6 Ways To Invest In Real Estate Without Getting A Mortgage Loan
By Paul Esajian on February 5, 2016
How can individuals expand their investments in real estate without dealing with getting a mortgage loan?
There are pros and cons to using mortgage loans to finance real estate investments. Some wouldn’t dream of investing without using mortgages, but it’s not the top choice for everyone. So what options are there for those wanting to get started in real estate or who are eager to expand their investments?
The Pluses & Minuses of Investment Property Mortgage Loans
The pros of using a mortgage to finance your investments include:
- Maximum leverage and control of investments
- Reducing exposure to risk
- Increased liquidity and diversification
- Ability to control and profit from more property, faster
The cons of attempting to use mortgages to buy investment property:
- Adding to acquisition and holding costs
- Final loan terms are notoriously more expensive at closing
- Risk of lender and mortgage fraud
- The stress and time drain of the mortgage application process
Note that the arguments for and against using mortgages aren’t necessarily about leverage. There are others ways to gain leverage.
Six Alternative Ways to Invest in Real Estate
1. Pay All Cash
Simply paying all cash is the most obvious alternative to using mortgage loan financing. This can also potentially help get deals closed faster and with negotiating the best deals. It can also keep total buy and hold costs down. However, it is also certainly the slow path to growth, and if you are limited on cash, it can be riskier having all of your eggs in one basket.
2. Fund Investment Properties with Your Retirement Accounts
The average retirement account balance in the US is around $100,000. However, with a recession and stock market correction potentially in the works, those balances could come crashing down pretty soon. Those more interested in seeing positive gains for their retirement savings may want to tap into those funds and use self-directed retirement accounts to put that money into work in brick and mortar real estate. If your savings have already taken a sizable hit from recent market declines, this may be leverage with non-recourse loans. This still means going through the mortgage loan process, but results in loans that do not require a personal guarantee.
3. Real Estate Stocks and Funds
These are often seen as the easy way to deploy smaller amounts of capital in return for passive income. Some private options may be good. However, publicly traded real estate stocks, REITs, and similar vehicles all tend to move with the broader stock market. Right now that outlook isn’t good, and this may not be the part of your portfolio you want exposed to extreme volatility.
4. Loan Your Capital
If you don’t feel you’ve got sufficient capital to acquire a portfolio of rental properties or comfortably engage in rehabbing houses, then consider multiplying what you have by loaning it to other investors. There are plenty of rehabbers, landlords, and wholesalers out there that will accept more private capital. Let them do all the work, and participate in the rewards with a competitive rate of return. Some may accept investments of as little as 5,000 dollars. For others, the minimum may be 100k.
5. Partner Up with Family and Friends
There is a good chance that many of your friends, family members, and coworkers are in the same position as you are. Partnering up together can provide equity leverage to invest in real estate. Even if you all had $100k and could by your own properties, divvying that up and 10 of your putting 10k each into 10 rental properties would decrease each partner’s risk level, improve diversification, and increase overall upside potential.
6. Real Estate Crowdfunding
There are now many types of real estate crowdfunding, and over 100 different portals to raise money on. This could provide the equity capital you need to invest, without having to jump through mortgage lender hoops. Do make sure you do your homework before getting started. Make sure you are aware of all of the potential costs, what it will take to run a successful campaign, and how different platforms operate.
Summary
Mortgages aren’t for every investor, and not on every deal. They do have great advantages. Some won’t have any other choice if they really want to get going right away. Yet, for many others, there are at least the 6 above options for funding real estate investments without having to go to the bank.