Real estate agents building a rental portfolio have an obvious head start: you already understand the asset class better than anyone who’d normally be advising you on it.
Funding it without quietly draining the business that pays your actual bills is the part nobody walks you through.
How to fund an investment property
Here are five steps to funding an investment property that runs on its own money.
1. Draw a hard line between business capital and investment capital
You’ve already drawn a hard line between personal and business expenses, right? This is similar.
Your business checking account does not need to double as your “save for a rental” account. When the funds exist together in the same account, they compete for the same dollars the moment a slow month hits, and the business (the thing actually generating your income in the first place) should never lose that fight.
Give the down payment its own account, funded on its own schedule, with its own rules for when it’s allowed to get raided. I might suggest a high-yield savings or a cash-value life insurance policy specifically for this purpose.
2. Find a down-payment source that doesn’t depend on this month’s closings
These days, it feels like everyone has a side hustle. That might be why you’re pursuing investment property.
Other than this month’s commissions, where else could you generate cash for a down payment? The options are endless in today’s gig economy. Even within real estate, you could fix and flip a house to generate the down payment for the rental property you really want.
You could also have the funds or an asset already in your possession that could be used for the down payment and not even realize it. Get creative. If you’re determined enough, there might be more than you think hiding in plain sight.
You don’t need the full down payment to start the account, either. Lenders want to see money that’s been sitting and growing for a while, not a lump sum that shows up the week before closing — a sudden deposit raises questions a seasoned one doesn’t.
Put $1,000 in on purpose this month, and you’ve already started the clock a lender would want to start anyway.
3. Know that a lender can count other assets as income, not just as savings
By this point in your life, you may have some assets building. They could be retirement accounts, cash value life insurance or equity in your primary residence. Don’t make assumptions about the options you have with these accounts.
For example, most agents assume cash value sitting in a policy only helps once they actually withdraw or borrow it. Some lenders will code that cash value as a usable asset and divide it by 84 to calculate a monthly qualifying income figure, which can help you qualify for an investment property loan without producing the kind of steady W-2 pay stub a bank normally wants to see.
Make a list of your assets and schedule a direct conversation with a lender who actually understands commission income before you assume you don’t qualify.
4. Redirect the money you’d otherwise throw at debt, deliberately
Years ago, I was playing the Cashflow board game (the one built to teach the difference between an asset and a liability). A very astute friend started doing exactly what most of us are taught to do: throwing every spare dollar at paying off his mortgage as fast as possible.
I told him that’s the radio-show guru move, and it’s not the only one: What if the extra he was putting toward the mortgage went toward real estate instead? He switched strategies mid-game and won.
The board game version takes 10 minutes to play out. The real version takes longer, but the math holds: aggressively prepaying low-interest debt often produces less than the same money would, redirected into a cash-flowing asset.
When I did the math for one client, she could end up with an extra six figures for her retirement years just by changing how she paid down her debt. Do your own math and test your assumptions.
5. Treat the first property like a stress test, not a bet on the business
Before the first offer goes in, run the numbers as if your sales pipeline went dry for three months: Can the property still cover its own note, or does it need your commission check to survive? A rental that only works when the business is having a good month is just moving the same risk to a different address, not diversification.
Refuse to buy investment properties with a hope and prayer for income one day. You can’t control everything, but do your best to have cash-flowing rentals from the very first property you buy.
You already know how to evaluate a property better than most of your clients do. You don’t need to get better at real estate. You need the money behind it to come from somewhere other than your paycheck.
Money Matters Month is here. All September, Inman is focused on the financial side of real estate — the part nobody teaches you when you get your license. How to budget through lean times, protect your profits when business is good and find new ways to grow your bottom line no matter what the market is doing.
Amanda Neely is a Certified Financial Planner and the CEO of Counterflow. Connect with her on LinkedIn and Substack.
