Anyone skilled in investing knows that real estate can be great alternative investments, but sometimes funding the purchase of investment property requires alternative investment financing.
It happens to most investors at some point: you come across that perfect alternative investments, but just don’t have enough cash to close the deal. Typically the first course of action for investors is to borrow money from friends or family, or even bring on a partner. If you’re unable to do that, or don’t want to, you still might have some options at your disposal.
We’ve put together a list of 5 non-traditional ways investors can access cash for investment property loans. Since these are non-traditional (or alternative investments), we didn’t include friends, family, home equity, etc. These are meant to be things you probably aren’t already thinking about. Keep in mind that these alternative investments financing strategies are not suitable for every situation, or for every investor. As with any major alternative investments decision, perform your own due diligence and seek the advice of a financial professional before pursuing.
Car Title Loan: If you’ve already paid off your car, or have a decent amount of equity, it is possible to get a title loan on your car. Think of it as a cash out refinance for your car. Since the loan is secured, the interest rates for car title loans tend to be pretty attractive.
Retirement Funds: Do you have 401(k) or IRA funds invested in stocks or mutual funds? If so, it’s possible to access those funds and put them into alternative investments of your choosing. Now there are several routes you can go with this strategy, so again, make sure to do some additional research to determine which option makes the most sense for your situation. At a high level, though, here are the different ways you can access those funds:
- Take a distribution: This is the basic way you can get at your retirement funds, but it is also potentially the most expensive route. If you are under the age of 59 and a half you can expect to pay a 10% penalty off the top, as well as ordinary income tax on every dollar you withdraw. If you don’t have much money in your account, this might be your best option, but make sure to talk to your CPA beforehand so that you know exactly what tax consequences you are facing. Also of note, ROTH accounts have different rules than traditional accounts, so don’t make sure you’re researching the appropriate account type.
- 401(k) loan: If your funds are invested in a current employer 401(k) account, this is likely the best option to access your funds. If you’re considering this option, talk to your company’s 401(k) administrator and get the current loan fees, interest rates, etc. for your plan. The max amount you can take on a 401(k) loan is 50% of your account balance or $50,000 – whichever is less.
- Self-Directed IRA: Self-directed IRA’s have been gaining popularity over the past several years, but still are unknown to many investors. The beauty of self-directed IRA’s is that you can access your retirement funds, without paying taxes and penalties. If you have a decent amount of money in your retirement account, this is likely going to be your best option. Keep in mind that these are just a special type of IRA account, so you still have to abide by the rules and regulations set forth by the government for retirement plan alternative investments. That means there are certain types of things you can’t invest in (i.e. life insurance contracts, collectibles, etc.), and there are certain people you can’t invest with called disqualified persons (i.e. yourself, parents, kids, etc.).
- P2P Loans: Peer-to-peer loans are offered by a growing number of platforms, but the leaders in the space are Lending Club and Prosper. On these sites you can request a personal loan of up to $35,000 (maximum depends on platform). These loans are then funded by the platform’s network of investors.
0% Credit Card Offers: You probably get these all the time in the mail from credit card companies. Sign up for XYZ card and get 0% interest for 12 months. Well, if you need access to short term cash to fund alternative investments, that offer could be just what you need. You can even stack a couple of these offers on top of one another to increase the amount of cash you can access. While this certainly sounds great, just make sure you know exactly what you’re looking at if/when the offer expires. Experienced investors know that it’s seldom an investment goes perfectly. If you aren’t able to exit your alternative investments as expected, and are forced to push out beyond the 12 month 0% window, you can expect to pay a sizable amount of interest on those credit cards. Make sure you’re able to handle those payments, and better yet, have a plan B in place to pay off those balances.
In addition, there is another major consequence of these offers. If you’re planning to max out these credit cards you can expect to see a significant drop in your credit score. If you’re going to need your credit to obtain a mortgage, or other line of credit, be careful that these credit cards don’t harm your ability to do that.
Portfolio Loans: If you have at least $80,000 invested in stocks, mutual funds, etc. at a traditional brokerage, it’s possible to leverage those assets to obtain a low interest rate loan. The beauty of this option is that you don’t have to sell the stocks – you are just putting them up as collateral in the event you don’t repay the loan. So if you have some long term stock alternative investments this could be a great way to get some additional value. The interest rates on these loans are going to be much lower than you’d be able to get from a bank or other lender, so again it could make a lot of sense in the right situation. The downside to this arrangement is that you can’t exit those portfolio alternative investments while the loan is outstanding or if your real estate values have dropped (i.e. under water). If something happens in the market and you really need to sell the stock, it could become an issue.
While these are just a few ideas for alternative investments financing, the Asset Quest team is full of “out of the box” financing ideas! Give us a call at (239) 541-8448 to discuss!