Four Areas to Look for Capital Hidden in Plain Sight
By Christopher Levarek
“If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.”
- Peter Thiel
Investing in real estate for the W-2 job holder or military/veteran can be intimidating at first. Often we hear the same arguments from those trying to get into real estate as to why they can’t invest. Many of these arguments align with the common beliefs and expressed in the mainstream news regarding lack of funds, tight wallets and hard times. It’s no wonder that many investors fail to get started when it seems so plainly obvious that they have no funds to get started with.
Today we want to shine a light on four areas already at a typical W-2 investor’s fingertips which will not only remove these false beliefs of “hard to find capital" but also help jump start the journey into real estate investing. These four locations for capital are typical to the median average earner or W-2 worker however the true goal of an article like this is to encourage looking outside the box.
One of our favorite quotes is, “If you do what you’ve always done, you’ll get what you’ve always gotten” by Tony Robbins. Be sure and think on your specific situation and if you are held up by finances, look to the fringes and others who’ve come from similar situations. How did they get started? Find financing? In doing so, you will find that capital is in plain sight and it was only the mindset that needed shifting.
Without further ado, the four areas to find capital for the W-2 investor or military/veteran:
The 401k/TSP
Investing into a retirement plan is a good idea for the future. For a W-2 typical office job, a 401k is highly common retirement fund, often matched dollar for dollar at companies, which is invested in lower-risk stocks/bonds. For the military member, a Thrift Savings Plan is a similar retirement savings fund which is set up for the same purpose typically at the start of a military career.
In both cases, these funds are growing with each paycheck and hopefully earning a good return within the fund or account. However, a real estate investor is able to borrow against the fund amount in a 401k or TSP at a lower interest rate then say a credit card. Currently, a 401k that I(Chris Levarek) own lends at 6.5% with the ability to borrow up to 50% of the fund.
This is a great source of capital which could allow any account holder to invest into real estate deals earning higher returns at a better loan rate then a hard money lender or even personal loan from a bank.
The HELOC
The Home Equity Line of Credit is an amazing source of capital that many the homeowner are not familiar with. This line of credit is taken on a primary residence or investment property for a percentage of the equity existing in the home(see our previous blog post which dives deep on the HELOC).
This source of capital allows a real estate investor to purchase additional property by utilizing the equity in their primary residence/property instead of idling remaining unused. The great benefit to the HELOC is that the line of credit can be open typically from 15-20 years and no interest accrues if there is no balance. This means the investor can borrow and pay back funds without having to fill out paperwork each time as in a traditional loan.
Recently, I walked an aspiring investor through opening a HELOC on his home with a local bank in Phoenix, AZ and this individual was able to acquire a line of credit of $85,000! This person had no idea they actually had money to invest and now is beginning to look at properties or deals with added confidence.
The Roth IRA
Similar to a 401k or TSP, the ROTH IRA is a retirement plan which can be set up by anyone which takes after-tax contributions and is then invested into stocks or bonds. This means that someone can invest a portion of their income into the account achieving 6-8% returns in low-risk bonds/stocks and offering a better option then simply a savings account at 1-2%.
What most people don’t know however is that if an opportunity comes along or a real estate investor wants to invest in a deal, the Roth IRA account holder can withdraw ALL contributions from the account tax-free to do so. So if a Roth IRA holder invested $7,000 into the account over 7 years, they can withdraw $7,000 immediately with no penalty like one would find with a traditional IRA.
This plan is a great way to put money aside for savings and also tap into these funds when needed for investing in real estate.
Personal Unsecured Line of Credit
Another source of funding which can be accessed in a good economy is a personal line of credit. Whereas a HELOC is a secured line of credit on the equity in the home, a personal unsecured line of credit is based upon a person’s financials but doesn’t necessarily have a lien or position on the asset. Many lenders or local banks offering personal lines of credit to investors at great rates in a good economy. These rates and lines can beat out hard money loans and typically have a low cost opening fee.
In order to tap into this source of funds, a person needs to find a lender offering this line of credit and submit a “personal financial statement” with application. This will show personal assets and liabilities and as long as the debt to credit ratio meets the lenders needs, the line of credit is issued.
A family member of ours was able to recently open a $50,000 personal line of credit at 8% interest rate with a 2 year term. This person has a military job and rents for their primary residence to demonstrate that assets did not play a key role in acquiring the line of credit.
In Final
Financing real estate investments in a strong economy can be easier then many people think and these sources of capital can be hidden in plain sight. We hope some of these options are available to the reader however we again want to stress that even if they aren’t directly applicable, thinking outside the box or shifting from the traditional lack or limitation mindset is most important. If the desire is strong enough, the way will be found. Invest Smart!