Chapter 3 Understanding Financial Statements And Cash Flows Multiple Choice Commercial Real Estate Investing – Where To Get Money For Your Down Payment

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Commercial Real Estate Investing – Where To Get Money For Your Down Payment

In this article I want to review some of the best ways to get the down payment you need to buy your first (or next) investment property.

First, multifamily and commercial real estate—when purchased correctly—continue to be strong places to invest even in a lagging economy. I would go further and say that investors can do well whether the economy is going up, down or sideways.

I’ve mentioned this before, but it’s worth revisiting. The real beauty of investment property is that there are several ways to make money:

1) Cash flow (monthly rents received)

2) Principal reduction (tenants pay off your mortgage)

3) Increase in property value (through proper management, property improvement and simply over time)

4) Tax savings (with depreciation and tax-deferred exchanges)

Of course, I can’t go into detail about all of these, but investors can be very successful regardless of what’s going on in the market.

OK, let’s talk about financing in today’s market.

Let’s face it. Lenders are very discouraged these days.

Gone are the days of low down payments demanded by lenders.

For a conventionally financed multifamily or commercial real estate project, you’ll be looking at a 20 percent down payment that the lender will require. For some projects, this can be 25 percent or even higher depending on the perceived risk of the bank or credit union for the project.

So where can you get an advance?

Of course, this could be a 50-page booklet, but let me focus on a few of my most popular places:

1) Other investors or partners

One of the most reliable places to get a down payment on a property is from other investors or partners. Many investors start partnerships with family members, friends or business partners.

2) 401(k) Loans

Many people have sizable 401(k) accounts built up over time. If your plan allows, a 401(k) loan can be a fairly easy place to get cash for a down payment. I will caution, as do many advisers, that you need to look at all aspects of this – including the potential effects on your superannuation fund.

3) Self-directed IRA accounts

Like 401(k) accounts, most people have taken a hit on their retirement funds in recent years. There may be some reluctance to release that money, but some of it could work very well in your next real estate project, especially if you don’t plan on touching that money for many years. A few years ago, this option was not very well known, but recently it is becoming more and more popular.

4) Existing investment properties

If you already own an apartment or piece of commercial real estate, you may be able to tap into some of the equity that has built up over time. Talk to your lender and pay attention to how this affects the cash flow of your existing property. The great thing about this is that it really is part of the whole model and benefit of investing in commercial real estate. It can be a great way to invest in your next property.

5) Home equity loans

Lenders today don’t provide as fast large home loans as they did 5 years ago, but this can be another way to get a down payment on your next investment property. Again, check how this affects your personal cash flow and if feasible, look into this option.

These are just a few of the ideas that investors from all over the country have used with success.

My opinion: if your project is THAT GOOD in terms of opportunity, then contract the project first and then find the money. NOT vice versa. If the project is this good, you shouldn’t have any problem calculating the down payment for it. In today’s world, this may take you a bit longer – so plan ahead.

Whether the market is going up, down or sideways, investors can and will find some great opportunities. In fact, many people have built substantial real estate businesses BECAUSE of falling markets.

These are just a few ways to raise money for a down payment. Again, carefully review how each of these might affect your existing personal or business financial statement and whether it all makes sense for the new property you’re buying.

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