A recent survey of over 100 market experts and economists still predict home prices to rise for the next 4 years.
Even the most pessimistic are saying prices will rise over the next 4.5 years by almost 10%
A recession is not necessarily bad news for home prices at 4 of the last 6 recessions saw price increases. And the fifth saw a nominal decrease. Many are comparing this coming recession to the ones in 1980 and 1981 in which we see the number of sales decrease dramatically but prices to increase.
With the Mid June dramatic rise in interest rates, it’s anyone’s guess as to where we go from here. What we do know is that our expert advice can help you to make the best decision possible.
Real Estate Stats and Thoughts
Our primary areas of service are below, and it continues to be a strong sellers’ market. Average appreciation is now at 24.7% year over year, but we expect the brakes have been applied with the rise in interest rates.
Active listings are at historic lows in Cherokee County Active Listings – we have 7 homes for sale under $200,000! 5 Are lots, 1 is a rundown mobile home on leased land, and 1 is an 874 square foot home built in 1948. Our buyer’s agent Josh helped a friend find a first-time condo and get it under contract. The buyer’s requirement to be under $140,000 narrowed down the search to 3 homes within 50 miles of our office that were livable.
More Exciting Stuff in Woodstock
Named #31 Top Place to live by Money Magazine. The new city center is moving forward. Just released details here Anyone going there at lunch time will appreciate the new 650 multi-level parking deck at the site of the former Morgan’s Ace Hardware which moved up the road into a sparkling new larger home. We talked with mayor Caldwell and he’s planning on traffic modifications also to ease the congestion after concerts etc. into Towne Lake by making some streets one way. Even more exciting is the likelihood of a boutique hotel with conference space, office and commercial space and residential apartments. This should enhance the value of every property within 5 miles. And none of this will increase property taxes.
Property Management: 9 Ways to come up with the down payment for your next investment
Despite the high cash requirements for buying investment properties, you have plenty of options to come up with the cash for a down payment on a rental property.
Before we dive in, it’s worth pausing to note that the best source of funds for a down payment was, is, and always will be cash from your savings. When you borrow a down payment from someone else, you leave yourself vulnerable to overleverage, to slimmer cash flow margins and returns, and to possible rate hikes or called loans.
This is why we’re so big on boosting your savings rate and cutting your spending. The more of your own savings and cash you can invest with, the better position you’re in to earn high returns from your rental properties.
All right, we’re finished proselytizing, let’s dive into some alternative ideas for coming up with the down payment for an investment property!
1. Home Equity
Have some equity in your primary residence?
One of the most effective ways to borrow money for a down payment on an investment property is to take out a home equity line of credit (HELOC) against your primary residence. It’s relatively affordable, it’s flexible, and if you have a lot of equity, you can borrow a lot of money!
HELOCs can be fixed interest or variable, based on the prime rate. They typically have a 10-15 year draw period, during which borrowers can use the line of credit like a secured credit card. During this time, the borrower often only pays interest on the credit balance and does not have to pay any money toward principal each month.
After that, there’s a 15-20 year repayment period, when the borrower can no longer pull money from the line of credit, and must make regular monthly payments to pay off the balance. Many real estate investors use a HELOC to cover the initial down payment or the renovation costs when they buy a new property. After renovating, they then refinance to pull some cash back out and pay off their HELOC balance, and then go out and do it all over again. You can also tap your equity with a home equity loan. Usually a second mortgage, home equity loans could theoretically be a first mortgage if you own your home free and clear. But home equity loans don’t offer the same flexibility as HELOCs, as standard mortgage loans with a fixed repayment schedule. As a final note, keep in mind that conventional lenders won’t like you using HELOCs to come up with the down payment for an investment property. First, they don’t want to see any part of the down payment borrowed, and second, it will add more debt to your debt-to-income ratio (DTI).
It may also lower your credit temporarily, like any other new debt.
2. Rental Equity Line of Credit (“RELOC”)
All right, so “RELOC” may not be a term, but it’s still a thing. Landlords can take out HELOCs against rental properties, rather than their homes, if they have enough equity. As with mortgages, expect the interest rates and fees to be higher on credit lines against an investment property compared to a HELOC. That’s because the risk to lenders is higher, as borrowers are more likely to default on investment property loans than on their home loans. You can also expect the maximum LTV (loan to value ratio) to be lower, with RELOCs compared to HELOCs. That means that lenders will lend you less of the property’s total value, again because their risk is higher.
Like HELOCs, rental property lines of credit make for flexible sources of financing for new investment properties… if you have the equity.
Another option if you have equity in your home or other rental properties is cross-collateralization.
Also known as a blanket mortgage, you can offer to let your lender put a lien against your home or another rental property, as additional collateral. Say you apply for a loan to buy a new rental property, and they require a 20% down payment (plus closing costs, plus cash reserves). You don’t have enough cash, but let’s say you do have another property with $100,000 in equity in it. So, you tell the lender about your equity, and they agree to use that other property as additional collateral and waive your down payment requirement. They now have two properties secured for one loan, and feel confident that even if you default, they can recover their money by foreclosing on both of your properties.
4. Your 401(k)
Thinking about raiding your nest egg? It gets tricky quickly when you borrow money from your retirement accounts to buy investment properties, beware!
But here are the basics. First, if you know — with 100% certainty — that you will be able to pay the money back in under 60 days, you can withdraw the money from your 401(k). As long as you return it within 60 days, it doesn’t count as a distribution, and you don’t suffer the IRS’s wrath with penalties and back taxes owed and lots of tears.
Since that’s a risky play, you have another option: you can borrow the money from your 401(k) administrator. Sure, it’s technically your own money that you’re borrowing against, but until you reach 59 ½, you don’t have access without the aforementioned penalties. But the good news is that 401(k) loans are very cheap, since you’re basically borrowing money from your future self. Money that, incidentally, is already in your account.
You can borrow up to around $50,000, or up to around 50% of your 401(k) balance,
5. Your Roth IRA
Like 401(k)s, you can pull money out of an IRA for up to 60 days penalty-free, as long as you put it back promptly. Which is just as risky with IRAs as it is with 401(k)s.
Another option with IRAs is to use a self-directed IRA to buy investment properties. With that said, it requires you to set up a self-directed IRA with a custodian, which involves some work.
Alternatively, you can pull contributions back out of your Roth IRA any time, penalty-free. But not earnings — any gains in your Roth IRA must stay put until you’re 59 ½, or you’ll face IRS penalties.
One final option is to pull money out of your account to buy a primary residence for house hacking (more on that coming). The rules are different in Roth IRAs when you pull money out to buy a home:
- It must be your first home,
- Your Roth IRA must have been open for at least five years,
- The funds must be used directly toward the home purchase, and
- You can’t withdraw more than $10,000.
6. Seller Financing
Why not ask the seller to lend you the down payment? It’s rare in this market but could become a thing.
Seller-held second mortgages were common, although expect the loan term to be significantly shorter than for traditional mortgages. No seller wants to hold a loan for 30 years; they want their money sooner rather than later. But as with everything else in real estate investing, seller-held seconds are negotiable. That goes for everything from the loan term to the interest rate to any up-front fees. Perhaps you offer to pay higher interest for a longer repayment term or negotiate a 30-year amortization period with a three-year balloon. In fact, if you’re planning on refinancing or selling the property within the next few years, a balloon payment can be an excellent compromise between you and the seller. In a balloon note, the remaining balance of the loan becomes due by a certain day; in the example above, your monthly payments are based on a 30-year amortization schedule, but you must pay the entire balance of the loan within three years, through either refinancing or selling the property. That way, your monthly mortgage payments remain low, but the seller still gets their loan repaid in its entirety within a few years.
7. Gap Funding
There are companies that specialize in lending real estate investors their down payment for investment properties. Known as gap lenders, they either charge high interest and fees, or they require an ownership stake in your deal. That’s the price of investing in real estate with no money down. And it makes sense: gap lenders take on enormous risk, lending you your down payment. They take second lien position behind your main lender, and they’re effectively lending 100% LTV. Still, a piece of something is better than all of nothing. If you have no other way to close a great deal, gap funding can make sense. Just make sure the combined monthly payments leave you with positive cash flow if you’re buying a rental property — the last thing you want is to lose money each month.
8. Loans from Friends & Family
Like so many other options on this list, you can’t borrow money for a down payment if you’re using a conventional loan. But portfolio lenders usually allow it.
Your parents, siblings, aunts, uncles, friends, grandparents are all viable sources to borrow from, to help you accumulate the down payment for your next investment property. And they’re not likely to rake you over the coals on interest or fees, either. As with seller financing, all terms are negotiable. One other perk: the debt won’t appear on your credit report, and the lender may not include it when calculating your DTI. If they bother calculating it at all, which many portfolio lenders don’t. Just make sure you confirm that the portfolio lender you’re using allows it, before begging your family and friends for a private loan!
9. Co-Investment from Friends & Family
A loan isn’t the only option, when raising money from friends and family. They might want in on the action, as a partner.
If your friends and family balk at the idea of a loan, ask if they want to go in on an investment property with you. You’ll have to negotiate terms: who’s providing how much of the down payment for the rental property, who’s overseeing contractors and renovations (if any), who’s managing the property and tenants.
Most of all, agree on an exit strategy. Will one partner buy the other one out at a certain point? For how much? Or will you eventually sell the property on the market to cash out? When? The only wrong exit strategy is not having one and leaving the partnership open-ended. Because inevitably the day comes when one partner wants to cash out, and the other wants to keep holding the property.