Find Capital Within Your Existing Portfolio
By Paul Esajian on August 16, 2019
The real estate investing business is widely unpredictable. You never know when opportunity will strike or when you will need a quick capital infusion. If you wait until you are desperate you will end up taking a high interest loan or another funding source you will quickly regret. You are better off finding outlets for capital a little too soon rather than a little too late.
If you have a portfolio the odds are you have more capital options than you think. The biggest thing is to find a liquidation strategy that you can live with. Never let an immediate need for capital force your hand and cause you to ruin your portfolio. Short term debt and seemingly juicy purchase opportunities can come and go leaving you with a huge hole in your portfolio. Instead consider any of these five options for finding capital within your existing portfolio.
- Property Sale: The most obvious liquidation option within your portfolio is a property sale. As we stated you should never sell a cash flow generating property just to cover an immediate need. If you own rentals, look for properties that may have work coming up on the horizon or other potential issues down the road. If there is a slow shift in the market it makes sense to sell before the other shoe drops and prices fall. In most portfolios there is at least one property that is a constant headache and you can justify selling. You may not be able to squeeze top dollar out of the sale, but you can still get a fair number that you can live with. Selling outside of the peak of the market is never easy but can be the best strategy to employ if you are looking for a capital infusion.
- Cash Out Refinance: Selling is not the only option within your portfolio. If you like the property and want to retain ownership you can consider a cash out refinance. It is no secret that investment property loan guidelines have changed quite a bit in recent years, but there are still options available. The two biggest factors are credit score and equity. Before you do anything talk to your real estate agent and get an idea where values in your market may be. Once you have that you can figure out where your loan to value will fall and if taking cash out is an option. With interest rates still near all time lows, taking cash out won’t spike your payment as much as it would in previous years. On a fixed rate cash out loan you will receive a check at the closing and know where your monthly payment will be for whatever loan term you decide. You still retain ownership of the property and depending on the scenario may be still have positive cash flow and residual equity left over.
- HELOC: A cash out refinance is not the only option if you want to hang on to your property. Perhaps a better option is to add a home equity line of credit (HELOC) behind any existing mortgages. A HELOC is a new loan that is in addition to your first mortgage. The main benefit of a HELOC is that you only repay for what you use. You can take a line of credit for $25,000 and keep it there for when you want it. If you don’t use it for months you won’t have a monthly payment. The HELOC acts as an open checking account with interest only repayment options for the first ten years of the loan. This will keep your monthly payment to a minimum for at least the first 120 months. The second half of the loan will add principal to the repayment, which not every borrower is comfortable with. However, for the relative ease of set up and low interest rate options a HELOC is often a preferred method to generate quick capital.
- 401K: There are several strategies as to the best approach for handling your money. If you are employed full time you should consider using your 401K or other company provided capital options. It must be mentioned that before doing anything you should talk to a financial planner or accountant to find out the penalties and long-term ramifications. That being said, these loans often offer discount rates and reduced repayment penalties. If you find a situation where you can earn a higher rate of return using the capital elsewhere, it can make a ton of sense. This doesn’t work in every scenario but under the right circumstances is a great way to find capital.
- Partnership Buy Out: As you dive into your portfolio you may find a situation or property that you passively invested in. You have a percentage of ownership interest but the potential for the property is not as strong as you anticipated. If this is the case, you should explore your buy out options. As is the case with a quick sale, you may not get full value for your stake, but you can get a number you can live with. Sixty or seventy cents on the dollar may not sound appealing at first, but if you are using the capital for higher returns elsewhere it is an option worth considering.
High interest loans and other speculative loan options should only be used in extreme situations. These often just put a Band-Aid on the problem and in most cases end up making them worse. Before doing anything look at your portfolio and see what your options are there first.