You found the first investment property of your dreams but you’re having a bit of trouble coming up with a down payment. Don’t get discouraged. Here are five overlooked and underused sources you might be able to tap:
1. Home equity. Most homeowners think of home equity as a source of financing for home improvements, a new car or a college education — not as capital for investments. But the rates on these loans are often lower than you’ll find on many other types of loans. The disadvantage of going this route, of course, is that your home is collateral.
2. Assets. Equity in assets like cars, RVs or boats can be used to secure a bank loan or seller loan (see below). You offer a promissory note against the equity. Essentially, a lien is taken out on the assets so if you fail to repay your loan, the lender can seize and sell them.
3. The bank. You might be successful if you ask for a loan from a bank that knows your financial history and the property you want to buy. If you don’t have this kind of banking relationship, start one if you want to keep buying investment property. Consolidate your accounts at one institution and take out any small loans you need from it. Then, when you need larger sums, you’ll have a bank to turn to.
4. The seller. Borrowing from the seller is more common than you might think, particularly when the other party is eager to make a deal. Tell the seller that the down payment is all that’s standing in the way and ask for a loan. Interest on these loans tends to be high, ranging anywhere from 10% to 15%. But if the property is a good investment that generates income, a seller loan may be the answer.
5. Life insurance. Term life insurance is a pure insurance policy, not one that is combined with an investment component, as is the case with a whole-life or universal-life policy. If you have whole-life insurance, you may have accumulated substantial cash value over the years that can be used as collateral. But remember that the death benefit is reduced by the loan amount and the effective interest rate might be what you’d pay on a home-equity loan or on a loan secured by stocks or mutual fund holdings.
Before acting on any of these solutions, check with your financial advisor for guidance on the best course of action.
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