Finding Extra Dollars to Finance Real Estate

• John Vandivier

I previously wrote about <a href="http://www.afterecon.com/economics-and-finance/lower-home-prices-part-2/">finding lower priced housing, but low prices still aren't free. At some point you have to pay up. This article assembles a number of traditional and less traditional funding sources you may not have considered.

Some of these financing techniques can be used for other purposes including debt consolidation.

Section 1 goes through general loan and equity access options which do not require current real estate ownership. Section 2 goes through real estate-backed lending options. Section 3 explores basic commercial finance options. Section 4 goes through real estate purchase structures which can lower down payment.

Section 1 - Personal Loan and Equity Access Options

  1. Purchase Real Estate with IRA
    1. You can use your IRA to purchase investment property, but it's subject to certain rules.
    2. Unlike the 401(k) options discussed below, this IRA approach does not have any additional fees or penalties if done correctly.
    3. Three of the most important rules in using this approach in my opinion:
      1. You can't mortgage the property purchased.
      2. You can't live in the property purchased. It must purely be an investment.
      3. Income gained from the IRA property is paid into the IRA.
    4. One thing I'm not sure about - the rule that you can't mortgage an IRA purchased property: Does that mean you can't finance at all, or you still have non-mortgage finance options? Can you mix IRA money and non-IRA money in a deal?
    5. First-time home buyer exception: You can withdraw from your IRA to help buy a home as a first-time home buyer. You are considered a first-time homebuyer if you haven’t owned a home (or had financial interest in one) at any point during the last two years. So, even if you owned a house at some point in the past – say, five years ago – you may well meet the first-time buyer requirement.
    6. You can move money between an IRA and 401(k) without penalty in many cases.
  2. Liquidate your 401(k)
    1. Cryptocurrency has a much higher return compared to traditional 401(k). You could cash out of your 401(k) and invest in crypto and make a bigger retirement gain.
    2. If you believe option 1.1 then you think of 401(k) more as a constraint on investing and less as a beneficial asset - but you still might intentionally circulate your 401(k) to make income gains through employer match, intentionally taking the early withdrawal penalty but netting ahead of standard income. Look out for vesting considerations and be sure to actually run the numbers as this could easily cause income loss in some cases.
    3. Keep in mind that liquidating your 401(k) could potentially utterly ruin your retirement. This would be considered risky stuff according to standard financial analysts. For me, a crypto investor with a six figure income, it's nbd.
    4. If this liquidation allows you to move into a home and gain equity through mortgage payments instead of rent, this move can be a net win.
    5. If this liquidation allows you to consolidate high-interest or high-monthly payment debt, this move can be a net win.
  3. Take a loan out on your 401(k)
    1. If you think your 401(k) is a decent retirement vehicle then option 1 is silly, but you can still leverage the equity in your 401(k) to take out a loan.
    2. The interest on the loan would be paid back into your 401(k). That is, you're lending to yourself.
    3. It's not all roses with this approach either.
  4. Crypto Equity Loan
    1. Do you have crypto like me but you don't want to buy and sell to avoid transaction fees, tax events, and disclosures? You can leverage several services, including at least one blockchain-based service, to get a fiat loan backed by crypto equity, with a high-but-lower-than-credit-cards interest rate of around 12%.
    2. Some options include Nexo, BlockFi, Salt, and Unchained Capital.
  5. Auto Loan
    1. Obviously you can get a loan to buy a car, but that's a little different than when you take a paid-off car to a lender in order to back an auto equity loan. I'm talking about the latter here.
    2. Access the equity in your car to back a loan.
    3. As far as I know, this is a really shitty option. The car loans I've seen have interest rates comparable to a credit card, with the added bonus that you can lose your car. I'm not really sure why you would do this unless maybe it's the only way you will get approved for credit reasons or something.
  6. Other Equity-backed loan
    1. If you have some kind of weird, valuable stuff, you might be able to custom-underwrite this as equity for loan. As an example, you may be able to get a loan against an art collection.
  7. Personal Loan
    1. P2P lending services like Prosper and Lending Club can issue rates as low as 6% to those with good credit, often beating banks. For those with bad credit, P2P services may still qualify you when a bank wouldn't.
    2. Or, just get a personal loan at a bank.
    3. For real estate, you can also use hard money.
    4. In case you're under the impression that a loan can't be used for a down payment, think again. Holding cash in a savings account for more than 60 days will season the money, allowing it to be used in a down payment.
  8. Put it on a credit card!
    1. This is an awful way to finance a whole down payment, but I don't think it's an unreasonable addition to a financing mix.
    2. Getting a new card might hurt your credit score, so be careful. If your existing credit lines won't support your needs, consider asking your current credit card provider to increase the limit instead of getting a new card.
  9. Ask friends and family for money.
    1. This will typically make you look like a shmuck, but it will sometimes work.
    2. Consider forming a legal business to limit liability and shmuckiness. Turn your friends, family, or talented past acquaintances into actual business partners instead of donors and pity lenders. Obvious disclaimer: Conducting a proper business is hard.
Section 2 - Real estate-backed finance options

Accessing real estate equity through finance may be financially preferred to liquidation in order to fund a new purchase. A property owner can avoid many of the fees associated with the sale transaction, and possibly economize on some of the purchase transaction fees. By reducing expenses, the total purchasing power available towards the purchased property is increased.

Risk and time-cost can also be reduced this way. With a finance strategy, no negotiation between buyers and sellers needs to happen after the appraisal. Temporal delays of buying and selling are reduced. Certain other stresses may be reduced or eliminated, like holding open house and moving furniture.

If you do intend to sell instead of finance, by the way, check out some of these interesting real estate services:

  1. Discount agencies
    1. Redfin
    2. Purple Bricks
    3. Houwzer
    4. Beware of certain issues related to discount agencies. Even so, the math might favor this approach.
  2. Premium agencies
    1. An alternative strategy is to intentionally pay more for a top quality agent which can potentially help buy and sell faster and with better pricing.
    2. Upnest can help with that.
On to the financing options themselves:
  1. Second Mortgage
    1. I'm a big proponent of the second mortgage. It can be used to gain cash which could make a high interest investment, netting gain over a low home loan interest rate, or for debt consolidation or other purposes.
    2. Another good use would be to use a second mortgage to get rid of your property mortgage insurance.
    3. If you are interested in purchasing a non-primary residence without selling your house, this is a great option.
    4. By making minimum payments on a second mortgage, like a first mortgage, you will accrue equity. You would eventually be able to refinance the mortgage and potentially roll it back into the first mortgage.
  2. HELOC
    1. A home equity line of credit is a great alternative to a credit card. Many lenders will even issue a card which spends out of a HELOC account. If your intent is to cut up your credit cards, a HELOC can work the same way with a lower rate, higher limit, and lower payments.
    2. But, if your intent is to really finance a longer term property purchase or investment, HELOC is decidedly worse than a second mortgage. Payments are interest-only and making minimum payments may result in a growing balance. You never gain equity with HELOC and the rates are higher than second mortgage.
  3. Bridge loans
    1. This is a pretty whack option in most cases, but it exists. A bridge loan can be issued when you are trying to sell one property and buy another property. In many cases you should just wait for the sale to go through, but the bridge loan can be used if you can't afford to wait on the sale to go through.
  4. Portfolio Loan
    1. If you own even a single property you can enter into a portfolio loan which may allow the equity in existing property to be used as a down payment on the purchase of additional property.
    2. This becomes a decent option if you already have equity in a single property, but it becomes a best-of-breed option if you have equity in more than one property.
3 - Commercial Lending Options

Commercial loans don't come in a ton of unique flavors. There's pretty much just a commercial loan, which is an alternative to a personal loan available to legally formed businesses.

Instead of accessing new loan structures, using a business will allow you to access special terms under the structures already mentioned in sections 1 and 2 often have special terms for legally structured businesses. Some deal structures mentioned in section 4 are only available to commercial entities, or businesses.

As an example, LendingClub will issue personal loans up to $40,000, but they will issue business loans up to $300,000.

You can literally start a corporation for under $1000 and take advantages of some of these options.

Commercial loans have a huge liability benefit. If a company you own goes bankrupt, depending on the formation of the business, you may have little to no personal liability.

Limiting liability also makes it easier to work with other people which can really open up doors. Be careful though, poorly structured terms can easily ruin your personal ability to obtain return on investment.

4 - Deal Structures

  1. FHA loan
    1. As little as 3.5% down on a primary residence. Keep in mind that a duplex, triplex, or even a 4-plex may be considered a primary residence depending on your state.
    2. I don't believe 5+ units in a building can be considered a primary residence in any state.
    3. A legal divorce might make you and your significant other able to each purchase an FHA-backed 4-plex, getting 8 units between yourselves with 3.5% down. Your significant other might get a little mad if you ask though ;)
  2. VA Loan
    1. If you are a veteran you can get $0 down and other cool financing options
  3. Navy Federal Credit Union
    1. $0 down like a VA loan, but veteran family members can qualify in addition to actual veterans. Some fees are a bit higher.
  4. USDA Loan
    1. $0 down, but you have to buy rural land and other qualifications apply like income limits.
  5. SBA Loan
    1. SBA offers a number of loan structures for legal businesses, which can finance a property at 90-100%+. That is, 10 to 0% down or even less. Yes, in some cases they will pay you instead of you paying a down payment.
  6. Piggyback Loan
    1. One of my favorites. A piggyback loan occurs by opening a first and second mortgage at the same time. This will generally result in a higher interest paid, but it may cancel PMI resulting in a net lower monthly and faster equity accrual, or it may be used to reduce the down payment required.
  7. Explore lenders and sellers
    1. Traditional commercial loans are 20% down but some banks, even without a special structure, may allow 10% down. Private loans can be 5% down without a special structure, just by getting a good deal.
    2. Other banks may not advertise such terms but you may be able to get special terms just by asking, and particularly by presenting a deal from a competitor and asking for better terms. For low dollar deals you will get some eye rolls but for higher dollar deals you will see increasingly flexible terms, or sometimes completely custom contracts. This will be particular the case when working with lenders other than traditional banks, such as credit unions or hard money lenders.
    3. You can see some really creative deals when engaging property owners directly, without an intermediary. Sky's the limit.