Is It Worth It To Borrow Money to Invest in Real Estate?
One of the most common obstacles that people encounter with real estate investing is where to get the money for that first deal. Few people have tens of thousands of dollars sitting in their checking account to invest. On top of that, many people already have a home mortgage to pay each month. They may believe that a bank wouldn’t be likely to lend them more money for another property.
The fact is that there are ways to find money for real estate investing. Borrowing money is one of those ways. But is it worth it to borrow money to invest in real estate? Successful financial gurus often say that, yes, it makes good sense to borrow money to invest. In fact, there are lots of plans you can follow to successfully borrow money to invest in real estate. Here are a few to consider.
Borrow From a Life Insurance Policy
Whole life insurance policies have cash out values. You probably already know that. But did you know you can also borrow against your whole life insurance policy at very competitive rates? You don’t even have to qualify with a certain credit score. In most cases, all you have to do is call your insurance representative and tell them you’re interested in borrowing on the policy. The rep will let you know how much you can borrow and what the terms will be. You could have the money in your bank in as little as a week. As long as you make the total payments on the loan as agreed, you aren’t jeopardizing your policy.
Borrow From Your 401K
Another way to borrow money to invest in real estate is to take a loan out against your 401K. The IRS allows plan participants to take out a loan based on the amount in the account. Again, you don’t need to apply or qualify for a loan of this type. Loan amounts, repayment periods and interest rates will vary, so you’ll need to speak to your 401K custodian to work out the details. Be sure to make all the repayments as agreed and on time, since penalties can be severe.
Get a HELOC
A HELOC is a “home equity line of credit.” A line of credit is different than a straight loan. With a line of credit, you take draws according to your changing needs. The interest rate is adjustable—tied to the prime rate— so you could be paying more or less interest than other loan options. Your HELOC could extend from 5 to 10 years, depending on your needs. One of the benefits is that you don’t have to pay interest on any draw you don’t take. If you’re doing a flip or simply aren’t sure how much you’ll need for your real estate investment long-term, a HELOC is worth considering.
Take Out a Home Equity Loan
A home equity loan is a straight loan against the equity in your home. Since home equity loans are asset secured against your house, you don’t need to qualify with a credit score. With this type of loan, you get a lump sum that you can use to do your real estate investment (or anything else you want to invest in). You’ll have fixed payments over time, with a fixed interest rate. Your repayment term could be up to 30 years since a home equity loan is essentially a second mortgage. Interest rates on home equity loans are typically very attractive. Be sure to make all the payments as agreed in order to retain ownership of your home.
Do a Cash-Out Refinance On Your Home
If you’ve owned your home for a long time, you could do a cash-out refinance on your home. This isn’t technically a loan because you don’t have to repay the money. Assuming you have enough equity, you can refinance for a larger amount than your original mortgage. You then have a brand new mortgage with new terms, optimally at a lower interest rate then when you originally made your purchase. You get the extra money in cash, which gives you the opportunity to invest in real estate.
Borrow From Family
Do you have family members with an interest in helping you succeed? You could borrow from family members to invest in real estate. If you decide to consider this, realize that you should do so only with a formal arrangement in place with written and signed repayment terms. No borrowing is worth risking a relationship over. But if you have a family member who genuinely is interested in funding your real estate venture, a contracted loan might be worth considering.
As you can see, there are lots of different ways to borrow money for real estate investing. There are probably even more that aren’t listed here. Lack of money doesn’t have to be an impediment to starting your real estate investment portfolio. When you’re resourceful, you can find places to borrow money, and yes it is worth it. The amount of potential gains on real estate investment has been proven time and again.
Of course, real estate investing is speculative, just like every single other form of investment. But real estate has significant benefits over things like stocks and bonds, including control over its success or failure. You should always talk to a professional about your financial plans.
If you’re interested in pursuing real estate investment, a good place to start is American Real Estate Investments. You can read about various opportunities and have a representative contact you if you have more questions.