"I don't have a lot of cash on hand, so therefore, I don't think that I can invest in real estate." We hear that objection all of the time when talking with people about investing in real estate. Stop for a minute....pause...and allow your mind to expand and think bigger.
You deserve so much more in your life, and if you let this phrase stop you from unlocking future wealth and freedom, you're limiting your potential.
Top real estate investors aren't any smarter than where you are at today. They've simply taken time to take the puzzle pieces and begin putting the puzzle together.
Funding and financing is a big part of the process, but you may find out you have more options at your disposal to start than you think. Here are a few sources to consider to begin putting your resources together:
Cash On Hand
The reality is that very few deals actually come down to cash on hand that you have sitting in a bank ready to go, but it's obviously one of the options on the table. If you have this, great! If not, like most of the population out there, keep reading!
Certificate Of Deposit
People like CDs as a way to earn more than they could in a savings account, but what types of returns are you actually getting on them? 1 percent? Half of a percent? At the time of this article, that number has risen a bit, but you're still nowhere close to the types of returns you can get with strong real estate investment.
Here is the secret....the bank is taking the money you're investing in their CDs and turning around and lending it to people to invest in real estate. Banks like real estate because it's a safer asset than other asset classes out there. So perhaps you think about taking the bank out of the middle and putting the money you've investing into CDs with them and placing it directly into real estate yourself.
Old IRA or 401k
Chances are you may have an old IRA or a 401k from a past employer. If you're not working there anymore, you should be able to roll it into a Self-Directed IRA. A Self-Directed IRA is an IRA plan that follows all the same guidelines as other IRAs from a tax-perspective, however you can use it to invest in real estate (as well as other non-traditional opportunities)
There are many great companies out there (we can provide some recommendations), but once you set up your self-directed IRA, they roll your funds from your old IRA account to this new account and you're ready to go! This process can take a couple weeks, so go ahead and get it started when you're ready to make that move.
Many people like this option because it's money you weren't planning on accessing until retirement age anyhow, so you're less concerned about the liquidity of it vs cash sitting in a bank that you may need in a pinch.
One word of note: if you reach out to a financial advisor to learn more about a self-directed IRA, they may be less excited to have a conversation about it. Remember, financial advisors are paid based on you having your money invested with them. Moving it over to a self-directed IRA means it's going somewhere else that isn't with them.
Home Equity Line of Credit (HELOC)
If you own a home, and have owned it for awhile, chances are you have a decent amount of equity in your home. If you have enough, you might be able to take out a loan for a certain amount of that equity. This option will come at a cost, because the lending institution is going to charge an interest rate on this money, and will want a monthly payment from you on the balance. So understand your numbers and the returns you're expecting on your real estate investment to see if your real estate investment will outpace the money you'd be taking out from your HELOC.
Another option is you can skip a HELOC and refinance your current property to pull some cash out. As an example, if your home is worth $300,000 and your existing mortgage balance is $150,000, a lending institution could refinance at 80% LTV (loan to value) meaning they would give you $240,000. You'd take the $240,000 mortgage, pay off the existing mortgage of $150,000, leaving you with $90,000 to put down on an investment property.
If you're happy with your new payment, and are ok paying the fees it would take to do the refi, this could be another option for you. Once again, know your numbers and understand your risks, but this can unlock some additional funds to get you started.
Life Insurance Policy
Some life insurance policies out there have some sort of cash value or some sort of opportunity where you could take out a loan against your policy, so you could use those funds to be able to put toward real estate as well. If you have this review your policy to find out what options are available to you.
Other Collateral (Stock Options, Other Assets, Etc)
People issue a loan against collateral, that if you default on the loan, they can sell to recoup their money. Perhaps you have something that people would be willing to give you a loan if you put up as collateral. Everyones situation is different, so think about the assets you have and research what options you have that someone would be willing to provide a loan on.
In closing, think about this process like pushing a snowball down a hill. It takes work to build your snowball and get it to the edge of the hill. But once you push it down it builds momentum and moves faster and faster, so the toughest part is getting started. So in the beginning, your mindset isn't thinking "How much cash do I have?", it's thinking, "How can in unlock other options to put together the funds to get going?" Get that snowball started and see where it takes you!
If this is something that you want to learn more about, feel free to reach out to us and we can get a conversation started and put a plan in place for you to point you in the right direction.
Disclaimer: We're not a CPA, so make sure that you consult with somebody that you know, like, and trust to be able to help you make good, smart decisions according to your situation.