Creative Ideas for Down Payments
Renters Warehouse Blog
If you’d like to invest in real estate but are struggling to come up with a down payment, don’t worry –you’re not alone.
Many would-be investors find saving up for the down payment to be tremendously challenging. Most people just don’t have enough cash to pay the 20% or more that’s typically required for investment properties. The median home listing price in the U.S. today is nearly $250,000, according to Zillow –which would require a buyer to have a whopping $50,000 saved up!
Fortunately, though, there are options for would-be investors –even if you don’t have a drawer packed full of spare cash. There are a number of different ways that you can come up with a down payment and secure your first investment. Many of these strategies involve creativity, hard work, and careful research, but if investing in income property is something that you’re serious about, then you can make it happen –even if you’re short on cash.
With this in mind, let’s take a look at some creative options that can help first-time investors to get started.
Consider House Hacking
House hacking is a popular strategy for some first-time investors. This method involves buying a multi-unit property and living in one unit while renting the others out. One of the key benefits of this strategy is that it allows first-time buyers to qualify for a low-down payment residential loan, such as a 3.5% FHA loan, a loan that’s designed to help first-time buyers secure their first home. But a duplex or triplex can qualify as your primary residence, as long as you’re living in one of the units. With this approach, you could secure your first property for a down payment that’s as low as 3.5% –much more feasible than the 20% that’s usually required.
Use Your Home Equity
If you already own your own home, then you’re already miles ahead of the game –especially if you’ve had a chance to build up equity in it. If you have, then you could consider taking out a line of credit against your home. Known as a HELOC (home equity line of credit) or a home equity loan –you can borrow against the equity and use it to fund the down payment portion for your investment. Many investors use a HELOC to cover the down payment and renovation costs, and then once that investment is complete –they pay it back and start all over. While you’ll want to ensure that you look into this option carefully as there are risks involved, it can be a great way to get started if you’re lacking funds to cover a down payment.
Tap Into Your Retirement Fund
While you should proceed carefully with any investment that involves tapping into your retirement fund, this is another strategy that some investors have used. With a Roth or traditional IRA, you may be allowed to withdraw $10,000 penalty-free to fund a down payment on a property. With a 401(k), you can usually withdraw money as long as you return it within 60 days. As this is a risky strategy, there’s another option that may be a bit safer, rather than withdrawing funds directly, you could borrow money from your 401(k). Depending on your employer’s plan, you may be able to borrow up to 50% of your savings, up to $50,000. Be sure to check into your retirement fund’s terms and conditions to see what your options are.
Assume a Seller’s Mortgage
While less common, another strategy is to look to assume a seller’s current mortgage, also known as “buying subject to.” But first, you’ll need to find a seller who’s willing to go this route. While the loan terms will vary depending on the seller’s current mortgage, this option generally requires a low down payment. This isn’t something that every seller will be willing to offer, but if you find someone who does, it can be a great way to get started with less money upfront.
Consider a Fix-and-Flip
If you’re struggling to come up with the down payment for a rental, consider starting small –and doing a couple of fix-and-flips to work your way up the housing ladder. Some first-time investors get started by purchasing an affordable fixer-upper, renovating it, selling it –then snowballing the proceeds into the next property. After a few projects, you should have enough to make a good down payment on a higher-end rental property.
A hard money loan can be a useful investment tool to secure funds for a fix-and-flip. To learn more about using hard money loans to fund an investment, check out this informative podcast: Rent Estate™ Podcast Episode 10 – Special Guest Sean Blomquist – Hard Money Loans – What You Should Know.
Consider the BRRRR Method
Next up, the BRRRR method. Similar to the fix-and-flip strategy, many investors use the BRRRR method to get the ball rolling with their investments, as it’s a great way to get started with less cash up-front.
With the BRRRR method (which stands for Buy, Rehab, Rent, Refinance, Repeat), you purchase a fixer-upper, with the goal of increasing its appraisal value. Once it’s rented, you can refinance it –and pull your original cash out and use it as a down payment on your next property, keeping the ball rolling. Each time you do this, you’ll also be generating a new stream of rental income, which will allow you to increase your income and expand into increasingly profitable deals.
While you’ll still need to secure funds for your first property, starting small means that you’ll need less up-front cash than you would if you were starting out with a more expensive rental.
Find an Investment Partner
Investing partnerships can be tricky, but if structured right, they can benefit both parties. One simple way to structure an investment partnership is to look for someone to offer a short-term loan that will serve as your down payment. Be sure to outline the collateral, how much interest you will pay, and how long the loan will last.
Sell Some Things
If you’re serious about getting started with real estate, and willing to make some sacrifices –you could consider selling off some possessions. Cars, boats, and even motorcycles can all be used as a source of cash to secure a down payment. Just make sure the sale is well-documented, so you have a paper trail to show the bank.
Line Up Gifts Early On
If you’re planning on using gifts from family or friends for the down payment, you’ll want to get these organized early on. In most cases, your lender will require a gift letter from the donor, and will also want to see how funds were transferred into your account.
Pay Down Debt First
If your plan is to secure a mortgage –someday, it’s always a good idea to start working early on to get yourself in a good position to borrow. Lenders consider things like your credit score, your debt to income ratio, and your down payment when assigning loans, and being a strong borrower can help you to qualify for the best loan terms possible.
Feeling overwhelmed at the prospect of saving? You shouldn’t be. While saving up does involve some sacrifices, it doesn’t have to mean doom and gloom for the entire time that you’re saving. Here are some creative ways that you can make saving up easier and faster.
Start With a Lump Sum
One of the best ways to start your savings plan is by beginning with a lump sum. A sizable amount will give you the momentum you need to keep on growing it, and will encourage you to put aside bigger sums of money as and when you can. If you’ve come across a sudden windfall or received a bonus, then consider moving it directly into your savings account.
Automate Your Savings
If you’ve run the numbers, and can afford to save a bit each month, then you’ll want to automate this process as much as possible. You can set up a recurring transfer so that your account automatically deposits a certain amount from your checking to your savings every time you’re paid.
Consider a Side Gig
If you have time (and energy!) to spare, consider launching a side gig. This can include tasks like pet sitting, lawn care, moving services, deliveries, and even assembling IKEA furniture. (See websites like TaskRabbit). There’s no shortage of opportunities available if you have a skill or some tools, you can put them to use. There are also websites where you can lend out equipment like sports gear, camera gear, and more –a great way to make some extra cash. Just remember: all of that extra money is earmarked for your deposit!
If you find yourself struggling to save for a down payment, don’t let that hold you back. There are a number of options out there that can help to make investing more feasible, so be sure to look into them to find a solution that’s best for you, then start working toward your goals. With a clear plan and hard work, income property ownership can be within your reach.
Are you looking to get started with rental properties, but aren’t quite sure where to begin? Check out: Tips for Success From Experienced Investors. See what you should know before you start.
And if you’re still on the fence about rental property, then claim your FREE guide: Stability of the Buy and Hold Method.
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