Creative Ways to Generate Down Payment

[Michael Taylor]

So I purchased my first investment property and I want to purchase another one with in one year. I am looking for various/creative ways to come up with money for the next down payment. Anyone have any ideas?

[Jon Holdman]

The best way is to save up. Buying rentals is not much different than buying stocks. Your returns are generated by the money you invest. Hopefully your first rental is generating income and that will let you accumulate the next down payment quicker. This can be a slow process starting out, but becomes a snowball rolling down a hill in time.

But I suspect you're looking for some alternatives to the slow and steady approach.

1. Get a second job.
2. Sell something.
3. Cut as many expenses as absolutely possible. Dave Ramsey in "Total Money Makeover" provides a lot of ideas on this.

Maybe that's still not quite what you have in mind. Perhaps you're looking to borrow money. The downside to this is that most places you can borrow money result in money that costs more than the rental generates. That is, if your rental is producing 10% cash on cash returns and you can borrow money at 6%, you're still getting the 4% difference. OTOH, if you're paying 15% for the money, you're losing 5% on the portion that's financed with this expensive money. That may still work if you can repay it fairly quickly.

Sources of cheap money (less than what you might earn from the rental)

1. 401k
2. Home equity loan
3. Personal line of credit
4. Asset based loan (stock, vehicles, other properties, anything else with significant value)

Source of expensive money (more that what you'll earn)

1. Hard money (rarely will these lend in second position, but you might leverage a different property, short repayment terms)
2. Credit card cash advances
3. Equity partner

Equity partner is really the worst choice. They're not a loan that gets paid back. If you go 50/50 on the down payment with a partner, they're a partner forever and will get 50% of the returns forever. The only way to get rid of them is to buy them out for 50% of the equity at whatever point you do the buyout. That also means you have someone else who's "helping" you make decisions.