100% Financing

townhome

This month I’m trying to buy another rental property.  I’ve been thinking through how to do this with 100% financing but I haven’t made the effort to look for private funding yet.

Private funding is when you get a loan from someone you know rather than getting a loan from a bank. The good thing about it is that you don’t have to deal with a bank and the stringent lending standards most banks follow.  This lets you and the person lending you the money work out the details of the loan and the interest rate.

Private funding is great for the lender as that person is able to get a high interest rate on the money they lend.  For instance, lending to a real estate investor at 8% interest is much better than having that money in a checking, savings, or certificate of deposit account.

But since I haven’t done the work to build up a list of people willing to invest with me, I am working on trying another method.

Using Another Method

What I am doing to fund this property is still technically 100% financing but it is using a method I haven’t read about before. I know there is “nothing new under the sun” so people have probably been doing it for years; I just haven’t heard about it.

It may sound a little complicated at first but hang with me and I think that you will see that it is actually very simple.

The Problem

So my main problem was that I had a goal to buy another investment property by 2017. However, I ran the numbers on various potential investments and decided that it would never make sense for me to sell stock to buy Real Estate.

But I still had an idea about investing in Real Estate with no money down. When I ran the numbers this way I found that such an investment would still make a lot of sense for me.

But where would I get the money? I’ve talked a lot about private funding but that wasn’t available. What other sources of funds do I have available?

The first thing that occurred to me was the investment property that I already own. I actually do have some equity in that property and it is roughly the amount that I would need.

The problem with that was that I had recently tried to refinance that property and it hadn’t worked out. The bank would only give me 70% of the appraised value of the property and after such a dramatic reduction in the amount available to lend, the loan no longer made sense.

I kept wracking my brain and finally it hit me! I could use the money that I have in the stock market as collateral for a loan with the brokerage company. This can be done if you have a margin account. When you have margin account the brokerage will let you by more stock than you have money in your account.

Conversely this means that if you own $50,000 of stock, you can usually take out $25,000 in borrowings. The brokerage will closely monitor the stock and if it thinks the situation is risky the brokerage can actually force you to sell the stock!

But this is only a temporary solution.

Another Try

So I took the loan from my brokerage account. But I’m also going to try again to refinance my other investment property. This time I’m going to apply with a different lender. In addition about 18 months have passed from that application so I have built up more equity through paying down more principle.

Basically the loan from the brokerage company will act like a bridge loan. I hope to have it outstanding for only three months at the most.

Overall Strategy

So – my overall strategy is to get a bank loan for 80% of the purchase price and get a loan from my brokerage account for the other 20%. The brokerage loan will also cover my closing costs. This will leave me in a situation where the property is 100% financed. However, my preference is to use the refinancing of my investment property to lower my interest rate and pay back the brokerage loan.

This should all work out as long as I can get that other property refinanced and that will depend a great deal on the appraised value. I think the property value has been going up but we shall see what happens.

I am excited to be able to do a 100% financed deal because it will keep me from selling stock. It will also allow the tenant to pay off the entire cost of the property!

Author: Patient Wealth Builder

I live in the Mid Atlantic region with my wife and children. I am a finance manager for a Fortune 100 Company with over 10 years experience and have an MBA and CPA – but my true passion is investing!

8 thoughts on “100% Financing”

  1. Any reason to do this before year end? If you are planning to hold onto the property forever sounds like a plan, but if you intend to sell in the next ten years I’d beware because you are going to be leveraged and you don’t want to be forced to sell in a down market.

    1. I am planning to hold for twenty to thirty years. Thanks for the warning though I will think about it. I basically want to buy it using the bank’s money and have the tenant pay the bank. I am arranging it so the tenant pays the bank for the principal and interest. At the end of it all – I have a house that someone else paid for. And on top of that I get paid every month. So the downside is when I have repairs and vacancies. There is no way to prevent those but I do have a savings buffer. This isn’t a deal that is easy to find and that is why I have been patiently waiting, researching, and reaching out talking to others. But hey – the ink hasn’t dried on the sale, so we will see if the deal actually closes etc.

    1. There are certainly risks. One big one is if my portfolio drops significantly in value. If that happens the brokerage will begin to sell some of my holdings to pay for the loan. Then with a rental property you always have the risk of vacancies, bad tenants, and major repairs. I am hoping that I can very quickly pay back the loan to my brokerage to alleviate that risk. Once that occurs it will be closer to a plain vanilla buy and hold investment – only it will be 100% financed. I’ve been working on putting this together on and off for a year now so I’m also interested to see how it pans out!
      Patient Wealth Builder recently posted…The House I Did Not Buy MondayMy Profile

  2. Good luck! I will be following to see how this turns out. It’s a bit too much risk for me, but I think you can do it. 20% from your margin account doesn’t sound like too much. What’s the interest rate on margin accounts these days? 5-6%?

    1. Thanks it should be interesting! I have a backup plan to take a loan from my 401(k) if necessary to pay down any brokerage debt that I don’t want to carry and / or to take care of issues at the house. The property manager finds tenants in an average of 19 days so I’m thinking it won’t take much time to get someone in the property once I take ownership. I cut down the time that it will take by already getting an agreement so I should be able to drop the keys off with the property manager after closing.

      20% isn’t too bad but I have a highly leveraged portfolio so I could get hurt if the stock market takes a dive before I pay back the margin loan. I do use hedges in my account for protection and I’m going to take another look at them and perhaps layer on more! Right now the interest rate on a margin account is more like 7-8%. The interesting thing about that is that I originally wanted to find a private lender and pay them a similar rate. So I’m about even with what I expected from a private lender and I have a little less work on the front end to get the loan. I am hoping to use this deal as a proof of concept to show future potential lenders how it could work. I’ll keep everyone updated here!

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