Navigating Your First Real Estate Deal: A Guide to Funding Options
Welcome, aspiring real estate investors. I'm the Property Alchemist, here to guide you through the intricacies of funding your first real estate deal. Many of us are familiar with the process of buying a home for personal use, but venturing into investment properties can seem daunting. Let's explore how you can make this transition successfully.
For most people, the idea of real estate investment follows a straightforward formula: save up for a substantial down payment and secure a bank loan. If you've purchased a home before, you know the effort required to accumulate those savings. Now, the prospect of repeating this process for an investment property might seem overwhelming. Rest assured, it's a challenge you can overcome.
I often field questions about the potential pitfalls of property investment: difficult tenants, unreliable contractors, and the maze of regulations, especially in complex markets like New York City. Yes, these challenges exist, but they're not insurmountable. For professionals accustomed to navigating corporate or governmental bureaucracy, these are merely different aspects of a familiar landscape. Many of us have held positions where crisis management was the norm. As a real estate investor, you'll apply the same problem-solving skills, with the added option of hiring management companies to handle routine operations.
It's understandable if the idea of becoming a landlord gives you pause. American culture has cultivated a certain mystique around the perils of property ownership, from problematic tenants to unscrupulous contractors. This narrative isn't new; even as far back as 1904, Elizabeth Magie created the board game Monopoly to illustrate the negative aspects of land-grabbing. Popular media has continued this trend, with numerous films and TV shows highlighting the challenges of property ownership and landlord-tenant relationships.
Here's a selection of notable examples from recent decades:
The Money Pit (1986) — Comedy about a house renovation gone wrong
Pacific Heights (1990) — Thriller about tenants from hell
The Super (1991) — Comedy about a slumlord forced to live in his own building
Jungle Fever (1991) — Features a subplot about a difficult landlord
Glengarry Glen Ross (1992) — About real estate sales and the darker side of the industry Joe's Apartment (1996) — Comedy about a tenant dealing with roaches and a shady landlord
Rent (1996 musical, 2005 film) — Features struggles with landlords and gentrification Duplex (2003) — Dark comedy about landlords vs. a problematic tenant
Breaking Bad (2008–2013) — TV series with subplots involving problematic tenants
New Girl (2011–2018) — TV sitcom with occasional landlord-tenant conflicts
99 Homes (2014) — Drama about the 2008 housing crisis and foreclosures
The Big Short (2015) — Features the 2008 housing market collapse
Don't Breathe (2016) — Horror film involving squatters
While these portrayals often exaggerate for dramatic effect, they've contributed to a somewhat skewed perception of real estate investment. The focus on house flipping in reality TV, with its manufactured drama and "unexpected" complications, has further muddied the waters. It's no wonder that many people struggle to find positive role models in this field.
However, it's crucial to recognize that success in real estate investment is far more common than these dramatizations suggest. According to the Census Bureau, approximately 10.6 million individual investors owned rental properties in 2018. A 2022 report by the National Rental Home Council estimated that individuals and families own about 23 million single-family rental homes in the U.S., with 45% of rental units owned by individuals who possessed just 1–2 properties.
These statistics should reassure you: if you decide to invest in property, you'll be joining a substantial community of successful individual investors. Moreover, if you opt for a traditional 30-year fixed-rate mortgage (avoiding riskier options like no-doc loans, variable-rate mortgages, or loans with payment balloons), you can trust that the bank's approval indicates your ability to manage the investment financially.
Now, let's explore some common methods for funding your first real estate deal:
Cash — needs no explanation
Equity refinance — borrow against the existing equity in your home
New property bank mortgage — borrow from the bank against a new property New New Property private mortgage — borrow from the seller against a new property
Cash + New Property Bank Mortgage
Use cash for the down payment (typically 20–25% for investment properties)
Finance the remainder with a bank mortgage
Advantage: Lower interest rates, potential for better terms
Example: On a $200,000 property, use $40,000 cash and a $160,000 bank mortgage
2. Equity Refinance + New Property Bank Mortgage
Refinance an existing property to pull out equity
Use the equity as a down payment on a new property
Finance the remainder with a bank mortgage
Advantage: Allows for expansion without using personal cash reserves
Example: Refinance to pull out $50,000 equity, use as down payment on a $250,000 property with a $200,000 bank mortgage
3. Cash + New Property Private Mortgage
Use cash for a larger down payment to entice the seller
Finance the remainder with a private mortgage from the seller
Advantage: Potentially easier qualification, flexible terms
Example: On a $150,000 property, use $50,000 cash and get a $100,000 private mortgage from the seller
4. Equity Refinance + New Property Private Mortgage
Use equity from refinancing for the down payment
Arrange a private mortgage with the seller for the remainder
Advantage: Useful when bank financing is challenging to obtain
Example: Use $40,000 from equity refinance as down payment, with $160,000 seller financing on a $200,000 property
5. All Cash Purchase + Delayed Financing
Buy property with all cash
Quickly refinance to pull out most of the purchase price
Use the pulled-out funds for the next property
Advantage: Competitive edge in bidding, then recoup most of the investment
Example: Buy $200,000 property in cash, then cash-out refinance for $160,000 to use on next property
6. Equity Refinance + New Property Private Mortgage + Delayed Bank Financing
Use equity refinance for down payment
Initially use private mortgage for quick closing
Refinance with a bank mortgage after seasoning period
Advantage: Quick action on good deals with eventual lower interest rate
Example: $50,000 from equity refinance as down payment, $200,000 seller financing, refinance to bank mortgage after 6–12 months
Each of these approaches offers distinct advantages and can be tailored to specific situations. While most new investors will likely start with a conventional down payment and 30-year fixed mortgage, those with limited cash but ample determination might leverage partial owner financing to enter the market earlier.
As you contemplate your first deal, consider your individual strengths and weaknesses. Are you a skilled negotiator? Cash purchases might give you an edge. Do you excel at building relationships? Owner financing could be a viable path.
In the world of real estate investing, knowledge truly is power. We've explored various strategies to fund your first deal, from traditional bank mortgages to creative financing options like seller financing and equity refinancing. The key takeaway is that there's no one-size-fits-all approach. Your path to success in real estate investing will depend on your unique skills, resources, and circumstances. Whether you're a savvy negotiator who can leverage all-cash offers or a people person who excels at building relationships for owner financing, there's a strategy that can work for you.
Remember, while pop culture may paint a daunting picture of real estate investing, the reality is far more encouraging. Millions of individual investors are successfully navigating this field, and you can too. The challenges are real, but so are the opportunities for financial growth and independence.
As you embark on your real estate investing journey, stay informed, be persistent, and don't let fear hold you back. Every successful investor started with their first deal, just like you're planning to do. To continue learning about real estate investing strategies, market insights, and expert tips, subscribe to our blog. We're committed to providing you with the knowledge and tools you need to turn your real estate dreams into reality. Don't miss out on future articles that could be the key to unlocking your investing potential. Subscribe now and join a community of aspiring and successful real estate investors. Your next big opportunity might be just one article away!