Some Resources for Real Estate Investment Capital

Savings accounts - Banks and credit unions hold billions of dollars of investors' excess capital. People place their money in these institutions because it's easy, safe and the interest that's earned is guaranteed. However, you're probably already aware just what's happening to the potential estate-building power of those funds if you're using one or more of these institutions as your primary investment vehicle. It's likely that you're acutely conscious of the fact that the few percentage points of interest (which, by the way, is taxable) you're receiving doesn't even come close to keeping up with the real rate of inflation – regardless of the way the government measures and reports it.

To determine what you can safely use for investment purposes, begin by making a list of how much cash you have on deposit in banks, credit unions, savings and loans, certificates of deposit, savings bonds and any other similar entity. Also, make note of any maturity date that affects the interest you'll earn if you take your money out ahead of time; it may be wise not to touch those funds early if it means suffering a sizable interest penalty. Next, decide what you consider to be a reasonable amount of money to have on hand in these liquid investments – funds for emergencies that may arise, medical bills, college tuition, next year's vacation and the like. Keep in mind that there's no need to get overly generous with these amounts; after all, if you're still working, changes are that you'll continue to add to them regularly. But do make sure that you allow enough to reasonable cover your needs. Amounts over and above that are available for you to invest elsewhere.

Cash-value (whole) life insurance - Your insurance policies that have a cash value are an excellent source of capital. Review your policies to determine the amount of loan value you've built up. Then, find out how much interest you'll have to pay to borrow that money. The rate may vary depending upon the age of the policy; but whatever it is, it should be considerably lower than current mortgage interest rates because you're borrowing your own money. But be cautious: borrowing against your insurance policy will reduce the lump-sum payment that the beneficiary would receive in the event of the death of the insured (as long, of course, as the loan is outstanding).

This source of investment capital is ideal for the investor who, over the years, has built up a sizable cash reserve in his or her insurance policy. It's generally the least expensive source of investment capital that you can borrow. As such, you should be aware that insurance companies typically are not overjoyed when you want to borrow in this manner. They realize that it's an inexpensive source of funds for policyholders – money that they'd prefer to be charging higher rates for the use of.

Stocks - Stocks are another effective source of capital. Using them, you have two choices. First, you can sell the stock outright and invest the after-tax proceeds. But if you're not exactly burning up the charts as a stock market investor, you may have a bit of difficulty selling your securities for as much as you paid for them. And if you are fortunate enough to sell at a profit, that profit is taxable as capital gains.

The second alternative you have doesn't involve selling your stocks at all. Instead, you can use your stock as collateral and borrow against it. Your local banker will inform you of how much he or she will loan – typically up to 75 percent of the current market value of your stock (which is a reasonably good margin compared with the low margin that's typically available to buy stock), provided that the funds will be used for a real estate investment and not to buy more stock. Even though you must (of course) pay interest for the use of this money, with the right choice of investment property you'll likely be able to earn considerably more again than what it's costing you to borrow.

Another advantage of borrowing against your stock instead of selling it is that you retain ownership of the stock, even though the lender is holding the stock certificate as collateral. As such, this means that if your stock is appreciating or paying a dividend, you're still reaping those benefits.

On the other hand, however, your banker will undoubtedly check the current market value of your collateralized stock on a regular basis. If the stock is decreasing in value, and drops below the bank's acceptable margin, you may be asked to either pay down the loan or add additional stock in order to bring your loan back up to the required margin level. It's therefore obvious that you should not pledge all of your stock for the loan; some should be held back for just such an occurrence.

Refinancing your property - If you own a home, you may be able to access money that you've accumulated there in the form of equity to finance your investment-real estate plan. But be careful and prudent; if anything goes wrong, you're home will be at stake. So don't go overboard. Here's a quick and simple formula that will help you determine how much capital you may be able to obtain by refinancing. It's then up to you to decide if it's practical to do so.

Step 1. Determine the current fair market value of your property.

Step 2. Subtract your current mortgage balance to determine the amount of equity you have in the property.

Step 3. Assume that you can obtain a 75-percent mortgage on your property – calculate 75 percent of the current market value determined in Step 1.

Step 4. Determine your total refinance costs and how much cash you'll actually have left after all closing costs are paid.

Step 5. Determine how much more you'll be paying for the new mortgage loan than you're paying now.

Step 6. Divide the amount from Step 5 by the amount of net cash you'll have (Step 4). This percentage figure is the rate-of-return amount that you'll need to earn on your new investment in order to obtain a break-even cash flow situation.

If none of these options will work for you, don't give up just yet. Read on; there are other ways to buy investment property.

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