Unlock Real Estate Funding: Strategies For Investors

Real estate investing can be lucrative, but it requires a lot of capital. Here are some ways to get funding for your next real estate deal:

- Retirement accounts: You can borrow up to 50% of your 401(k) balance, with a maximum loan amount of $50,000.

- Credit cards: Credit cards can be used for short-term financing, such as acquisition and renovation.

- Crowdfunding: Crowdfunding websites are a quick way to get funding, but they tend to be expensive.

- Friends and family: If you have a successful track record, your friends and family may be willing to invest in your next deal.

- House hacking: You can buy a multifamily property, live in one unit, and rent out the others to cover the mortgage.

- Traditional lenders: Banks, credit unions, and other financial institutions offer long-term loans at lower interest rates, but they have strict requirements for loan qualification.

- Hard money lenders: Business owners who lend short-term loans with higher interest rates.

- Private lenders: Individuals who lend large sums of money in exchange for a return on their investment.

- Seller carry-back financing: The buyer gets their mortgage through the seller, creating more flexibility for the down payment, appraisal process, and closing costs.

Borrowing from retirement accounts

Borrowing from your retirement account to fund real estate investments is a viable option, but it's important to understand the risks and limitations. Here are some key points to consider:

K) Loans

You can borrow against your 401(k) to fund real estate investments, but there are some important restrictions. Firstly, not all 401(k) administrators allow loans, so you'll need to check with your plan provider. If they do permit loans, you can typically borrow up to 50% of your 401(k) balance or $50,000, whichever is less. The loan must generally be repaid within five years, and you'll need to pay interest on it. While the interest is paid back into your 401(k) account, loan repayments are subject to normal income taxes. Additionally, if you lose your job, the loan balance usually has to be repaid within 60 days to avoid penalties and tax ramifications.

Roth IRA Withdrawals

With a Roth IRA, you can withdraw the principal contributions without penalties or taxes at any time. This makes it a good option for those who have been investing in a Roth IRA for a while and have substantial funds available. However, it's important to note that you cannot withdraw any earnings or income from the account without incurring taxes and penalties. An exception to this rule is for first-time homebuyers, who can withdraw up to $10,000 in principal and interest penalty-free, as long as the account has been open for at least five years.

Self-Directed IRA (SDIRA)

A self-directed IRA gives you more flexibility in how you invest your retirement savings. You can roll over funds from your existing 401(k) or IRA into an SDIRA, and then use those funds to invest in real estate. However, there are several restrictions to be aware of. You cannot live in or actively manage the property, and you must hire a third party to manage it. Additionally, any revenue generated from the investment must be returned to the SDIRA account to maintain its tax-deferred status. Not all SDIRA providers allow real estate investments, so be sure to choose one that does.

Investing in REITs

Another option is to use your retirement account to buy stock in a Real Estate Investment Trust (REIT). REITs are companies that own various real estate assets, and investing in them offers more flexibility and liquidity compared to direct real estate investments. You can purchase REITs through traditional 401(k)s and IRAs, or through an SDIRA.

Using credit cards

Advantages

The main advantage of using credit cards for real estate investing is the potential for streamlining the buying or renovation process. There is no need to deal with lender or mortgage approval, which means instant financing, quicker closing times, less paperwork, and reduced risk of financing delays. Credit cards can also help to improve your cash flow, especially if you are a real estate beginner or are already juggling multiple projects.

Another benefit is the potential for lower interest rates. If you have a card with a zero- or low-interest promotional rate, you may save money compared to traditional financing options or cash-out refinances. Additionally, credit cards provide the opportunity to earn rewards such as cash back, points, or miles on your expenses.

Disadvantages

The most significant drawback is the high risk of overextending yourself. Credit card payments are typically higher than mortgage payments, and if your ability to make payments is affected, you will have fewer protections and options than with a mortgage. Your credit score is also likely to drop due to increased credit utilization, and your debt-to-income ratio will increase, impacting your ability to secure other financing.

Tips for Using Credit Cards

To successfully use credit cards for real estate investing:

• Ensure you have a high enough credit limit to support the purchase, down payment, or renovation costs.
• Check with your closing agent, attorney, or mortgage company to see if using a credit card is allowed for purchases or down payments.
• Be prepared to take out a cash advance, use a third-party payment service, or access a HELOC if direct credit card use is not possible.
• Choose cards with benefits that align with your spending habits and financial goals, such as introductory APR offers, low or no annual fees, and generous welcome bonuses.
• Always aim to pay off your balance in full each month to avoid high-interest fees.

Examples of Suitable Credit Cards

• The Blue Business® Plus Credit Card from American Express: Offers 0% intro APR on purchases for 12 months, then a variable APR of 17.99% - 25.99%. It also provides 2X Membership Rewards points on eligible business purchases up to $50,000 annually and has a $0 annual fee.
• Ink Business Unlimited® Credit Card: Earn unlimited 1.5% cash back on every purchase, with a $900 bonus after spending $6,000 in the first 3 months. This card has a $0 annual fee.
• Chase Sapphire Preferred® Card: Features a generous welcome offer of 60,000 bonus points after spending $4,000 in the first 3 months, plus 5X points on travel purchased through Chase Travel. It has a $95 annual fee.
• U.S. Bank Cash+® Visa Signature® Card: Allows you to choose bonus categories, including furniture and electronics, with 5% cash back on two categories and 2% cash back on one everyday category. It has no annual fee.
• Citi Double Cash® Card: Offers a simple cash-back program with 2% on every purchase (1% when you buy and an additional 1% as you pay) and a 0% intro APR on balance transfers for 18 months. There is no annual fee.

Remember that using credit cards for real estate investing is a short-term strategy due to the high-interest rates, and it's crucial to pay off the balance as soon as possible to avoid excessive interest charges.

Crowdfunding

Interested investors contribute to a pool of capital collectively sourced from other investors. Their pooled money provides financial backing for current or prospective real estate investments. These opportunities can be residential or commercial holdings and include either the development of new housing, retail or office space, or partial ownership in a share of existing holdings.

Advantages of Crowdfunding

• It's a chance to diversify assets and your investment portfolio.
• In comparison to traditional real estate investments, low startup capital is required.
• Its shared cost structure enables financiers to invest in larger property holdings than they might have been able to access individually.
• The risks associated with ownership are split among multiple investors.
• It offers access to new or exclusive opportunities.
• Investors can hold commercial real estate or real estate portfolio holdings in addition to residential properties.
• It offers exposure to the real estate market without investor involvement in the upkeep and maintenance of a property.
• You don’t need to qualify for a mortgage or make regular payments on a mortgage.
• It doesn’t require owners to guarantee loans with property and assets.

Disadvantages of Crowdfunding

• Crowdfunding platforms may charge investors management or advisory fees.
• Your assets can’t be easily sold off or divested quickly.
• Participants must pay taxes on any dividends they receive.
• As a relatively new investment offering, many platforms and projects lack a lengthy track record of success.
• Some platforms may require their investors to be accredited investors (relatively well-capitalized) before they can participate.

Examples of Crowdfunding Platforms

• Fundrise: Allows investors (even non-accredited investors) to quickly get started with real estate crowdfunding and start buying into both residential and commercial properties by teaming up with other investors.
• RealtyMogul: Offers both non-accredited and accredited investors access to commercial real estate investments and individual properties, including a variety of REITs that allow investors to spread their investment dollars across a range of real estate holdings.
• CrowdStreet: One of the more well-known real estate crowdfunding sites. It provides accredited investors with access to commercial real estate projects that aim to deliver high returns on investment.
• Yieldstreet: Largely geared toward accredited investors, Yieldstreet offers a way to crowdfund real estate financing vehicles rather than own a part of residential or commercial property holdings.
• EquityMultiple: Allows you to invest in privately managed commercial holdings. Real estate investment opportunities can include assisted living facilities.

Borrowing from friends and family

Open and Honest Communication

Transparency and honesty are crucial. When approaching a friend or family member for a loan, be upfront about your investment plans, risks, and expected returns. Avoid sugarcoating or downplaying any potential risks. Open communication builds trust and reassures lenders that their money is in capable hands.

Setting Clear Expectations

Discuss repayment terms, interest rates, and any collateral requirements in advance. Put everything in writing to avoid misunderstandings later. A written contract, including a promissory note, supporting mortgage documents, and a repayment schedule, provides clarity and protects both parties.

Timely Updates and Accountability

Keep your friend or family member informed about the progress of your investment. Provide regular updates and promptly communicate any delays or setbacks. Consistent communication demonstrates responsibility and strengthens trust.

Handling Difficult Conversations

If your investment faces challenges, such as unexpected repairs or market downturns, address them openly. Present solutions and alternatives. Avoiding problems will erode trust, while proactively addressing them builds confidence in your ability to handle adversity.

Nurturing Bonds Beyond the Loan

Remember that the transaction goes beyond the financial aspect. Maintain open communication, check in regularly, and express gratitude. Invite your lender to see the property or attend an open house. Show that you value their involvement and emotional investment in your real estate journey.

Dealing with Potential Challenges

Be transparent about the risks involved and set realistic expectations from the outset. Communicate regularly and provide updates to ensure everyone is on the same page. Have a plan in place for managing the investment and be clear about what will happen if things don't go as planned.

House hacking

• Renting out rooms in your primary residence: This is one of the most straightforward methods of house hacking, especially if you own a larger home with spare bedrooms. By renting out rooms, you can generate a steady income stream to cover your mortgage and other housing expenses. However, this approach requires sharing common spaces with tenants, which can impact your privacy and potentially lead to conflicts if not managed well.
• Investing in multi-unit properties: You can purchase a duplex, triplex, or fourplex, live in one unit, and rent out the others. This approach offers more privacy since each unit typically has its own entrance and living spaces. It can also provide a higher rental income as you're renting out entire units. However, the initial investment required for multi-unit properties is usually higher, and managing multiple units can be more complex, especially for new landlords.
• Offering short-term rentals: Leveraging part of your home for short-term rentals on platforms like Airbnb or VRBO can be lucrative, especially in tourist-friendly locations or during peak seasons. Short-term rentals often command higher nightly rates and offer flexibility in pricing and availability. However, they require active involvement in managing bookings, guest communication, and maintenance.
• Building accessory dwelling units (ADUs): ADUs are separate living units on your property, such as granny flats or in-law suites. They provide tenants with their own space while allowing you to generate rental income. Creating an ADU often involves a significant upfront investment and navigating local building codes, but it can add considerable value to your property.
• Renting out space on your property: If you have extra space on your land, such as a garage, barn, or even your driveway, you can rent it out for storage or parking. This can be a straightforward way to generate additional income without necessarily impacting your living space.
• House flipping: House flippers often use house hacking strategies by purchasing older homes in need of repair, living in them temporarily while making fixes, and then selling for a profit. This approach allows you to save on rent or housing costs during the renovation process.

Frequently asked questions