By Sidney Stephens | www.Kepler.Properties
Searching for capital can be one of the largest deterrents from investing in real estate. So, let’s talk money. Here are some of the straightforward and creative ways to get it.
Not all of us have a nest egg set up for a solid investment, but if you do, this is a no-brainer. You can’t win if you don’t play so put your money to work. The average savings account will yield .06% annually. Using the rule of 72, it’ll take you a whopping 1200 years to double the balance in your account. The average rate of return in long-term residential and diversified real estate investments is 10.6%. You’ll double your initial investment in about 7 years. To put things in greater perspective, the annual rate of inflation in the U.S. is 3.22%. This means the price of goods will double roughly every 20 years. The cost of goods is increasing at a rate 60 times greater than the growth of your savings account. If you don’t put the money in your savings account to work on higher yielding investments, its value will rapidly decrease over time.
A common misconception is that you have to wait until you’re really old to take advantage of your 401K, or divest completely and face significant penalties. This couldn’t be further from the truth.
You have a few options here:
1. Borrow against your 401(K)*
When pursuing this type of loan, make sure you research the following:
- Length of loan term? Usually is a 4-6 year loan term.
- How much can you borrow against your account? For example: Merrill Lynch limits borrowers to 50% of current balance or $50K whichever is less.
- Will you be responsible for repaying interest and principal at the same time?
- How is your interest and principal payment handled? Is it directly debited from your paycheck or do you send in payment on a monthly basis?
Pro Tip: If you’re paying monthly interest, you’ll want to take this into account when analyzing your investment opportunity. Please note, this type of loan won’t show up on your credit report but will have an impact on any mortgage approval process.
2. Move to a Self Directed IRA*
You can move your 401K capital to a self-directed IRA. What’s great about this account is you can direct your capital into investments of your choosing. There are specific rules regarding what types of investments you can make with monies from this type of account. For more information on these rules and regulations, click here. One of the most important rules to consider is that you cannot directly invest capital from your account into an opportunity or entity you have over 50% interest in. This strategy works well if you aren’t operating as a managing partner in an investment.
3. Withdraw from your 401K
Desperate times often call for desperate measures. Although this requires some stellar timing on your end, if you’ve found the perfect investment opportunity but you’re short on cash, and you’re between jobs (or leaving your current job to pursue this new investment opportunity) withdrawing from your 401K could be the solution for you. You’ll have to pay a 10% penalty and claim it as income on your taxes. This can be a small price to pay if all your resources are tapped and if you stand to gain a substantial return on a well-placed investment.
*Please consult your financial institution for more information.
A HELOC is a home equity line of credit, or a loan where the collateral is the equity in your home. Because it is a line of credit you won’t be advanced the entire sum up front, but it will behave similar to a credit card in that you can draw funds up to an established credit limit. Be aware of the following when considering a HELOC:
- Monthly payments are typically interest only, but a debtor is free to make a repayment as large or small as they please so long as it is more than the minimum payment and less than the outstanding principal.
- Repaying the loan will include the total amount drawn plus interest. You only pay interest on the amount drawn from the credit line.
- HELOCs have variable interest rates typically based on an index.
- Be conscious of the draw period, or the length of time you have to actually borrow funds from the HELOC. At the end of the draw period the full principal amount is due (referred to as the balloon payment).
- Failure to repay the loan will result in the foreclosure of the underlying asset.
Friends & Family
As you’re looking for capital, don’t forget about your friends and family. They have access to the same concepts noted above. When getting your family on board, make sure you have all your ducks in a row. Have the ability to describe your deal, strategy, cost analysis, potential return, your team, and organization in detail. Make sure to have photos and analysis sheets prepared. Remember, if you’re working with other people’s capital, it is essential to provide clear communication, integrity and professionalism every step of the way.
Whether you’re in the office, the gym, out for drinks, or at you’re local REIA meeting, mentioning your investments in passing may spark someone’s interest or plant the seed of a very fruitful partnership. You’ll quickly find that if you present an investment opportunity effectively to a complete stranger, they’ll be open to engaging with you as if they were a friend or family member. It never fails to surprise me how eager people are to diversify their assets and investments. Even with a limited understanding of the opportunity, many will be anxious to put their capital to work.
Hard Money Lenders
Hard money lenders are best known for offering short-term, high interest, unsecured loans for real estate projects. Hard money lenders can be vital to getting a project off the ground. They can take what liquidity you do have and apply that towards getting a larger loan to complete a project. Keep in mind that you may have to take advantage of some of the methods above to gain enough liquidity to qualify for a hard money loan. Hard money loans are one of the most popular tools for investing in real estate projects. See our related article – The Quick Reference Guide to Hard Money Lending.
No More Capital Woes
Whether you’re ready to close on a real estate deal or setting yourself up to find deals, making sure you have the capital and liquidity to execute is key. Figure out a way to leverage your capital and other people’s money to achieve your financial dreams. Let us know how you’ve creatively financed your projects!
Learn more about Kepler and how we can service your real estate needs. Click HERE![/tatsu_text][/tatsu_column][/tatsu_row][/tatsu_section]