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Financing Your Way To Retirement

Owning your own home provides you with your first source of creative financing via a home equity line of credit.

Case Study

When Greg first thought of investing in real estate, his first order of business was to buy a home. Greg knew that this was a huge first step in unlocking his investment potential. He found a home that he knew had great rental cash flow potential. Because he intended to use this home as his primary residence until he found the next one, Greg was able to lock in a great financing rate. He then took out a home equity line of credit for $10,000 and used that money as a down payment on his next real estate investment. He moved into the new one and then rented his original home. Greg continued this process over and over, and in two short years, his rentals were cash flowing over $2,800 a month.

Even though traditional lenders disapprove of using Borrowed Funds as down payments, using credit card funds works well with seller financing or lease options.

Case Study

Liz found a home for sale with an asking price of $60,000. The seller was willing to carry the financing with only $3,000 down. After analyzing the property’s expenses and potential income, Liz knew that the home would produce a $200 per month positive cash flow. She wanted to take advantage of the easy seller financing, but she did not have $3,000 saved up for the down payment. She was about to give up on the deal when she remembered the Visa card that she kept for emergencies. It had a credit limit of $4,000, but the cash advance limit was only $2,000. She decided to be assertive and call the Visa company to see if there was anything else she could do. She told them that she needed a $3,000 cash advance and requested a limit increase. They sent her a check for $3,000, which she used as the down payment to purchase the property.

A Lease Option agreement can give you the option to sublet the property and realize instant cash flow. When you sign a lease option agreement for this purpose, make sure that the contract doesn’t restrict you from subletting the property. Because you have signed the lease, you are the lessee or the renter. By re-renting the property, you are subletting.

Case Study

Terry was unable to obtain bank financing due to the unpaid credit obligations that appeared on his credit report. He was determined to not let his poor credit stop him from investing in real estate. Instead of offering to purchase a seller’s property right away, he asked the sellers to agree to a lease option. He was able to obtain lease options on five properties in the course of two years. It was a good deal for the sellers of the property because they didn’t have to worry about the costs to own the homes, and they knew that at the end of the agreed term, they would have a buyer for the property. It was a good deal for Terry because he was able to cash flow $200 per month from each property. He applied this money to his unpaid credit obligations until they were paid in full. By the end of the lease option term, Terry’s credit was in good standing. He purchased the properties with bank financing for the amounts he had previously agreed upon. The real estate market had risen since he first initiated the lease options, so he also earned some additional equity due to the appreciation.

Seller financing is a great way for someone to sell their property if they do not need a lump sum of cash, are not interested in using the profit to purchase more real estate investments and want to avoid large capital gains tax. When you are out there buying real estate and making a name for yourself as an investor, deals will come to you whether you are looking or not. It is not uncommon for an investor to purchase more properties from a previous seller.

Case Study

Luke saved up $5,000 that he used as a down payment to purchase one of Don’s rental properties. Don seller financed the remainder at a 7 percent interest rate. Luke ran the property well and cash flowed $300 per month from it. Because Don did not realize all of his profit from the sale immediately, his capital gains tax burden was lessened. He also enjoyed the monthly cash flow the properties still produced for him without the obligations of ownership. Don owned 10 other rental properties that he wanted to sell with seller financing as well. Because his experience selling to Luke had been a positive one, he offered the properties to her first. He was interested in purchasing all of the properties but he did not have an additional $5,000 per property for a down payment. Because Luke had already established a track record with Don, he decided to sell the properties to her with no down payment and seller financing at 7 percent. Luke averaged another $300 per property per month in positive cash flow.

Not all loans permit a seller to sell his property without paying off the existing financing. Most loans have a Due on Sale Clause that gives the lender the right to call the loan due if the seller sells his property. Be careful that you understand the terms of the existing financing when buying a property “subject to” the current lines. If the lender calls the property due, you usually have 30 days to obtain new financing. You want to make sure that you would be prepared if this were to happen.

Case Study

Todd was interested in purchasing a property, but the current interest rates were so high that after analyzing the property’s expenses and income, he realized that the property would produce a negative cash flow. Todd knew that the seller had a loan on the property with an interest rate of only 6 percent. With a rate this low, the property would produce a positive cash flow of $300 per month. He made an offer to the seller to purchase the property subject to the existing financing. The balance on the loan was $20,000 less than what the seller was asking for and Todd only had $10,000 cash that he got from an equity loan on his primary residence. He also offered to use this $10,000 as a down payment and for the seller to carry a second mortgage on the property for the remaining $10,000 at 6 percent interest. The seller preferred to sell his home outright, but he knew that due to the current interest rates it would be a hard sale. He agreed to Todd’s offer for a term of 10 years. This gave Todd ten years to obtain new financing that would pay off the first and second mortgages. Three years later, interest rates had decreased dramatically. Todd refinanced his property, and the seller was paid off in full.

One-hundred-percent financing can easily be obtained when you combine two loans to purchase a primary residence. However, lenders usually want to see at least 5 percent of the investor’s own funds used when purchasing a non-owner-occupied property. An investor’s own funds do not need to be cash savings; it can come from an equity loan on another property of the investor’s.

Case Study

Gary wanted to get started investing in real estate by purchasing his first home. He had good credit but no cash for a down payment. Gary’s loan officer helped him find 100 percent financing without private mortgage insurance obligations. The loan officer combined an 80 percent LTV first mortgage with a 20 percent LTV second mortgage. Because neither of the loans was solely above 80 percent LTV, their lenders did not require Gary to take out private mortgage insurance. He was also able to avoid coming into the close with extra cash for the bank fees and closing costs by negotiating these fees with the seller through the sales contract.

Principal is not being paid off with interest-only loans. However, the investor may still be building equity due to appreciation

Case Study

Sam owned 10 rentals that produced $2,000 in cash flow. His goal was to retire from his 60-hour-a-week job and start spending time with his family. He needed a total monthly cash flow of $6,000 to retire. The interest rates had gone down since he had purchased his properties, so he hoped that by refinancing them he would be much closer to his goal. After meeting with his loan officer, they determined that the new rates with a fixed 30-year amortized loan would increase his monthly cash flow by another $2,000. This was exciting to Sam, but it still would not be enough income to retire. His loan officer then ran the numbers using an interest-only loan and was able to increase the monthly cash flow to a total of $6,500. Because Sam was more interested in creating cash flow than equity, he decided to refinance his properties with the interest only loan and retire from his exhausting job. The smaller payments of the interest only loan helped Sam reach his goal of financial freedom more quickly.

Our team’s diverse backgrounds and investing experiences include a high school teacher, a college drop-out, an MBA graduate, a writer, a secretary, a real estate agent, a banker and a stay-at-home mom. Despite our diverse backgrounds, we all made the decision to truly change our lives. Although our starting points couldn’t have been any more different, we each discovered that our journey toward financial freedom began with real estate.

About sujoydhar

Sujoy Dhar is a business and technology and blogger. He is driven by the need to be creative and says that writing for various web properties allows him to stay up to date on one of the most rapidly evolving industries around. Each day provides Dhar with a new opportunity to educate readers about tech news and advances that help change the world for the better.

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