Though the most common way to come up with a down payment for an investment property – particularly for first-time real estate investors – is to scrimp and save until you have enough to take out a hard money loan, that’s not always feasible. In fact, waiting until you have enough money saved up can seriously delay your investing plans. Fortunately, there are a few ways you may be able to get creative to come up with a down payment for an investment property, which this guide explains.
3 Creative Ways to Come Up With a Down Payment for an Investment Property
Check out these creative ways to come up with a down payment for an investment property to see if one of them may work for you:
- Use your home equity
- Tap into your 401(k) or Roth IRA
- Make it a co-investment with friends or family
Here’s a closer look at each.
Creative Down Payment Funding Idea #1: Use Your Home Equity
As an investor, you know that you’ll have to face at least a little risk when you buy your first (or tenth) investment property; a lot of that risk is financial.
If you’re ready to take the plunge on your first investment property, you may find it worthwhile to use your home equity to get enough cash for a down payment. Here’s how it works:
- You take out a home equity loan or line of credit (HELOC) on your primary residence.
- You use the cash you borrow to make a down payment on your investment property.
- You pay back the home equity loan or HELOC over time, just as you would with any other type of loan.
There are a few things to keep in mind if you’re considering this option:
- You need to have built up enough equity in your home to cover the loan.
- You need to be comfortable with the idea of having two mortgage payments (or one mortgage payment and a HELOC payment) each month.
- Your interest payments may not be tax deductible.
- You likely need to pay closing costs when you take out the home equity loan or HELOC.
If you’re interested in using your home equity to come up with a down payment for an investment property, talk to your lender about your options and whether this type of loan makes sense for you.
Related: Should You Allow Pets in Your Rental Property?
Creative Down Payment Funding Idea #2: Tap Into Your 401(k) or Roth IRA
Another way to access cash for a down payment on an investment property is to tap into your 401(k) account – but only if your employer permits it. Some employers allow employees to take out a loan from their 401(k) accounts, while others will let you withdraw money outright.
The biggest advantage of using your 401(k) to come up with a down payment is that you’re essentially borrowing money from yourself, so the interest rate is usually quite low. And, if you’re able to repay the loan according to the terms set by your employer, you may not have to pay any taxes or penalties on the withdrawal.
However, there are some drawbacks to consider before you tap into your 401(k):
- You’ll have less money saved for retirement.
- If you leave your job, you may have to repay the loan immediately – or face taxes and penalties.
- Your ability to contribute to your 401(k) will be reduced while you’re repaying the loan.
If you’re interested in taking out a loan from your 401(k), talk to your employer about the rules and regulations regarding 401(k) loans.
You may also be able to use money from a Roth IRA to come up with a down payment on an investment property. With a Roth IRA, you contribute money that you’ve already paid taxes on – so when you withdraw it, you don’t have to pay any taxes or penalties.
There are a few restrictions on how you can use money from a Roth IRA, but if you follow the rules, you can withdraw up to $10,000 for a first-time home purchase without having to pay taxes or penalties.
If you’re thinking about using money from a Roth IRA for your down payment, talk to a financial advisor to make sure you understand the rules and restrictions.
Related: 7 Essential Curb Appeal Tips to Help You Sell a Flip
Creative Down Payment Funding Idea #3: Make It a Co-Investment With Friends or Family
If you’re having trouble coming up with the cash for a down payment on an investment property, you may be able to get help from friends or family members. One way to do this is to structure the deal as a co-investment.
With a co-investment, each investor contributes a certain amount of money towards the purchase of the property. The investors then share in the profits (or losses) when the property is sold.
There are a few things to keep in mind if you’re thinking about using a co-investment to fund your investment property:
- You need to have a good relationship with the people you’re going to be investing with.
- You need to have a clear understanding of what each person’s role will be in the investment.
- You need to have a clear exit strategy for when (and how) the investment will be sold.
If you’re interested in using a co-investment to come up with the down payment for an investment property, talk to your potential partners about the idea and see if they’re on board.
Related: How to Make a Small Bathroom More Attractive to Prospective Buyers
Do You Need a Hard Money Loan?
Paces Funding is the top hard money lender in Georgia, North Carolina, South Carolina and Tennessee. Apply for a hard money loan here or click through our site to find out how we can help you now!
[…] Home/Business, Investing, Investment, Investments, Tips/Everything You Need to Know About Cash-on-Cash Return in Real Estate Previous […]