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Alternative Funding Strategies To Use On Your Next Deal

Published on Friday - October 09, 2015

One of the biggest hurdles for investors, old and new alike, is finding ways to fund their deals. In a perfect world, you would have access to capital – allowing you to make any offers you like. While this may be the goal, it is not always realistic for a relatively new investor. Whether you are looking for down payment funds or enough to finance the whole deal, you may need to be creative in your approach. The capital you need is all around you if you know where to look. Not having cash available is not an excuse for backing out of a deal. Here are four funding options you may not have thought of:

1. Equity: One of the first places you should look for funding is in your existing portfolio. Whether you are looking at your primary residence or rental portfolio, it may hold the equity you need. With property values having gone up in many markets, your equity position may be much greater than you had thought. The two main ways to tap into this equity are through cash out refinance loans and home equity lines of credit. The easiest and most cost effective option is the line of credit, which allows you to repay only the money you use. You get to keep the terms of your existing first mortgage, while adding a second loan to the property. Instead of paying a full complement of closing costs and prepaid items, a line of credit has only a minimal set of fees. A cash out refinance, however, may allow you to take a larger chunk of cash out of your property.

2. 401K funds: There are many investors who scoff at the notion of borrowing from retirement funds. This option is certainly not for every investor, but in the right situation it should be considered. Before you do anything, you need to see what the fees and penalties are. There will certainly be some of each, but it may be worth it. Here is where you need to look at the projected returns that your money will bring you. If you are buying a rental property and the cash flow is strong, your money is being well spent. The appreciation and tax benefits you will receive over the years will be well worth it. The right property with considerable cash flow is probably a better retirement plan anyways. Short term flips and rehabs may not make the most sense if you are pulling from your 401K. It is important that you speak with your account manager and find out everything you can before you do anything. For the right property, talking money from your 401K can be the best option.

3. Private money: You can almost always find someone that wants to invest in real estate. This will require you to take a smaller stake in the deal, but something is always better than nothing. Start by sending an email to friends, family and co-workers announcing that you are in the real estate business. You can also start by sending posts on social media. If you reach out to 100 contacts, you will get at least a handful of people who are interested. Get into specifics of the deal or how you want this partnership to go. In most cases, they will fund some or all of the deal while you will handle the real estate side. Working with people close to you may be difficult at times, but it is also very rewarding. This could be a one-time transaction, or something that develops into a steady working relationship. With the unpredictability of the stock market and general interest in real estate, there are more people interested in investing in real estate than ever before. Take advantage of private money, and your business will grow accordingly.

4. Credit cards: Using credit cards for some or all of your funding can be a risky proposition. For starters, the concept only works if you can find a card with rates at or new zero percent. It is especially important to understand the interest rates, fees and terms when using a credit card to fund a deal. By missing out on the introductory APR period, you may be subject to an increased rate moving forward. If there are no hidden fees, you can write yourself a check and use this money to grow your real estate business. However, you need to be disciplined enough to pay off or pay down these cards as soon as your deal closes.

Not having funds for down payment or funds to close shouldn’t be the end of the line for you. Hard money is always another option, but you may not need to go down that road. Being able to think outside the box and come up with options separates you from the pack. With these four options alone, you may be able to get all the funds you are looking for.

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