Clever Ways to Put Together A Down Payment to Build A Rental Property
A self-sufficient income is one of the few ways to retire comfortably without relying on retirement savings. But coming up with a down payment to build a rental property can seem daunting, if not impossible. Luckily, there are some clever ways to come up with the 15-30% required down payment to build your first rental property. Here’s a few ideas to get you started:
Before going down the path to find a clever way to come up with a down payment, keep in mind the best source of funding will be from your own cash savings. Using your savings removes the possibility of becoming overleveraged and subject yourself to possible rate increases and smaller return margins. The more of your own savings you can use, the better position you will be in to get high returns on your rental property.
401(k) or Roth IRA
Cracking open your retirement nest egg is risky but it can lead to a more fruitful retirement later. With a 401(k) or IRA you can withdraw funds consequence free as long as you return the money within 60 days. If you return the funds within 60 days it’s not considered a distribution and you can avoid any IRS taxes and penalties.
Or instead of withdrawing your funds, you can borrow from your 401(k) administrator for the surprisingly low rates that are typically offered. You are however limited on the amount you can withdraw. You can borrow up to 50% or under $50,000, whichever is lower. Check with your retirement account administrator for specific details.
Convert to a Self-Directed IRA
Your retirement account can be converted into a self-directed IRA for purchasing investment properties. This is a tricky process so you’ll want to hire a professional to properly handle the paperwork. Keep in mind that with a self-directed IRA you can use your funds to invest in properties, but all earnings and profits must go into your IRA until you are 59 ½ or you will face IRS penalties.
A home equity line of credit (HELOC) is a great option to build a rental property if you’ve accumulated equity in your current home. Home equity lines of credit are flexible, affordable, and allow you to withdraw a substantial amount of money. The only downside is it may temporarily lower your credit score, like any other debt.
You can secure a fixed-interest or variable, based on prime, rate for your HELOC. Withdraw periods are usually 10 to 15 years during which time you’ll only pay the interest. After the draw period has ended, you’ll make monthly payments if you haven’t already paid back the credit line. This flexible financing with low rates makes a HELOC ideal for building a rental portfolio.
Personal Loans & Co-Investment
Chances are you have built a network of friends and family that want to see you succeed. These people are unlikely to try to take advantage of you with interest and will have a personal stake in seeing you succeed. Furthermore, a personal loan from a friend or family member is not going to affect your credit.
If a friend or family member wants a piece of the action, you can bring them in as a partner in the investment property. If you take this route, for the sake of your relationship, outline specific terms, responsibilities, and an exit strategy for you and your partner.
Using a cash advance from credit cards for a down payment is high risk and should only be considered if the money you are withdrawing is only needed for a short amount of time and you’re certain to have an influx of cash afterward. The upside of using credit cards are they are instantaneous and flexible. The downside is, of course, it’s ridiculously expensive and will affect your credit score and debt to income (DTI). Although credit cards are high risk, they are still a viable option if used carefully.
Building a rental property can greatly improve your investment portfolio and possibly secure long-term retirement income. If you think you’re ready to build an investment property, I invite you to talk to one of the experts at Putnam Builders to discuss your financing options. Our experts can help guide the design of your rental property using the previously built rental properties that have been the most successful for other investor builders.
Putnam Builders has been building custom rental properties on the Gulf Coast of Texas and surrounding areas since 1963. We would love the opportunity to discuss your custom rental property ideas in our design studio in Bacliff, TX or in the comfort of your own home. Please contact us at 281-339-0838 or request a free consultation.