How to afford down payments on investment properties

Question

Hi,

I am new here and learning but my question is how do people typically come up with a down payment. If you need 20% down for an investment property, that can be a lot of money. Do people typically use equity (HELOC) from other homes they own if the value has gone up a lot. What percent increase would a home have to go up in value for someone to do this? Or how much equity would someone have to have in a home to do this? That seems like it can be risky but is this common? If people decide to save for a down payment, do they keep money in a savings account or do people typically invest that money. If you need a 100k down payment on a 500k house, and it takes you multiple years to save up for that and you put your money in a savings account, your money will not grow (think of inflation) so would it technically be better to invest it in stocks or bonds in a non retirement account (something that you can liquidate very easily). It baffles me that some people are able to buy so many investment properties if you need around 20-25% for every down payment on every house. How do people acquire so many homes so quickly? Thank you.

Todd Rasmussen · Answer

@Henry Van Eijk

We saved for down payments for our first two investment properties. Sold one and bought one then sat down and realized that saving for down payments takes forever, we took a HELOC on our primary and bought houses needing a lot of work at a discount. Recycled that money through them with financing and bought our last 18 in the same amount of time it took us to buy our first three. Debt is impatience expressed financially.

Mary Aviles · Answer

@Henry Van Eijk Most real estate investors, especially the successful ones, don't use their own money. There are special lenders just for real estate investors, called commercial lenders, so you don't have to use your own money.

When you buy a property, there are lines of credit, Fix and Flip loans for flips, and Bridge Loans for rentals. Most of these provide 90%-100% of the purchase price, plus 100% of the rehab cost. These are provided by commercial lenders, and the amount and rates depend on your experience.

After you complete your flip, you reinvest the profits in your next purchase. And when you complete your rental, you BRRR it, and recycle your money to the next purchase. Both strategies require using very little to none of your money.

Finding out about these commercial lenders was one of the biggest things I learned about being a real estate investor. So you don't need to struggle to pay 20%, to save up for years and years, to own and risk your house through a HELOC, etc. You can finance your real estate purchases through commercial lenders.

Message me if you want more information on the one I use. They have the best rates, and fund in all 50 states. After using commercial lenders for years, I have used very little of my own money to buy my real estate portfolio.

Lawrence Briggs · Answer

@Henry Van Eijk , Depending on the lender, you can usually put down 15% for a single family investment property (non-owner occupied). I am actually doing that this week as I will be closing on my first rental. For me, I have a standard 9-5, but I started working a side gig as a food delivery driver. I saved all my earnings from the side gig and used it to fund the real estate deal. The funds are being used for the down payment and closing cost. Wishing you much success!

Joe Villeneuve · Answer

1 - Accumulated savings over time.

2 - Refinancing an existing property.

3 - Partners.

4 - Starting out using strategies that involve very little cash...such as Sandwich Lease Options.

Kerry Baird · Answer

What @Joe Villeneuve said, plus moving into an owner occupied house with low down payment, staying 2 years while making improvements and then moving out.  Doing that again and again.  I also cashed out my IRA and used that for houses, as I could control my investment better with houses, once I learned how, than I could affect any improvement in the stock market.

David M Trapani · Answer

1. Save money for down payments;

2. Seller finance (joining investor groups or meet-ups in areas of interest helps);

3. Pay cash for less expensive properties (as mentioned by Vicky L. may be OOS);

4. Cash-out refinance;

5. Lease with option to buy;

6. Buying subject to existing seller mortgage;

7. BRRRR;

8. Use 1031 tax-free exchange;

9. “Walk” seller carry back note & 1031 into replacement properties;

10. Cold call (or have agent do so) expired listings and properties owned for many years as these may afford seller carry back opportunities;

11. Second home financing with 10% down;

12. FHA, USDA, VA (if veteran) or other smaller down payment loan programs;

13. Self-directed IRA;

14. HELOC on primary;

15. Family, friend or partner loans;

16. Hard money loans;

17. Commercial or credit union loans (often lighter qualifying standards);

18. Partnerships or syndication.

Not an exhaustive list. Keep day job & save money. Work on r/e a few hours every day. Talk to agents and other investors. Make calls & make offers. Keep on going.

Best wishes on your journey!

Jim Parker · Answer

Hello Erik,

As a practical matter real estate investment requires cash and in a strong sellers market you either need lots of cash or a partner with lots of cash.  Seller financing is always a possibility but when the market is hot alternative financing strategies fall on deaf ears.  Primary residence cash-out refinance or a  HELOC if you can find it are always available if you have a pile of equity but you'll still have to stay below 80% LTV.  Retirement accounts are an option but it is seriously painful to do a straight withdrawal.  A self-directed IRA gives you the opportunity to invest IRA funds in real estate if you can tolerate all the IRS rules and restrictions that go along with it.  Lastly, savings accounts have been dead for 20 years and brokerage accounts with risk appropriate investment continues to be a way better idea.

Set your goals and work steadily toward them.  Every deal you do will put you closer to where you want to be whether it provides you with more wealth, more experience, or hopefully both.

Chris Levarek · Answer

@Henry Van Eijk Give "https://store.biggerpockets.co..." a read. But in a nutshell, if you can't fund it or you haven't saved for it, partner up.

David M Trapani · Answer

PS - 19. Use wrap around mortgage.

20. Sometimes starting small is better. Condos or small SFH. Improve, increase rents and cash out refi (BRRRR); 1031 into small apts (duplex, etc). Improve, increase rents, cash out refi or 1031 into NNN commercial.

21. House hacking.

Reggie Powell · Answer

@Henry Van Eijk real estate investing is a long play. When I decided I wanted to play, I saved for 2 years straight. I lived off of basically nothing. I saved up enough to buy 2 properties. In my state of California. I put 20% down, then 25% down on number 2. I saved for another year and then bought a third. That one I had to put 30% down to make the numbers work. I bought them all on 15 year loans. Now I’m looking to buy more. I listen to all the BP podcasts. It’s easy after listening to them to think anyone can go buy 30 homes in their first year and retire. Just live off of cash flow. The reality is, you need to save money. Be frugal first. Save up for your first rental. Learn your market. Whether that’s your local market or whatever hot out of state market you want to play in. Learn how to find deals. Then make an offer and buy a good property. For me, I use my money that I save from my job. I only make so Much, so the deals need to be really good. I don’t syndicate or use hard money. There are many ways to invest, but I think it’s best to learn with your money first before you go borrow from others to buy deals you’ve never done.

How to afford down payments on investment properties

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