Ways To Fund Your Real Estate Investments

Today, I would like to briefly touch on a important subject matter when it comes to real estate investments – funding your down payment/closing costs. Many people think that real estate is a high stakes game that requires huge sums of money and is an investment vehicle that only rich people can participate in.

Many look at their chequing or savings account and come to the conclusion that they do not have the cash required to even make a down payment on an investment property. Well today, I would like to present you with a well known source of capital that real estate investors understand, use and most people have access to. This source of capital is called a Personal Line of credit or a Line of Credit (LOC).

A Personal Line of Credit is basically a revolving loan that you can secure from the bank. There are two type of Personal Line of Credits available. One is a Secured Line of Credit which means that any loan that is advanced to you is secured against an asset such as your principal residence. The other is a Non-Secured Line of Credit. The Non-Secured Line of Credit as the name suggests is not secured against any asset, you just have to qualify for the loan, but carries a higher interest rate.

Both Secured and Unsecured Line of Credits come with benefits and may allow you to fund real estate investment costs such as down payments, closing costs, inspection costs, appraisals, renovations and so on.

Benefits:

1. Relatively low interest rates compared to other source of credit such as credit cards. Interest rates are calculated by taking the current prime lending rate of that specific lending institution and adding their premium to that rate. Over the past 5 years, the interest rate on LOC loans have been between 7%-10% - much lower than credit cards. The rate that you ultimately get depends on your financial standing, credit score, current prime rate and the lending environment.

2. Interest Only Payments. Some banks/financial institutions will allow interest only payments which ultimately means that less money is required to service the debt.

For example, some banks only require that you pay 3% of the principal amount each month. So if you establish a $10,000 line of credit and you use it all for a major purchase, your monthly interest cost can be low as $30.

3. No Application Costs. There are no up-front fees or costs with applying for a Personal Line of Credit.

4. Revolving Credit Facility. LOC are revolving credit facilities which means that you can establish a line of credit and you will only be charged interest if you borrow from it.

• Once you open your Line of Credit, you have access to the full credit limit and you don't have to reapply
• As you pay off any credit that you have used, it becomes available again
• For example, if you have a credit limit of $10,000, you might use $2,000 for closing costs or renovation and have $8,000 for other purposes. As you pay off the $2,000, that credit becomes available again.

5. Tax Write Off Benefits. This is one of my favourite benefits. If you use your line of credit dollars towards an investment such as an investment property, you can write off all the expenses related to the loan. This means that you can now write off the interest as a investment/business expense!

Have Equity in Your Home? Get a Home Equity Line of Credit (HELOC).

Equity simply means that the fair market value of your home is higher than your current mortgage balance. The difference between the market value of your property and your mortgage balance is your equity amount. Now depending your finances and credit rating, banks may allow you to draw on that equity amount through something called a Home Line of Credit (HELOC).

What is a Home Equity Line of Credit (HELOC)?

A Home Equity Line of Credit is simply a revolving Line of Credit that allows you to use the equity in your home to borrow money. With the Home Equity Line of Credit, you can have access to up to 80% of the appraised value or purchase price of your home (whichever is lower), less any prior outstanding mortgage charges. As your mortgage balance decreases, your available credit increases.

The terms on a HELOC vary from bank to bank and of course your personal financial situation. I recommend that you consult with your mortgage broker or personal mortgage professional/banker on how a HELOC affects your finances and if it really meets your goals.

In closing, there are different ways to raise the money required to fund your real estate investments and Personal Line of Credit and HELOC are just a couple of ways.

Ajayan Sritharan
Real Experts Inc
www.realexpertsinc.com