Sources Of Capital
Real estate transactions involve money. Some people write the proverbial check, while others borrow to make a purchase. If you don't have the right circumstances to get a 100% loan then you will need money to put down. Depending on the transaction, the amount required can vary from 3.5% to 30%. It is easy if you've the cash on hand or readily available to make the purchase, but if you don't all is not lost.
One of the most common sources of down payment assistance is a gift from a family member or friend. Some loans have limits on the amount, and there can be tax consequences depending on the amount of the gift. Many parents take the view that they will be giving their estate to their children at some point, why not give it sooner and help them (and usually their kids, the donors' grandchildren) improve their living conditions and provide a financial investment opportunity to them.
If you don't have enough cash to buy what you want, look at your resources. It might be worthwhile to take money from your retirement account. You must consider all aspects of such a move, taxes, penalties, etc. if not old enough to withdraw, but if the circumstances warrant it you might have a better overall investment in real property over the long haul than you do with a low performing static retirement account.
If you are looking to invest in real estate beyond your primary residence, you may have an excellent capital resource in your retirement accounts. You can establish a self-directed IRA and take advantage of real estate opportunities with that cash. Chances are good today that you have better appreciation potential and minimal risk with your funds invested in real estate than in typical conservative financial positions. There are key restrictions for real estate acquisitions and holdings in a self-directed IRA that must be abided by, or the penalties are substantial. They are clearly identified and are not insurmountable. Just be aware of them and conduct your investment accordingly.
Money isn't the only means of transferring value in a real estate transaction. Some Sellers are willing to accept personal property for a portion of their equity. Some Agents are as well. We've seen boats, cars, cattle, dogs, notes and deeds of trust, even vacuum cleaners used in this manner. As long as value can be agreed to between the parties the property exchange can go forward. This works better in owner carry situations, or when blending the non-cash assets with cash to make the whole investment. Conventional lenders aren't always comfortable with such value exchanges, but talk to your lender before negating the idea. In the right circumstances everybody wins.
Some Sellers prefer to carry paper. The rate is usually higher than they will receive for the cash from a bank, and they can enjoy the benefits of a steady cash flow. That can be the start of a fun transaction. If they will carry paper, take some of your personal property for the down, you can buy real estate with little cash up front. Think of your assets and look for the right Seller.
Our Advice: If you want to buy real estate and don't have a lot of cash in the bank, open your mind. Your Agent might have a miracle loan program for you, i.e. the USDA Rural Development 100% Guarantee loan. If that doesn't fit you, maybe some of the assets in your safety deposit box can help you. That extra car might work well for the Seller's child, or, if a collectible it might personally appeal to the Seller. That lot you bought years ago to retire to might appeal to a Seller and contribute value to your transaction. A HELOC can give you great buying power quickly. There are many options that can work in the right circumstance. Chat with your Agent.
Cash is king, especially when it comes to getting a great price. It is harder to get a discounted price if you bring in alternative payment methods. Evaluate the cost of getting the cash assembled vs. contributing assets to the transaction. Compare apples to apples when evaluating your acquisition.
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