While most aspiring investors have come to understand the allure of building wealth through real estate, many falsely believe that they don’t have the capital to get started. After all, the average person rarely has $25k to $100k sitting around without purpose.
There are, however, a number of creative ways the ordinary investor can gather the funds needed to participate in a multifamily real estate deal. In this article, we’ll take a look at some of the most popular sources of capital that can be accessed quickly and easily.
Common Investment Capital Sources
- Cash – This one may sound obvious but, remember to think about cash creatively. In addition to actual green dollar bills you keep under your mattress, the money you have in savings accounts, CDs, stocks and mutual funds are also technically deemed cash because they can be easily liquidated. You may also consider selling any high-priced items you own such as boats, luxury vehicles, timeshares, antiques, collectible art, etc. A note of caution however - emergency funds should never be used to fund investments.
- Qualified Retirement Accounts – Whether you have a Solo 401(k), Self-Directed IRA, or you are contributing to your employer’s retirement plan, you can tap these accounts to fund a syndication deal. Money from self-directed accounts can typically be put in a variety of investment vehicles, including real estate. Most Solo 401(k) and employer 401(k) plans allow you to take out a loan of up to $50,000 or 50% of the account balance that can then be used to invest. When you take a loan from a qualified retirement account, the interest you pay goes back in the account, so technically the loan costs you nothing.
- Home Equity Loans – Left idle, the equity in your primary residence earns you nothing. You can, however, take out a home equity loan or a line of credit against it and buy into a multifamily syndication. The passive income stream generated by your investment will typically be enough to cover the monthly loan payment, while you are also earning capital gains and benefiting from advantageous tax breaks. The math is simple – you take advantage of interest rate arbitrage by borrowing at a low rate and earning returns at a high rate.
- Whole Life Insurance Policies – Your whole life insurance policy grows in cash value with each premium payment you make. You can borrow against that cash value and use the cash to invest. Brand new policies won’t be of much use unless they are properly structured for high early cash value (the Infinite Banking Concept). Normal whole life policies can become an excellent source of untapped capital once they have aged a few years. There is no requirement to repay life insurance policy loans; instead the loan amount and accrued interest will be deducted from the final death benefit.
- Underperforming Real Estate Assets – If you own undeveloped land, or any residential or commercial property that is not performing as well as you expected, consider selling those assets and putting your capital into an apartment syndication instead. Multifamily tends to deliver higher risk-adjusted returns than other real estate asset classes.
In addition to these five popular sources, there are a number of other less common ways to raise multifamily real estate investment capital. Your financial advisor or CPA can help you evaluate and choose the best options available to you.
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