4 Ways to Invest Without Using Cash
One thing that may hold some people back from investing in real estate is the belief that they don’t have the cash available to invest. That may be true for some, but what if you had sources of investment capital already available to you that you didn’t realize you could use for real estate?
This article will review 4 capital sources that may have more significant potential than many people realize.
*Disclaimer: I am not a Financial Advisor, and this is not investment advice. I intend to introduce possibilities, but these strategies may not be appropriate for all people. Please consult your trusted professional before acting.
1. Retirement Accounts
Remember that rollover IRA you have from a previous employer? Did you know you can unlock those funds and deploy them into real estate or several other assets?
Self-Directed IRAs (SDIRAs) are one of the most popular sources of capital for passive real estate investors.
A SDIRA is an individual retirement account that allows you to choose from various investment options as the IRA custodian permits. You aren’t limited to traditional investments, such as stocks, bonds, or mutual funds. With a self directed IRA, you can invest in alternative investments, like private mortgages, oil and gas limited partnerships, intellectual property, and of course—real estate.
However, several conditions apply. For example, you cannot actively manage the property; the property must be solely for investment (not a vacation home), all income must flow back into the IRA, and many others. There are also tax implications to consider, but for many people, investing in a real estate syndication as a passive investor with a self-directed IRA can be an excellent option.
Speaking with a SDIRA custodian that has experience with real estate investments is a great way to learn more about how this could work for you.
While using a SDIRA is undoubtedly the most popular way to use a retirement account to invest in real estate, you may also have the option to borrow against your 401k, withdraw principal from a Roth IRA, or use your retirement account to invest in a REIT.
2. Home Equity Line of Credit
Many people consider their residence to be their biggest asset. If you have read “Rich Dad Poor Dad,” you know that Robert Kiyosaki believes owning a personal residence is a liability for most people.
Why is that? Because owning the home you live in doesn’t produce income unless you rent out part of the home, which most people refrain from.
When you buy your home and pay your mortgage, you gradually pay down the principal, which means your equity in the home is increasing. At the same time, your home may appreciate further strengthening your equity. For many people, having a fully paid off home or even 50% or more equity gives them a sense of security, knowing that they have hundreds of thousands of dollars of value stored in their house. That’s great, but what is that equity really doing for you? It is dormant equity that could be leveraged and earn income elsewhere. What if you could unleash $100k or more and put that money to work, earning 8%,12%, or more per year?
By leveraging a home equity line of credit, you can borrow against your home’s equity, usually at an interest rate of 3%-5% with today’s rates. Then, invest in a real estate syndication that will earn you an average annual return of 10-15%, and from there, you just created income from equity that would otherwise be “stuffed under the floorboards.”
3. Pledged Asset Line
Some investors may be hesitant to invest in a real estate syndication because they aren’t holding a lot of cash, and they don’t want to sell other assets and pay capital gains. They don’t necessarily have to.
A pledged asset line allows investors to borrow money by establishing an asset backed line of credit. The proceeds can be used for any purpose other than to purchase more securities or pay down margin loans, and repayment options are flexible.
Think of this as a similar concept to a home equity line of credit (HELOC) but using an investment account as collateral instead of a property.
However, only certain assets can be used. These include after-tax brokerage accounts, revocable living trust accounts, and other non-tax-advantaged accounts.
A bank will determine how much it is willing to lend based on the value of these investments. For example, lenders may lend up to 90% on certain bonds and cash and more than 50% on individual stocks. The more stable the investments, the more banks are willing to lend.
The interest rate is typically tied to a benchmark rate, like The WSJ Prime Rate or 1-month LIBOR (London Interbank Offered Rate), plus an interest rate spread. Often the interest rate is lower than what you would get with a HELOC.
This strategy is not for everyone; it is recommended that you consult with your financial advisor to determine if this is appropriate for you and the amount of leverage you are comfortable with.
4. Cash Value Whole Life Insurance
There are many types of life insurance policies, and most of them would not be considered an investment vehicle. When I refer to cash value whole life, I’m referring to uniquely designed dividend-paying cash value whole life policies that are customized to allow for taking loans against the policy.
A policy like this can serve three purposes:
- It provides a death benefit to your beneficiary (it is life insurance, after all)
- The money inside the policy grows and compounds over time
- A high percentage of your contributions are available as “cash value” to borrow against
When appropriately designed, a scenario could look like this:
-You contribute $100K to the policy.
-You borrow $75k to put towards a real estate investment.
-That real estate investment produces income.
-The cash inside your policy continues to compound uninterrupted at the same time.
If you decide to pursue this strategy, it is critical that you work with a company that designs the policy properly for what you want to do. This is not effective for every whole life policy, and even when designed properly, this is a long-term strategy that may work well if you want to allocate a percentage of your portfolio to lower risk, slower growth investment, but also be able to borrow against those funds for other investments or purchases.
Conclusion
These are four different strategies, and they all have one thing in common. They give you the option to leverage an asset you may already own, such as a retirement account, your home, a brokerage account, or life insurance, and unlock the value of that asset to earn a return elsewhere.
As a hard-working professional, you have earned your money and been disciplined about investing it. My hope is that this article has you thinking about how to make your hard-earned money work harder for you.
Please consult a financial professional before executing any of these strategies. I include links below to a self-directed IRA custodian and a life insurance company that I personally know works with many real estate investors and understand these strategies.
SDIRA
INSURANCE