I started real estate investing two-and-a-half years ago, as of this post. After the first investment property, my boyfriend and I began investing together. Today, we own 15 properties in total.
Even though I had purchased a few homes in my lifetime, I didn’t know funding options as an investor. I had purchased several primary residences using a conventional mortgage. But when I started exploring other investment properties in the St. Petersburg, Florida, I soon found out cash was king. If you wanted an offer accepted on a foreclosure or auction property, you had to have money in the bank and a proof of funds submitted with your offer.
Below are some of the strategies I recommend to get started as a new investor.
Talk to a banker–or two. I know. You may not think you’ll qualify for a loan. (And you really may not be able to qualify!) But no matter what your situation is, go talk to a mortgage banker and understand requirements for a conventional loan on an investment property. You will most likely need to come up with at least 25 percent down and maybe more. Your credit score and income will have to meet the bank’s qualifying guidelines. The point for you is to start developing relationships and understand your options.
Another option is to talk to a commercial lender. This is a great way to fund your deals, particularly if you work with a bank that has portfolio loans available. A portfolio loan means that the bank holds the loan in house. Banks with portfolio loans can be much more flexible than conventional lenders, and in my experience, you have a better chance of qualifying for the loan. You will likely pay a slightly higher interest rate. We worked with our commercial lender to bundle three properties onto one loan and cash money out of the properties for our next investments. The bank also approved us for a commercial line of credit.
Finally, consider taking out a home equity loan on your primary residence. Some banks lend up to 90% of the value of your home on a second. We were able to qualify within a few days for a home equity line. The approval process was simple and didn’t even require a formal appraisal.
I personally have used all three types of loans to purchase investment property.
Fund your deals tax free your old 401k or current IRA. Do you have a 401k from a previous employer? Maybe you have an IRA that you have been contributing to each year. If so, you can roll it over into what’s called a self-directed IRA or self-directed solo 401k. These investment vehicles allow you to purchase real estate through your 401k, either as a Roth or traditional IRA. The great thing about purchasing investment properties through a self-directed fund is that all of the interest is tax-deferred. My upcoming purchase will be a property that is earning a 20 percent return after expenses. Where can anyone earn close to 20 percent on mutual funds? Also, the fees are much lower with this option.
Take a loan on your current 401k. Many employers offer loans for 401ks. My last two employers allowed me to borrow up to $50,000. You will pay interest on the borrowed funds, but it’s typically a very low rate. You will also need to make monthly payments on the 401k loan. But if you are needing a down payment on a property, this might be a perfect option.
Find an investment partner. After purchasing my first property, I invested with my boyfriend on the others. The thing I like about this strategy is that you each bring different strengths to the partnership and it helps mitigate your risk. If you do work with someone else, make sure the two of you work well together. We set up two different LLCs for the properties, one for Florida and one for Ohio.
Still need money? Scout deals for other investors. In real estate, the money to be made is when you purchase the property at the right price. Anyone can find a mediocre deal on the MLS. A serious investor knows how to pick up property below market value and has strategies for doing this. Personally, I work with a handful of “bird dogs” and teach them how to scout opportunities. If you can find an experienced person to help you, the training could be invaluable. Plus, you can get paid between $500 and $5,000 while you learn. This could help you save money for your own rental property. (If you are in greater Tampa or Sarasota, Florida, markets or Billings, Montana, feel free to contact me on bird dog opportunities. www.RealEstateBirdDogLink.com)