To Become Wealthy: Money for the Down Payments

Where does the money come from for the down payment for all of these investments that people by? This is still a bit if a mystery to me. I do not subscribe to a lot of the “no money down techniques”, at least not yet. But then there is the problem of where that money comes from. I have seen a few listings where the seller offers the option to help finance the down payment and this is probably where I will end up a lot of the time. I believe the term for this is seller financing. It is good for the buyer because you are buying the property with the all important OPM (other people’s money), but it is also beneficial for the seller, especially if they have a lot of equity in the property. Of course it is another way for them to make money thru loan interest, but it is also another way of deferring the profits from the sale to avoid any capital gains if they can not do a 1031 exchange.

I have saved enough money to cover the down payments on a couple of reasonably priced properties, but after that I do not know yet how I am going to buy more. My husband and I have discussed pulling some equity out of our current residence, but we have only owned it for 1 year, so there is not too much there.

At first I thought that Hard Money was going to be the key. But I recently did a lot of research into that, and it is not at all what I thought it would be. The big companies that lend the money do so at very high interest, for only 65-70% LTV and for very short periods of time. They only seem useful if you need the money ASAP and plan on paying it back in the near future with a lower interest loan or sale of the property. They also have minimums amounts that they will lend, usually around 500,000 to 1 million. I would love to be able to but a property with that amount as 70% of the LTV, but for now this offer is not on the table. So, this is clearly not an option for a small loan for the down payment.

I know that Hard Money can also come from individual lenders. I was advised to mention our needs to lawyers and accountants that we use. They are some professionals who are privy to their client’s financial info and are likely to know people who are looking to invest money. I have yet to try this, but it seems like a reasonable option. I have no idea what sorts of rate or terms these sorts of investors expect.

There is a web site that my husband recently discovered via a podcast. It is called prosper.com and it is a wonderful idea. Individuals can ask for any amount of money for a personal loan. They can put in photos and a description of what they need the money for. The site rates their credit and debt ratios and then people can bid to lend them money. I think the range of rates is somehow predetermined based on the borrowers credit. Lenders can join groups, or bid solo any amount as low as $50. The site then combines all of the bids into one loan. The loan is then paid back over three years thru automatic withdraws and deposits. We have considered borrowing money this way. I have actually seen a few other people borrowing money for investments already on this site.

The advice that I hear most often is to borrow money from family or friends or to join investment groups. I have considered both of these and am not totally happy with either.

Friends and Family- Unfortunately I do not have many friends that have extra money sitting around, at least not in the amounts that I would want to borrow. Most of them would have to take equity out of their homes or borrow from their children’s college savings to lend me the money to invest. The wealthiest friend that I have is currently in bad financial straights due to the loss of a job and may have to sell her own home to make ends meet. Honestly, my parents are the only people that I would feel comfortable taking a loan from. They would always lend me money if I needed it. Unfortunately they would be the hardest to convince that I would be making a wise investment. They would assume that I needed the loan to get out of some financial troubles regardless of what I told them. So, borrowing money from them means that they will worry that I do not have money to buy groceries until I can pay them back in full.

Investment Groups- Honestly I would love to form an investment group. The problem is that I have been burned before by getting involved in business with people that I thought I could trust. So, I do not know if I could be open enough, or trust others to be open enough to make one of these groups successful for me. We have discovered several meeting groups thru meetup.com and the richdad.com that we are going to try to see where they may take us. If we do go, I will be sure to write a blog about it all.

So, the only solutions I am leaving for myself is seller financing or to use our own personal money, savings and assets to grow our real estate portfolio. Of course first we need to purchase at least one property to put into the portfolio. But it looks like we are going to have to use the monopoly technique of trading in four houses for a hotel technique.

If anyone else has any creative financing options I would love to hear them!!!