Don’t have the deposit for your next purchase? Have the money but don’t want to use it? Here are 8 ways of finding the deposit to buy your property…
#1 Credit Cards.
Now I do not recommend that you do this because interest rates on credit cards are extremely high and of course the only reason you would want to do this if the cash flow from your property is substantial. And when I say substantial I’m talking about an IE ratio of more than 2. What’s an IE ratio? It’s the income to expense ratio on the property. So if the property had an income of 2,000 and all the expenses including your finance charges were 1,000 then I would say that’s an IE ratio of 2. Is it easy to find IE ratio of 2 properties around the world? No it’s not. It’s pretty hard, but if you want to use credit cards to fund your deposit you must have good cash flow especially if your main funding is coming from a variable rate of interest because interest rates do change. And of course if they go up you could be in a lot of problems. A slightly better way is.
#2 Personal Loans.
If you can use a personal loan to fund the deposit then at least you’re getting a better rate of interest over probably a longer period of time. It’s not the same as a mortgage but it’s still going to help you buy the property. Again, you still need good cash flow to fund this because in both of these two cases you’re effectively funding 100% or borrowing 100% of the purchase price of your property.
#3 Friends, Family and F….
using friends and family and basically getting them to help you out with your deposit. Sometimes we club another F in that group. The group called F F F and the third F is the Fool’s category (or the fools group) and those people were basically people you know and you convince them to lend you the money for the deposit. Kinda like and very similar to point #4 investors, where you’re actually getting someone to invest with you. This, of course, could be your family as well. But there are a lot of people out there who have money and no time. And if you’re in a situation where you have time and no money or you don’t want to use your money then usually you can partner with someone to do this. Now it’s good to know that there are more investors looking for good deals than good deals looking for investors. There are lots and lots of bad deals looking for investors and of course investors are smart trying to pick the wheat from the chaff. But if you have a really good deal you can find an investor to help you out and that’s a very good way of buying or increasing your portfolio. Of course, you have to split the returns with the investor, and so your personal returns might come down. Now my personal or one of my personal favourites is.
#5 The Seller.
Actually getting the seller to lend you the money or even give you the money to buy their property. Maybe you’ve heard of seller financing where you can just tell the lender or the seller rather hey over the next five years I’m going to give you 75%now and then over the next five years, I’ll give you 25%. And I agree an interest rate for you and the seller could be happy with that, or it depends of course on the deal… but that’s self-financing. Now why would the seller actually give you the money to buy their property? Well maybe we’ll talk a little bit about that or you’ll get a clue about that in point #8, but it is possible for the seller to physically give you the cash to buy their property.
#6 The Bank.
Now you might find it funny that when you’re buying a property the bank says they’ll lend you based on the value or the purchase price whichever is lower. But if you’re going for a refinance or you’re doing what’s called an “equity release” from your property the bank says hey we’ll just lend you money based on the value there’s no purchase price involved in that calculation. That’s really interesting. So “using the bank” is all about convincing the bank or finding ways to get the bank to lend you on the value of the property from the outset without you having to come up with a deposit. If the deal is good enough. Of course, in all these situations you want to have a good deal where the value of the property is substantially higher than the purchase price. How much higher? I would say 25% at least for it to be a really good nice juicy creative deal. So using the bank was number six…
#7 Short-Term Lenders or Bridging Finance.
Now if you’re going to buy a property let’s say you found this amazing deal it’s $100,000 but the purchase price or it’s worth $100,000. The purchase price is $75,000. Now that’s a really good deal. So you go to short term funding and you borrow the $75,000 you need at probably quite a high-interest rate to buy that property. After six months you go to a normal bank and say “Hey Mr. Banker I’ve got this property”. The bank says “well look it’s worth $100,000 will lend you 75% and therefore you take that $75,000 you now get from the bank and you pay off your original bridging finance and that’s a good way of kind of like using short-term finance to fund the gap or fund the difference for you. Of course providing you’re buying a really good deal and the value is higher than the price. And the last one is the most fun of all in the one I absolutely love.
#8 Using the Value
It’s using the value of the property as the deposit itself. Or let me say the difference between the value and the purchase price as the deposit. So I hinted at this when we talked about the seller in Point #5 and the seller could potentially give you the money to buy his property. Why? Well, let’s just take the same example of the house that’s worth $100,000. The seller needs to sell it for $75,000 he wants out. Let’s say you don’t have the cash.
You go to the seller and say hey could you give me $25,000. So you go and take the $25,000 from the seller. You buy the property that’s worth $100,000 for $100,000 borrowing $75,000 from the bank, you give the seller his $100,000. $75,000 you got from the bank plus the $25,000 he gave you and you now have a property where you didn’t have to put a deposit down. Now that’s a pretty creative way of using that value difference as a deposit. There are many other ways you can do that but it’s basically involves having a really good deal. And I call that being “entrepreneurial” or a “property entrepreneur” if you like. If you know how to structure these kind of like creative deals and that’s what I love doing. So yes actually doing that probably is a lot more involved than I’ve just given you a hint to but hopefully, the cogs are whirring upstairs and you’re starting to think about “hey how can I do that?” The way it works around the world is very different because there are different laws and the different procedures but you can do it right. There’s a ways of being creative in real estate. So those are eight ways of finding the deposit to buy that property just in case you have the money and don’t want to use it or you don’t have the money.