The real estate market is filled with opportunities for beginning investors, but how do you finance your first investment? A traditional loan is one way to get started, but there are many other ways to raise capital to pay for your first real estate purchase. Which one you choose will depend on your own circumstances, so it’s important to consider these options carefully.
The Delayed Financing Option
One way to begin your real estate investing career is to pay cash for your property purchase. You can use your savings to buy the property and remodel it to add value to the home’s market value. By financing the home later, you can recover the cash you spent, but talk to a lender about your plans in advance. You’ll want to make sure you can recover everything you spend.
Use a Self-Directed IRA
This option can help you add diversity to your retirement investments, while helping you explore real estate investing. An added advantage is that the property you buy will provide you with an additional source of income in your retirement. Tax laws are a bigger concern with this option, so, if you choose this option, it may be beneficial to work with professional organizations, such as a real estate investment firm.
Borrow Against Your Life Insurance Policy
If you have a whole life insurance policy, you can borrow against the policy and receive approval easier than you would with a traditional lender. Since you’re borrowing against yourself, you’ll also pay a lower interest rate. These types of loans often won’t show up on your credit report and many companies won’t do a credit check. Talk to your insurance provider to learn specific terms for borrowing against your policy.
The term is new, but the practice is something that has been done for years. It involves buying a multifamily home and living in one unit, while renting out the other units. In a single family home, you can rent out individual bedrooms and share the rest of the house with your tenants. In either case, a traditional home loan can get you started. If your credit isn’t the best or you don’t have the standard 20% down payment, you can even apply for government-sponsored programs, such as FHA or VA loans.
Real Estate Syndication
Real estate syndication is when you raise capital from private individuals – usually the best route is starting with friends and family who are accredited investors and not investing their life savings. At Point Acquistions we find investors to allocate their capital together to invest in larger commercial or multi family properties. Real estate syndication allows you to close on more deals because it allows you to leverage your capital together with passive investors and their financial resources.
Be sure to contact your attorney or counsel prior to raising capital through a real estate syndication as their are many legal and SEC considerations. The last thing you want to happen is to be the news for something if your deal goes south and you did not properly structure your investment.
Depending on your marketing talents, this can be a great way to raise capital without borrowing. There is a fee associated with the process, which the website deducts automatically from donations, but it’s still less than you would pay in interest on a mortgage. Crowdfunding is typically used as you advance into a more intermediate level of investing as companies such as RealtyMogul and CrowdStreet will require a successful track record prior to offering your deal on their site. Another advantage here is that you can receive funding in a relatively short time, but, again, that will depend on your ability to attract donors.
Getting your start in real estate investing and becoming a impact player depends on your ability to raise capital. Whether you borrow or look for alternative ways to pay for your first investment will depend on your situation. Once you know how you’ll fund your investment, you may choose to work with a real estate investment company to help you identify the best properties for your investment.