It takes money to make money. A lot of people talk themselves out of building lasting prosperity because they feel that they don’t have the kind of funds they need to get started in real estate. People who aren’t wealthy feel like they don’t have enough money. Those who are sitting on a nest egg become risk averse and miss opportunities because they fear losing what they have.
A few sources of capital that you may not realize you have:
1. Invest using your 401k or Self-Directed IRA
Have you ever thought to yourself, “I wish I could invest my IRA in rental properties.” You can! The IRS allows us to self-direct our IRA or 401k to purchase real estate, provided we follow the guidelines and use a custodian. Thousands of members of the RealWealth own property in their retirement funds, and have even been able to acquire financing to do so!
The process is easy and allows you to rapidly build your retirement savings because all rental income and profits go back into the IRA tax-deferred. We are happy to send you a list of IRA custodians recommended by our members.
2. Get a traditional mortgage loan
Did you know banks will lend you up to 10 loans for investment properties, as long as you have good credit, a 2 year job history, low debt-to-income ratios and reserves? Assuming you are buying a rental property worth around $100,000, you’ll need to have about $20,000 for a down payment.
You’ll also need about $3000-$5000 for closing costs and approximately 6 months worth of mortgage payments set aside in savings to cover potential vacancies or unexpected expenses. All told, you’ll need around $30,000 in liquid funds in order to obtain an $80,000 mortgage. With this kind of 80/20 leverage, you should be able to realize returns of 15-25% on rental property! Let us know if you’d like a referral to one of our stellar lenders who specialize in investor loans.
3. Leverage your home equity line of credit
If you’ve been able to build equity in your home, that’s great! However, there is some risk to having such a large amount of equity in one place. First, anyone can do a title search to determine the amount of your encumbrances (loans) vs the amount of equity in your property. If there’s a lot of equity there, it may become quite tempting to “slip and fall” on your property!
Attorneys will also check out how much equity you have in order to determine whether it’s worth it to pursue a lawsuit against you. And finally, if you have all your eggs in one basket, it could turn out like Humpty Dumpty in the event of an earthquake or other disaster.
Perhaps a better method for asset protection is to diversify. If you borrow against your primary residence, you can get very low interest rates. If you’re paying less than 4%, you can easily find safe, secured investments yielding 2-3 times that amount. Now you’ve brought your dead equity to life, earning money for you rather than sitting dormant.
4. Cut costs and create positive cash flow
If you are spending more money than you earn, your cash flow will be negative instead of positive. When you are able to get positive cash flow, you’ll have funds available to build future prosperity. So look at where you can cut your expenses.
Do you need 100 channels of cable TV? Could you get the same benefit from $100 tennis shoes that you get from $40+ every month spent at the gym? Swapping out an annual all-inclusive resort vacation for a camping trip or two can easily free up a couple of thousand a year. Channel this money into savings, and start investing in property. Once you see that you can become financially free in 12 years or less, it will become a lot more exciting to spend money on your future than throwing it away today.