Cash-out refinancing is pretty common in real estate investing. An investor will cash in on the equity they have on an existing property and then use those funds toward a down payment on their next property. Rinse and repeat.
That complicated process may soon be unnecessary thanks to a new fintech company.
Downpayments, a Miami-based financial tech startup, has come up with a way for investors to tap their existing property equity to buy new properties—no refinancing required. Here’s how it works and what investors need to know about it.
How the Program Works
Downpayments essentially gives investors a loan, which they can use toward their down payment. There are two options:
- An interest-free loan of up to 10% of your next investment’s purchase price
- A 20% down payment at a “competitive” interest rate (currently 7%)
In both cases, the loan must be paid off within four years of closing.
The program can benefit investors with a number of goals. As the company explains on its website:
Depending on your circumstances, this may mean different things; it might mean preserving your savings or avoiding having to go through a cash-out refinance in order to access the capital, which often means breaking a low fixed-interest rate. It might also mean you can buy your next investment property sooner, or without an equity partner, so you can control your own destiny and have the freedom to grow your property portfolio on your own terms.
Of course, nothing comes for free. While using Downpayments won’t require you to refinance your loans, you will need to put your property up as collateral. You’ll also need to use Downpayments’ brokerage services as you shop for your next investment.
As your registered in-house brokerage, Downpayments will curate your listings, provide on-demand showings, comparable sales, and guide you to the closing table.
Essentially, you won’t pay Downpayments directly, but it will get a commission from your eventual property purchase (just as any real estate agent would).
Is Downpayments Right for Your Portfolio?
Right now, Downpayments is only available to investors purchasing properties in Florida, but the company says it’s expanding to other states later this year. (No word on what those states will be, though.)
Still, even if the program’s available in your area, think carefully before proceeding. While it’s billed as an alternative to cash-out refinancing, Downpayments doesn’t help you avoid financing altogether. In fact, it just adds another loan to your mix—meaning extra monthly payments to balance and an even further leveraged property.
If you do use it, make sure you’re on a good budgeting system and are prepared to make your payments—on time, every time. As with any loan against your property, there’s a risk of foreclosure if you’re unable to make your payments.
You’ll also want to consider the brokerage requirements, especially if you have an agent you typically use when vetting new investments. Using Downpayments could mean forgoing that agent’s guidance or, potentially worse, doubling down on commissions if you decide to use both services.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.