Non-Traditional Ways to Finance Your Investment Property
There are a handful of traditional ways to finance your investment property. But if you have exhausted the tried-and-true path or are interested in funding your investment home without the assistance of traditional banks, below are alternative ways for you to consider.
Traditional Mortgage
Let's start with the most traditional way to purchase a home: securing a loan through a lender. This is because it allows buyers to own a home without putting up the full purchase price of the home in cash. For primary residences, buyers can put down as little as 3% of the purchase price for a downpayment. However, it is typical for lenders to require a 20% down payment when it comes to investment properties. There are instances where companies will allow for less than 20% down payment, but when you put down less than 20%, you'll be required to pay an extra fee called Private Mortgage Insurance (PMI). Avoiding the additional expense of PMI is advantageous when buying an investment property because, ideally, buyers will have net cash flow above all expenses and every dollar of savings counts toward this goal.
If we put the 20% down payment into context and say the home purchase price is $250,000, your down payment will be $50,000. In addition, lenders charge Closing Costs, which are usually around 2% but can vary. You'll see this on Doorvest home profiles as "cash outlay" or the total amount you'll need to bring to the home closing.
Cash Outlay = Down payment + Closing Costs
What makes investing in real estate through leverage so special is that your home will appreciate on the purchase price despite you only putting down 20%. In the example of the $250,000 home, if appreciation is 8% in the first year, your home's value will have increased to $270,000 - an increase of $20,000 even though you only had to put down $50,000.
Finally, if your strategy is to accumulate more and more investment homes, using leverage will save you funds for your next home purchase rather than paying for the home in all-cash.
All-Cash Purchase
Purchasing in all-cash can give a buyer the peace of mind of not having any debt obligation to pay off. Paying in cash eliminates the month-to-month mortgage and interest expenses, which increases cash flow each month. In the event of a potential tenant vacancy, having paid with all cash will eliminate the burden of covering mortgage expenses that month.
Here's the financial breakdown on an example home profile with a 6% mortgage and 20% down.
Compare that to the financial breakdown of paying for the home in all cash and eliminating the mortgage expenses.
The cash flow dramatically increases without a mortgage. However, an all-cash buyer will still be responsible for tax, insurance, HOA (if applicable), management, and maintenance or turnover expenses.
Purchase through a Limited Liability Company (LLC)
Purchasing using an LLC is another buying option for customers, and we've seen many Doorvest customers take this route. A few advantages of buying through an LLC include liability protection, an easier means to invest with partners, and tax benefits. Liability protection means that you as an owner will not become personally liable for the company's debts or liabilities. Without an LLC, customers still find protection from liability through insurance policies, though.
A particular tax benefit of purchasing through an LLC is eliminating double taxation. In short, LLCs pay tax on profits, but owners do not. It should be noted that customers can still receive certain tax benefits even without an LLC. We advise that customers consult with a CPA or tax professionals for tax-related questions.
Buying Doorvest homes with partners without an LLC is also possible, but having an LLC can help make the finances and profits neater for all sides. If financing your purchase, one important aspect to consider is that many mortgage companies do not lend to LLCs, including our partner, Beeline. Some companies do lend to LLCs but might do so with higher interest rates (especially if the LLC was recently created). To bypass the high-interest rates, we've had customers close using their name and then transfer the title to an LLC afterward.
Doorvest's Client Partners are happy to assist if you are interested in purchasing through an LLC. We have partnered with Tribvebest to simplify the creation of an LLC and streamline the buying process of your investment home.
1031 Exchange
The 1031 exchange is a savvy strategy that investment property owners can utilize to defer capital gains tax, by selling one investment property for another “like-kind” property. In short, you can sell an investment property and buy another property of the same or greater value while avoiding capital gains tax on the first property, provided the second is used for investment purposes.
Since Doorvest has already identified homes that are ready to purchase directly from us, we are the perfect platform for a customer looking to use a 1031 exchange. If you are looking to use a 1031 exchange when purchasing a Doorvest home, we'll connect you with our 1031 partner, Accruit.
Other
These purchase options are less common, but we may see more and more happen in the future as these practices become more widespread:
Through a retirement account
Our friends at Rocketdollar are making this become a more common practice. If you have a tax-advantaged Self-Directed Rocket Dollar IRA account or Solo 401(k), you can start investing through Doorvest.
Cryptocurrency
We currently do not accept crypto when buying a home, but as a forward-thinking company, this could change in the future. That being said, certain companies do offer loans secured by crypto; however, due to crypto's volatility, these loans will be at a higher APR than a traditional mortgage lender. If this is something you want to pursue, find out more here.
Adjustable-Rate Mortgage (ARM)
Many Doorvest customers are electing to use an Adjustable-Rate Mortgage instead of the common fixed-rate mortgage to curb the rising interest rate. ARMs usually have a lower rate for the first couple of years, followed by a higher rate for the subsequent years after the initial term. For instance, in a 5/1 ARM, the interest rate is lower for the first 5 years and then will be "adjusted" higher after the 5th year. If you plan to hold the investment for 5 years or less, this could be a savvy way to have a lower interest rate than what’s available on a 30-year loan. If you plan to hold longer than 5 years can refinance to a lower fixed rate before the 5 years mark (assuming interest rates are lower than they are currently).
Nonetheless, there are cases where fixed rates are lower than ARM rates. We recommend you speak with a loan officer for the best current rates. Our partners, Catlex and Beeline, are looking to offer these options soon.
Home Equity Line of Credit (HELOC)
This method of buying homes is available to present homeowners who have built up equity in their property. For instance, if a Doorvest home costs $200,000 and your primary residence has $300,000 in equity through on-time mortgage payments and appreciation build-up, you may be able to "cash out" the money needed to buy the Doorvest home and in effect, pay for it in cash. HELOCs are a second mortgage, so there will be interest on the withdrawal, but customers have recently seen lower rates for HELOCs than investment property mortgages. Our partner Caltex offers this option.
30/15 Loan
Similar to a 30-year fixed mortgage, the investment loan is amortized over 30 years. This one is unique because it is fixed for the first 15 years, and on year 16, the remaining balance is due (also known as a "balloon payment"). The benefit of having a balloon payment written into the loan contract is that customers have found lower interest rates for the first 15 years in comparison to a 30-year fixed mortgage. If you are planning to hold the home for 15 years or less, this is another savvy strategy you could use for a potentially lower rate. Even if you intend to hold longer than 15 years, you could always refinance before the balloon payment comes due.
Conclusion
There are no 'perfect' purchasing options. Sometimes, using a traditional mortgage might give you the best opportunity to close a deal or two. Yet, there will be other times when using alternative options makes more sense when purchasing an investment home through Doorvest. In both scenarios, Doorvest's Client Partners are here to help you decide on the purchasing choices that work best for you. You can contact them at clientpartners@doorvest.com, or schedule a call to get your questions answered instantly.
Build Wealth Through Doorvest
Get started by submitting a fully refundable deposit to begin receiving exclusively curated rental opportunities that match your investment criteria.
OTHER CATEGORIES
RELATED