Key facts
- Many lenders require a 20% down payment for investment properties.
- Lucy Zheng borrowed $50,000 from her 401(k) to buy a $60,000 rental property in Detroit.
- Mark Kearney used a $30,000 HELOC to help purchase a $100,000 rental property.
- Kent He used a home-equity loan, tapping into $160,000 of equity from his San Diego home, to invest in a short-term rental.
- Mike Savage utilized a loan against his paid-off truck for real estate investment.
Prospective real-estate investors often face significant financial hurdles, particularly the requirement for a substantial down payment, which can be around 20% for investment properties. With median home prices in the US near $400,000, this can amount to $80,000, excluding other associated costs.
However, individuals with limited savings have found creative strategies to enter the real estate market. Business Insider spoke with four investors who utilized existing assets to finance their initial deals.
Lucy Zheng, facing unaffordable California prices, targeted cheaper markets in Detroit. She financed her approximately $60,000 rental property purchase by contributing $15,000 of her own money and borrowing the remainder from her 401(k). She was able to borrow up to $50,000, or 50% of her vested balance, receiving the funds quickly and paying a small fee. The interest paid on the loan returned to her retirement account. She managed monthly repayments by temporarily reducing her regular 401(k) contributions. A key risk she noted was the need to repay the loan immediately if she left her job.
Mark Kearney, who never earned more than $52,000 annually, used a home equity line of credit (HELOC) to acquire his first rental. With his paid-off home valued at approximately $200,000, he secured a $30,000 HELOC, about 15% of his home's value. This credit line helped him purchase a $100,000 single-family house in Virginia. After securing a tenant, the property generated about $220 per month in profit, which he used to pay down the HELOC and build savings.
Kent He and his wife tapped into the equity of their San Diego home using a home-equity loan. After their primary residence appreciated significantly, they took out a loan for a portion of the $200,000 increase in value, allowing them to access up to $160,000. They used these funds to invest in a short-term rental property. He views primary home equity as a versatile tool for investment, provided the investment aligns with one's risk tolerance.
Mike Savage, a former firefighter and EMT, also employed an unconventional method by taking out a loan against his paid-off truck to invest in real estate.