4 Ways to Fund Down Payments for Real Estate

Many times, one of the biggest hurdles to purchasing rental property is having the funds for the down payment…especially when purchasing multiple properties! Here are some different ideas for quickly acquiring that money. Remember, these tactics may not always work depending on the lender and that you must really do your due diligence to be sure the numbers work.

1. 1. Borrowing or withdrawing funds from your 401K
   People will always warn you about the penalties involved with withdrawing funds from your 401K, however, I have a different view on it. As long as you’ve done your homework and know that purchasing this rental will profit handsomely, I think it will pay for these penalties over and over again during your lifetime. You should be in this for the long-run. A short-term investment won’t make this worth it. Typically, you can take up to 50% of your funds or $50,000 (they usually only allow whichever is less). But it could even be better to just borrow your 401k money. This way, you do not get hit with the penalties. Just be sure you can pay it back within the time-table given (typically about five years). Be sure to research this option thoroughly and to ask any questions to an adviser working with your 401k.
2. 2. Using 0% credit card offers
   If you have good credit, you probably receive those blank checks for 0% APR fairly often. If you have enough credit, you could easily write one of the checks out to yourself. This is practically free money besides the transaction fee. The key is to be sure you can pay it off before the 0% APR expires! Again, this relies heavily on doing your due diligence of a potential real estate deal. The numbers must work!

   

   Credit: Rich Dad Education Real Estate Blog

3. 3. Draft a promissory note with someone you know
   You might know someone who has extra cash or is getting terrible returns in a CD or savings account. They’d like to get a better return on their money, and you’d like to purchase a rental property. This is your chance to propose a deal with them. Be prepared and have the numbers clearly laid out showing why lending you money is a good idea and prosperous! Once they agree, you should draft a Promissory Note that you both sign. I offered $100/month interest-only payments for 3 years to borrow $20,000. At the end of the 3 years, I owe the $20,000 back and the note ends or we do it again!
4. 4. Pull equity from your current real estate
   This of course only works if you already own RE, but is still a great option to keep building your portfolio. Make sure the terms and rates work for you! Shop around at several banks. Sometimes local banks have better loan offers.

While some of these options are risky and even controversial, they can be a great tool to build your portfolio of rental real estate. If a deal is not going to make money, then you must not move forward. Using these techniques, you must remember that you’re technically 100% leveraged in the property, so you MUST have cash reserves and know for certain that the rental will perform. I have personally used all of these examples except for using equity. However, I’m sure I’ll use this tactic soon. Do you have unique and creative ways of coming up with a down payment?