Real Estate Investors – What’s The Real Deal With Self-Financing
Posted by admin under: Auction Schedule Jan 15
There are a few different schools of thought to self-financing. One that most people agree on is that it is incredibly easy and sometimes less expensive to use your own cash or already established home equity line of credit (HELOC) from your primary residence or any other houses you own.
HELOCs normally come with their own check book so you simply write a check for whatever amount is needed and you are literally your own bank. What’s more is that your interest rate is normally lower than private lenders and payments are based on the amount borrowed not the full amount of the credit line available. Plus you may be able to deduct all or part of the interest paid (ask your tax accountant for details).
So, what do you do if you are presented with a deal that you will only get if you can close within 12 hours? Well, your choices may be limited to your HELOC or a hard money lender. Many investors in this situation will use their HELOC to purchase a deal quickly and then refinance with a local bank.
HELOCs also come in handy for down payments and/or renovation costs. This way you don’t have to deal with a draw schedule and bank inspections. Check with your individual bank or lender as some do not allow you to self-finance renovations.
On the other hand, using your own funds provides zero leverage. Simply put, leverage is how far a certain pool or amount of money will take you. What this means is that if you have $100k to spend, it simply does not go that far before it is all spent. It is the difference between buying one house for $100,000, or putting 20% down on 5 houses worth $100,000 each.
When all is said and done, you spent $100,000. But, you either own one house outright worth $100,000 or you own 5 worth $500,000. On the surface, you have spent the same amount. It’s leverage.
Another option that may be available to you in terms of self-funding is to use your retirement plan. IRAs, 401(k), Keoghs, etc. may be available for use to purchase real estate. Realize that in most cases (depending on your age) the profits automatically go back into which ever retirement vehicle you originally borrowed against. There are many variables when it comes to using any type of retirement account (especially if you are younger than eligible retirement age to withdraw the money). Please seek professional advice on this before committing to anything.
You will need to know about vesting in the name of a custodian or trustee, the legal way to pay it back, the way to ensure an arms-length transaction, the difference in tax consequences, etc. If your IRA is self-directed you need to protect yourself by making sure you receive the proper information in order to reduce your liability. With proper legal and tax advice, and guidance, real estate can be an excellent component to any retirement plan.
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Sunday, January 15th, 2012 at 7:29 am and is filed under Auction Schedule. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.