without incurring any tax penalty. As an example, setting up a self-directed IRA, or SEP-IRA, is one way to go. Of course, always consult a tax attorney or accountant to set up this type of account, as well as explore all your options to pull funds from your existing retirement accounts in a manner that won’t trigger a tax liability. Another option for self-borrowing is to utilize short-term credit card balance transfer offers with low interest rates. Make sure you understand all the terms of the agreement first though – especially the repayment terms. Most are good for short-term funding, but be ready to pay back the principal before the promotional, low interest rate offer expires! Otherwise, you’re setting yourself up for a crushing financial blow. Unless you’ve had some experience using these types of credit card promotions, be wary of using them for the first time to finance any down payment on investment real estate.
Find suitable partnerships
This is a tried and true way to finance down payments on investment property. If you can find other, like-minded investors, partners are a great way to help you come up with down payments on investment real estate. While it is typical to split costs and profits equally, it does not necessarily have to be this way. Maybe you agree to be a property’s manager in return for your share of the down payment. Or maybe your partner can put up the full amount of the down payment in return for a much greater share of the profits – if you do all the searching, negotiating, and managing work. There are limitless ways to set up a partnership agreement. What will you bring to the table to offset your lack of cash for the down payment? Whatever you agree on, make sure it’s in writing – and preferably set up using the services of an attorney for your protection.
Other People’s Money (OPM)
As another creative way to fund down payments on any piece of investment property, why not use “Other People’s Money,” or OPM? Consider asking family members (at least the ones that like you) as well as friends to help you come up with parts for a down payment on investment real estate. Maybe you’ll pay them interest on it (in which case, you should write up a simple loan document for all concerned’s safety – you can find these type of loan documents readily available in any Google search), or maybe they will gift it to you. If it’s going to be considered a gift, make sure you understand what gift rules your lender may have as regards your mortgage. And you need to find out the lenders rules before you actually apply for a loan.
Using Your Own Funds
This is the least favorite, and last resort type of funding for any down payment. It decreases your overall leverage ability on any piece of investment real estate – but it will help you ultimately to secure the property. Though it is often used, it is not necessarily the best way of going. Certainly, simply sticking to a schedule of savings – whether by socking away some portion of your paycheck, or scrimping on something else in your life (like foregoing this year’s vacation), or putting a company bonus to work for you, using your own savings is one sure-fire way to obtain the funds for your down payment. Any way you accomplish it, eventually you’ll be able to save up enough for the necessary amount down on your first piece of investment property.
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