Over the last 2 years, since the start of the pandemic, we have seen extraordinary growth in the residential real estate market. As work-from-home has become a fixture in our lives, millennials have flocked to more scenic and spacious cities.
Real estate agents are just trying to stay afloat with the uptick in demand! The competitive transactions, with low inventory, has created a challenge for many. With a record 2021 in real estate behind us, many thought 2022 might cool off.
However, with interest rates undoubtedly rising, those younger millennials that sat on the sideline are likely to feel rushed to buy. Those might think, if they don’t buy now, interest rates might get away from them where they can no longer afford the monthly payment.
As a financial planner working with real estate professionals, I want to help assist you with your buyers in finding the creative financial strategies necessary to help them pursue their real estate dreams.
Whether its buying their first home or adding to their real estate portfolio, use this as a guide of possibilities outside of the conventional mortgage.
Real Estate Financing Strategies For First Time Homebuyers
Traditional IRA Withdraw Exception
If a homebuyer has funded a traditional IRA or their spouse, the IRS allows up to a $10,000 withdraw from a traditional IRA without penalty.
Typically, any money withdrawn before the age of 59 ½ without a hardship reason, requires a penalty to be paid. But, if you are a first-time homebuyer, the IRS waives this penalty to help Americans afford their first home.
The better news, is this rule applies to each spouse. So, if married, both spouses can withdraw up to $10,000 for a total down payment assistance of $20,000!
They aren’t that generous, as you might be wondering, because they do still require income taxes to be paid on the money withdrawn. But, this can be taken care of at tax return time, instead of at the time of withdraw.
ROTH IRA Withdraw
As a first time homebuyer under the age of 59 ½ , you have the potential ability to withdraw up to $10,000.
There are some complex rules, and it is best to seek your accountant, but this can be a great tax-free method to obtain some down payment funds.
In general, you can withdraw the funds if your it’s been 5 years since you first contributed the funds into the ROTH IRA. That time period begins January 1st of the year you made your first contribution to any ROTH. However, because you usually cannot make contributions of $10,000 in any given year, you will want to make sure you know when the basis for the last bit of the $10,000 contribution was made.
As for rollover contributions into a ROTH IRA, be extra careful here! Earnings from your rollover can be penalized if within the 5-year rule! Please seek guidance from your accountant.
401(k) Plan Loan
If your homebuyer works at a company that offers a 401(k) plan, they typically have loan options. Not all 401(k) plans offer loans, but the vast majority do.
The most common loan provisions allow for a loan of $50,000 or 50% of the total vested 401(k) balance, whichever is less. This money will incur a nominal interest rate attached to the loan and it does have to be repaid within 5 years of the loan taken. However, all of the interest accumulated is paid back to you along with the loan principle repayment.
I won’t go into too great of detail with this, as most real estate professionals are already know this strategy- in length.
Essentially, sellers who own their house free-and-clear will hold onto the note on the house while the buyer pays the seller back on long-term monthly payments with a negotiated interest rate attached.
However, in this competitive market, this strategy is less likely to accepted.
Lease To Own
This is also an option that most real estate professionals know well, so I won’t expand too much on it. Essentially this option allows a desired homeowner to make lease payments back to the original owner and deed holder. At the end of the agreed upon lease, the desired homeowner will purchase the home and take over title.
This is a dream scenario in todays’ housing market, but not to say that it can’t happen!
You might know someone who has been thinking about selling their house, but just isn’t ready yet. In addition, they might want to know that the new owners of their home are good people. They will certainly get to know your character through the term of the lease agreement. So, play nice!
Private Money Loans
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.
It’s hard to believe, but this method of down payment raising can actually work! We have seen crowdfunding take off in popularity over recent years. From hospital bills, college funding, and even a first home purchase. There are even crowdfunding websites specifically for homebuyers. Sites like Home Fund It, is an example.
Hey, put it out there to the universe!
For more financial strategies and tips, just get in touch!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
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.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
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.