Summary: If you’re focused on achieving financial freedom as fast as possible (Fast FIRE), it’s inevitable that you’ll run out of money eventually. So what are your options when you run out of your savings? Fortunately, there are a lot! In this two-part post, we cover some ways you can free up money to build your rental portfolio once you’ve exhausted your easily accessible funds. In part one, we focused on how to make more money. Today, we cover how to access the cash you already have and how to use other people’s money.
We are affiliate partners of EQRP and may receive a referral fee at no additional cost to you.
Access the Cash You Already Have:
Do a Cash-out-refinance
If you already have your own rental properties, you may be able to get a cash-out-refinance to free up equity created by market appreciation or by forcing appreciation.
A cash-out-refinance only works if you have significant equity in a property. Many banks are currently offering 70% loan-to-value and, in some cases, even less. So, for example, if you have a property currently valued at $100,000, the most you’ll often be able to cash-out of that property is $70,000.
Doing a cash-out-refinance works especially well if you have used the BRRRR method and your property has appreciated significantly or you own a property that that has gone up in value with market appreciation.
To explore refinancing a rental property, we’d suggest reaching out to an investor-friendly lender. Believe us, you don’t want to deal with a lender who doesn’t have a lot of experience with investors and investment properties.
You need a lender who thoroughly understands what you are trying to accomplish by doing a cash-out refinance or doesn’t hassle you about transferring the property into an LLC.
Your choice of lender could be the difference between success and failure.
Use a home equity line of credit (HELOC)
If you own a primary residence that has gone up in value (or that you’ve upgraded over the years, increasing its value), getting a HELOC to invest may be a good option for you.
HELOCs for primary residences often have better terms compared to cash-out-refinances. Also, you don’t get charged interest until you actually borrow the money.
Compare that to doing a cash-out-refinance, where you’ll pay interest on the money you cash-out for months while searching for a suitable rental property to purchase.
If you don’t own a primary residence, you can get a HELOC equivalent for a rental property called a line of credit. Unfortunately, every time we’ve explored a line of credit for one of our rental properties, the costs were prohibitive. Often the banks wanted to charge us significant up-front costs to set up the line of credit. Many also charge a fee to keep it open each year. For this reason, I suspect you’ll find that a cash-out-refinance works better for freeing up cash from your rental properties.
Though we aren’t cover 1031 exchanges in this article, keep in mind that selling using a 1031 exchange may work better for you than a cash-out refinance or a HELOC on your primary residence.
Sell stocks, other investments or liabilities, or your primary residence
Some of us have other assets (and liabilities) that we can sell to free up cash to fund our real estate portfolio. Note that the following options may not be the best choice for you for personal reasons. You just have to decide for yourself how important financial freedom is to you and what sacrifices you’re willing to make in order to achieve it.
One option is to sell your primary residence if you have one. Your primary residence is a liability. It takes money out of your pocket every single month. It doesn’t make money for you. However, many people see primary residences as an asset because they’re hoping the property will appreciate over time.
If a lot of your wealth is tied up in stocks, another option is selling those stocks. Consider using the proceeds to invest in an opportunity zone if you don’t want to pay taxes on the gains. There are a lot of rules associated with investing in an opportunity zone, so it’s worth talking to your CPA and thoroughly understanding the rules before taking the first step.
Free up Money from Your Retirement Accounts
There are several different ways to free up money from your retirement accounts.
You can borrow from your retirement accounts. The CARES act has increased the amount you can borrow to $100,000 if you have a COVID related hardship.
You can liquidate your retirement accounts (which is what we did). When you liquidate your retirement accounts, you may have to pay State and Federal income taxes on the amount you liquidate as well as a 10% penalty.
We only considered liquidation because we are in a unique situation. We live in a State with no income tax and have Real Estate Professional Status. So if you are going to liquidate, be sure to seek the assistance of professionals who can help you think through the downsides.
You can also use a self-directed account to invest in real estate. One of the more popular platforms for self-directed retirement accounts is eQRP, but lots of companies offer the option to shift your retirement account to be under your control, so you can choose to invest it as you see fit.
Keep in mind that there are many rules and limitations when investing in rentals using a self-directed retirement account. For example, your asset protection may be affected, you won’t be able to take advantage of the tax savings from depreciation or rehab projects and you can’t use any of the cashflow because you have to reinvest it. You can read about the downsides of investing in rentals using a self-directed retirement account by clicking here. Because of these limitations, people frequently tend to invest in more stabilized, turnkey properties. Or they will invest in syndications with their self-directed accounts.
As with all things, it’s worth discussing options with your CPA ahead of time. Since he/she knows the true state of your finances.
Use Other People’s Money
There’s a saying in real estate investing that the best way to invest is by using OPM (other people’s money).
So what are the options for real estate investing if you don’t have that much money on hand?
Perhaps one of the best ways to invest with little to no money down is to secure seller financing.
Keep in mind that even if 100% seller financing isn’t available for a deal. There’s always the option to combine seller financing with other ways of financing including commercial loans or even hard money.
Seller financing is when a seller decides to act as the bank and loan money to the buyer. Sometimes a seller will want a down payment, sometimes not. It depends on the seller’s circumstances and how risky they deem you to be as a buyer.
Often our Zero to Freedom Through Cashflowing Rentals students ask why a seller would consider seller financing at all? Why not just let the buyer get a loan from a traditional lender?
Providing financing can be attractive to a seller who is cashing out his/her portfolio and not planning to use a 1031 exchange. Rather than being faced with a large tax bill, seller financing allows the seller to spread out their tax payments over time. This is ideal for an elderly person who is looking for reliable monthly income through retirement.
Seller financing is also sometimes one of the only ways to make a deal go through. If your lender, for whatever reason, decides to lower the amount they are going to lend you at the 11th hour, the seller can make up the difference in order to make the deal go through.
Then, if you’re interested in pursuing seller financing on a deal, there’s usually no harm in asking the seller if it’s an option after you have the property locked up. If you never ask, you’ll never know if it’s a possibility!
Use Hard Money to do a BRRRR (Buy, Rehab, Rent, Refinance, Repeat)
Most investors who do BRRRRs use hard money loans to finance their initial purchase.
A hard money loan is a private money loan. It is associated with higher fees and interest rates than a traditional loan. These are used for the short-term when you can’t obtain traditional financing.
For example, you might use a hard money loan when a property is in rough shape and a traditional lender won’t lend on it. Or in cases where you want to pay cash to secure a great deal quickly. Hard money loans can also be used if you want to fund a rehab project.
To a new real estate investor, hard money often sounds daunting and, frankly, just a little “sketchy.” The truth is if you’re in real estate investing long enough, you’ll probably consider using hard money at some point. And just like anything in real estate, it comes down to the quality of your relationships. If you find someone you trust, there’s nothing sketchy about it!
With a good enough deal, you’ll be able to cover hard money costs and come out with a cashflowing rental. Ideally, it’ll be an infinte cash-on-cash return!
Partner with Someone with Money
A final option is to partner with someone who has some money. Then you would put in sweat equity on your side of the deal.
Whenever you partner, it’s really important to make sure you lay out all possible scenarios in your contracts. What would happen if you wanted to sell and your partner did not? How about if there was a capital call and you didn’t have the funds? What happens if one partner doesn’t provide the sweat equity initially promised? Investing in a good lawyer and building a contract that covers all the contingencies upfront is vital to a successful long-term partnership.
When Kenji and I enter partnerships on the property, we prefer the tenancy in common (TIC) structure. It gives us and our partners the freedom to be able to 1031 exchange out of the shared property individually at the time of sale (or even beforehand if one partner wants out). We’ll explain this structure in detail in a future article.
As you can see, there are a lot of opportunities to fund your real estate portfolio. From working harder at your day job and saving, all the way to putting in sweat equity in a partnership and doing BRRRR projects, you have the ability to do deals even with limited resources!
Have you done a BRRRR, been part of a partnership, or done seller financing? Have you found another way to creatively fund your real estate portfolio? Join the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians (for MDs or DOs only) or professionals group!
Interested in learning more about how to build a portfolio of cashflowing real estate? Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians or professionals group!