For the better part of the last 2 decades, this economy has been pretty darn strong! Dare I say, unprecedently strong.
Yes, of course, there has been some ups and downs during that period, as well. But, overall unemployment has been low, interest rates have been very low, and the stock market has rallied. It’s been a long-standing boost that has helped many increase their wealth rather rapidly.
For my fellow geriatric millennials out there, most of us came out of college, either before, or right after the Great Recession. And, the newly learned term geriatric millennial is something I wear proudly! We learned a great life lesson at the perfect time. Save and invest for the future, because you never know when something could come along that will threaten your ability to financially support yourself.
We also further changed traditional norm by getting married and having children at a later stage in life. This also helped pad our digital wallets a bit more.
All of this is said because as older millennials have bought their primary homes within the last few years, they have saved enough cash to start thinking about adding on an investment property. As I said, most of us understand the need for future income in case things go South again.
As a follow up to my last blog post about creative financial strategies to buy your first home, this blog post is meant to give financing strategies to buy investment real estate. Financial planning for real estate agents involves helping you best serve your clients by bringing forth creative financial strategies.
As my audience is mostly real estate professionals, namely real estate agents, this is meant to service as a guide to help you coach your clients into unconventional methods to purchase investment real estate property.
Here are 5 Creative Financial Strategies to Finance Investment Real Estate
Cash-Out Refinance
This is one that is obvious to most successful real estate agents, but is necessary to add into this list.
With most older millennials having bought their first properties within the last 2-5 years, and with significant U.S. housing appreciation over that time period, there is a lot of equity to tap into.
The key here is interest rates. The idea is that your buyer will want to keep their monthly mortgage payment the same or lower. Although that scenario is slimming with the recent mortgage rates increasing, it’s still plausible. All of the equity that is taken out in the refinance process is used tax-free for a down payment on an income-generating investment property.
I think that’s pretty sweet! Why wouldn’t someone take advantage of that opportunity right now?? Especially for those with the risk-appetite to be a landlord.
What if the cash-out refinance results in a higher monthly mortgage payment?
Well, what’s the expected net income? Is it much more than the increase in your new primary property monthly mortgage?? Are you buying a short-term rental property where the net income can be dramatically more than a long-term rental?
In those cases, I think you should carefully consider accepting a higher primary monthly mortgage on a cash-out refinance!
Home Equity Line of Credit (HELOC)
A lot of homeowners have heard of a HELOC, but not all are sure of the benefits of having one. For some reason people hear “line of credit” and associate it as bad debt. And certainly, if improperly used or mismanaged, it can be. But, what I find funny, is that people are very willing to take on much more debt in a mortgage.
A HELOC can be a good financial tool for a few different reasons. For one, it’s great as an added emergency reserve account. With todays’, still, historically low interest rates, it’s much cheaper borrowed money than a credit card.
But for our purposes here, by utilizing your home’s equity, you can potentially be granted enough of a credit line to use as a down payment on an investment property! In addition, if you have left over additional credit, you can use those funds for improvements, as well.
You might be thinking, “yeah, but HELOC interest is no longer a deductible expense and that makes it less attractive”.
Au Contraire, my friends. Yes, it’s true that the Tax Cuts and Jobs Act of 2017 rid deductible HELOC money for PRIMARY PROPERTIES. However, it is still a deductible expense when used for INVESTMENT Properties.
So, you now have a down payment, renovation funds, and potential tax deductions.
Self-Directed IRA
I am first going to mention that I think self-directed IRAs only make sense to those who are very well-researched and hands-on when it comes to the stringent rules of self-directed IRAs. But, they can be an additional source of tax-deferred funds to buy real estate.
Essentially, you can rollover 401(k) funds, IRA funds, SEP IRA funds, etc. into a new self-directed IRA account. That account/entity can then purchase the investment property. Let’s be clear here though. It’s not you, but the entity. I highly advise talking to an accountant first! You can also read more about it from my previous blog post.
Private Money Lender
Private money lenders have different sets of loan requirements. For starters, they want to get to know you on a more personal basis to determine your borrowing credibility. In fact, they can even be your family, friends, acquaintances, or neighbors.
Because, its’ not officially business-related (a loan company), they can negotiate more flexible loan terms and interest rate. This can be a very viable option for those who need additional down payment funds that aren’t able to be obtained through traditional methods.
Cash Value Life Insurance
Some of us have life insurance policies that we purchased some time ago. Usually people buy term life insurance, which means that for a lower monthly premium, we have life insurance on our spouses for a specified time period, like 30 years. These are great to have, but it’s a bit of a gamble as far as how long we will live.
Because of the above statement, you may have purchased a more permanent life insurance policy. One that doesn’t have an expiration date. It likely builds up a “cash value” over time. Cash value life insurance is a type of permanent life insurance that includes an investment feature. Cash value is the portion of your policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency.
The great news? You can borrow that cash value, potentially tax free, for a down payment on an investment real estate property! It will likely reduce the original death benefit on the life insurance policy, so its’ something to talk over with your family, financial planner, and your accountant.
For any of these strategies or additional ones, I’m happy to discuss the options potentially available to you or your clients! Just get in touch!
Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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