Raising Money for a Down Payment: Financing Your Next Investment Property

A lot of us look for the quickest way to make a dollar, and that’s how we fall into the trap of losing our hard-earned money with get-rich-quick schemes. You’ve heard something similar to this before:

“Buy your next property with no down payment! Simply buy my course for $3,000, and I’ll show you how!”

The irony is that same $3,000 could have been used as a down payment toward your next property, but instead, you wasted it. It didn’t help you buy a property, and it helped someone else get richer hooking you on the promise that it would. Some things they “teach” are: max out your credit cards, or find investors. Well those suggestions aren’t helpful, obviously! Save your money – I just told you their secret for free!

Let me be clear about this – there’s no legitimate way to buy a property without a down payment. Meaning, no financial institution will grant you a loan without a downpayment. Getting into the real estate industry takes time, patience, diligence and most importantly some money.

I can however, give you a few tips on sourcing the funds needed for a downpayment for your next revenue property.

Save your money the old fashioned way

This is the longest and most obvious route, but it teaches a lot about discipline and personal finance that can go a long way. It’s also a reality check for a lot of people. It’s simple really: you set your financial goal and divide it by the number of months to reach it. This gives you the amount that needs to be put away every month.

For example, if you want $40,000 saved in 3 years, you would just need to put away $1,111 a month. Hmmm, not very achievable for most of us, is it? Don’t let this discourage you. Start now with a more realistic sum, and continue to explore some of the helpful options below.

Find an investor

I find this to be difficult, especially for those trying to get into this business for the first time. Afterall, purchasing an income property is not only about finding a down payment. It also involves running and maintaining it. Why would someone trust you with their hard-earned money to manage and run a property if you’ve never done it before? This is where your accounting, management or handyman skills tell the story of what you bring to the table when trying to secure an investor. You have to convince them of what you can do that they can’t do on their own. That’s what will make you an attractive partner for them.

Although you are not putting any of your own money down, your expertise will help during the negotiations of what % of shares you should own in the revenue property. Sometimes, you can come away with as much as 50% stake in the building. You got your foot in the door, and you truly did do it without any of your own money down! (Hmmm, maybe I should charge for this advice!)

Remortgage your house

Refinancing a home may be scary for some but it’s a great way to kick start your real estate project

This is by far my favorite way to purchase additional properties. If you own a house today, chances are the property has gone up in value and the principal has been paid down since you bought it. All that money that has paid down the principal and the increase in value it has today amounts to something called “equity”. That equity can be re-borrowed (it’s already your money) to use to apply it towards new income property purchases. When a bank issues a loan to you on your existing equity that is what is meant by refinancing your property (borrowing money against your equity)

Revenue properties are not the same as residential properties. They should be treated as a business: as long as it is cash-flow positive and it is paying down the new mortgage on the house, then there is minimal risk.

It doesn’t matter if the value of the income property goes down because I’m holding it for the long-term and all my expenses are paid for by my tenants.

Live in your revenue property

Forego your dream home for a few years to build up your capital by living in your first investment property

This last one is another favorite of mine because I like to think of real estate investing as a ladder: you should start from the bottom and work your way up.

Some of the more serious investors forego their dream home for a few more years. Instead they purchase a multi-unit building and live in one of the units for a few years. This allows a few things to happen:

• You can get away with purchasing a property with as little as 5% down because you intend to live in it (it therefore falls under the mortgage rules of an owner-occupied property).
• You are getting a taste of what it’s like to be a landlord, up close and personal with your tenants.  
• You pay rent, but instead of it going to the landlord, you are paying yourself.

The last point is important, and it ties back into my first tip about saving money the old-fashioned way. All of a sudden, saving large sums of money monthly doesn’t sound so unreasonable, and within 5 years, by combining a few of these tips, you can move towards bigger and better things.

I hope you enjoyed this article and found it insightful. Sign-up for my newsletter to get alerts when new content is posted, and please comment below with any tips you have for raising money on income properties not discussed here.