How to fund down payments/closing costs

Question

Hi everyone,

I’m looking for advice on how fund downpayment/ closing costs for rental properties to maximize the amount of units I can buy per year.

Should I save the cash, use personal credit of line, home equity ( I own one property), etc.

I’m also wondering if the tax benefits from borrowing funds to invest outweighs the benefits of using your own cash.

Thanks in advance! I love reading all the great stores on Bigger Pockets.

Jordan

John Warren · Answer

Account Closed you can house hack, which is an amazing cheat code in the investing world. I have had several clients that were able to buy three multifamily properties in less than two years here in the western suburbs of Chicago using house hacking.

Once you have house hacked, you have to use a value add strategy. Always buy properties with built in equity and then access that equity through cash out refinances and HELOCs.

Lastly, save all you can, live a modest life style while you scale, and funnel all excess profits into the business. This is the part no one wants to talk about, but you can't build a large portfolio with no capital. If you don't have the capital, you have to buy good deals that will help you buy other good deals. Make sure you keep as much capital as possible working for you.

Brie Schmidt · Answer

To echo on what @Gloria Wiekert said, yes you can do that but you still need to show the bank that you have the closing costs in accessible cash or a 401k.  Also, the property needs to appraised for the total amount, something you will not know until half way through the deal.  So don't think that this option is a guarantee and not have enough funds to close

I have seen these alternative programs at higher rates, they aren't worth it IMO.  Unless you are doing major work to the property it will take you at least 5 years to get enough based on appreciation to refi into conventional, let alone have enough equity to cash out.  I ran numbers on them and using the average purchase price of $700k for the Chicago north side it would cost you over $150k in additional interest over a conventional loan.  Who is to say the rate will be what they are now when you actually have enough value to refi?  Then you are stuck throwing away money

Account Closed - you could use a personal loan or line of credit, but understand that will be reported on your credit and reduce your debt to income.  For example - say you borrow $50k and your payment is $500/mo that will actually lower your approval amount by $100k

Ronan Donnelly · Answer

Account Closed, some options are:

1) Partner with people who have cash by bringing or managing the deal

2) Hard money

3) Bring on private passive investors

4) Borrow from 401k

Agree with @John Warren, forcing equity via value-add and a cash out refi or HELOC is one of the best ways forward and validation that you are getting good at identifying, acquiring and improving assets. That skill, once acquired is highly scalable. Good luck!

Gloria Wiekert · Answer

Account Closed Congrats on taking your first steps towards investing :) Adding onto what the gentlemen above have recommended, a lot of first or second time buyers ask for a closing cost credit from the sellers when they make their initial offer. Let's say the property costs $100,000 and your closing costs will be around 2% - you would write your offer with a $2,000 closing cost credit so your total offer (assuming full price) would be $102,000. It's not much compared to the downpayment but every little bit helps when you're trying to fund a deal on a tight budget.

I also highly recommend doing your lending homework and finding all the low downpayment options you can, especially if FHA isn't an option for you. I know a few lenders in Chicago who's firms have rolled out 5% and 10% owner-occupy loans to help out people who aren't sitting on a pile of cash. They typically have higher interest rates but that likely won't matter when you cash out refinance later.

Lastly, try to hunt down those elusive but lucrative seller-financed deals. They exist but can be harder to find otherwise everyone would have one :) Best of luck!

Account Closed · Answer

Thanks to everyone for your great suggestions!

For the HELOC option would you suggest using your own cash to pay them off quicker or just let the rental income pay it down gradually?

Patrick Afrifah · Answer

@Gloria Wiekert I’m in the Chicagoland area and I’m currently looking for banks or credit union that can provide 95% LTV HELOC. Can you share the names of some of these lenders? Thanks.

Guifre Mora · Answer

A HELOC is a great way to fund your RE purchases. It's a revolving line of credit. You pay it back from your rents and repeat the process. If you have enough equity it can be a substantial asset.

Repayment is up to you. You are basically acting as your own bank. Pay from your own funds in addition to the rents can regenerate this equity quickly and you can repeat the process. It also gives you money for repairs if needed.

How to fund down payments/closing costs

Most Popular Reply