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.
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.
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.
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!