8 Ways to Find the Capital for Your First Passive Investment
Most real estate syndication deals have a minimum required investment between $50,000 and $100,000, which is no small sum. Considering that the median savings account balance in the U.S. is $5,300, putting together the necessary capital to invest in a syndication can be the number one hurdle for those trying to start passively investing in real estate.
If you are in a stable financial position, understand the risks and benefits of investing in a syndication, and are looking for ways to drum up the capital to invest, here are 8 options:
1. Utilize cash from your checking and savings accounts that is earning little to no interest. Warning – do not raid your emergency fund!
2. Sell physical assets that you no longer use or enjoy. Do you have a boat or RV that you are no longer getting your money’s worth from? Do you have an extra automobile in the household that you could sell? Did you inherit valuable art or jewelry that never sees the light of day?
3. Sell a portion of your brokerage portfolio to re-deploy into a syndication and diversify some of that Wall Street exposure into real estate to add cash flow and stability. Make sure you plan for taxes and try to leverage tax loss harvesting techniques (e.g., selling both positions that have lost and positions that have gained in order to reduce or eliminate your capital gains tax liability).
4. Leverage your brokerage portfolio through either a line of credit (LOC) or margin account. If you take this route, be sure to only borrow a small percentage to limit risk of a margin call if your portfolio decreases significantly. Ensure that you have a plan to pay back the LOC or margin loan.
5. Tap existing equity in real estate through either a cash-out refinance or home equity line of credit (HELOC). Use caution with HELOCs as they are usually variable interest rate products and payments could go up in the future if interest rates rise. Ensure that you can afford the new higher monthly payments. Ideally, you would want the cash flow from your new investment to be able to cover these higher payments.
6. Leverage your retirement account by taking out a 401K loan. Most major 401K providers will offer some kind of loan product, but remember you will be selling off positions to cover the borrowed amount and then buying it back over time during the loan pay-off. Your employer will withhold the monthly payments from your paychecks, so make sure you are comfortable with the reduced take-home pay.
7. Invest within your retirement account by utilizing funds in a self-directed IRA or Solo 401K. Most syndicators can accept SDIRA or Solo 401K investments. Do you have an old 401K from a past employer just sitting around? You can roll that into an SDIRA in order to invest directly in a syndication. I recently learned that even if you’ve already rolled your old 401K into your new one, you may still have access to that old 401k portion, giving you the ability to roll it into a separate SDIRA.
8. Leverage your permanent life insurance by taking a loan against your cash value. This is not possible with term life policies, but likely possible if you have whole life or universal life. Be sure to understand all the terms and conditions as this approach can reduce your death benefit and risk causing your policy to lapse. Ensure that you have a plan to pay back the loan.
Hopefully this helps give you some ideas on how you may already have funds available to invest in your next syndication sooner.
Please note that this information is not intended to be personal financial advice. Before considering any of these options, be sure to perform your own research and talk to a finance and tax professional about your situation.
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