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SHOW NOTES FOR EPISODE 500: 16 NO MONEY DOWN STRATEGIES YOU MIGHT NOT KNOW
Getting started as a real estate investor may seem like an ominous task, especially if you consider saving the money necessary for a down payment. But what if you don’t need a down payment or any money to get started? Believe it or not, there are ways real estate investors can get started without any money. In today’s podcast, Bill will be sharing some no money down strategies that you may not have heard before.
We’re celebrating our 500th Podcast today!!! Wow!
- Thank you especially to Tim Edmondson, our producer!
Getting Started Real Estate Investing Strategies
We all know it takes money to make money. And especially in real estate investing, it’s almost impossible to get started with less than a 20% down payment and a big wad of cash.
Right?
Well, not exactly.
Conventional wisdom isn’t always right.
It’s certainly easier to get started in real estate if you have cash. And if you eventually want to reach financial independence the fastest way, you do need to save a LOT of money.
But the truth is that in every business – including real estate investing – entrepreneurs get started every day with little or no money. Many of them simply get off the ground with just a strong dream and applying a whole lot of hustle.
I’ve had other podcasts and blog articles on getting started in real estate with little or no money down, so today, I want to share a few more ideas that you may not know!
But first, I want to briefly explain why real estate investing is worth your time, effort and money.
Why You Should Consider Real Estate Investing
Real estate is the ideal investment that has many benefits. When you own investment real estate, you make money from income, depreciation, equity build-up, appreciation, and leverage.
And I also love the fact that real estate investing is a hybrid between a small business and just pure investment. While not always easy, it is possible to start and grow a real estate investing business from scratch.
Then, once your business matures, you can live off your investment income for the rest of your life.
Sound good? Well, let’s get started?
Here Are 16 No (or Low) Money Down Strategies You Might Not Know!
1. House Hacking
I know we’ve talked alot about house hacking but did you know you can do it without a down payment? House hacking is one of my favorite ways to start investing in real estate. It is basically a way to start building your real estate portfolio beginning with your own home.
A classic house hack is buying and moving into a small multi-unit property, like a duplex, triplex, or 4-plex. where you live in one unit and rent out the the rest.
It doesn’t have to be a small multifamily property, although I think that is the best way to start. You can also get creative by just renting out extra bedrooms in a single family home to roommates, renting out a basement apartment, guest house, or even renting extra space on your lot to an RV (if your local laws allow it).
And all of this can be started with little or no money down because you can obtain owner-occupant financing to buy the property.
2. Zero Down Loans
Here are a few loan programs that allow you to buy a property with little or no money down. You can use these loans for house hacking too. Here are a few:
- FHA loan (3.5% down)
- VA loan (0% down for veterans)
- USDA (0% down in rural areas)
- Conventional loans (3% to 10% down with mortgage insurance)
With a $200,000 property, for example, this means you may put $0 to $7,000 down with some of these programs!
3. Hard Money Loans
Hard money loans are an alternative financing option commonly used to finance properties that won’t be approved for traditional financing, like a fix and flip. Investors can secure financing for a property up to a certain percentage of the property’s current or future value (after repair value) and will include the cost to renovate or repair the property into the loan.
This means if you negotiate a great deal with a super low purchase price, and you are within the hard money lender’s loan-to-value requirements, you could possibly purchase the property with no money or very little money down.
Hard money loans are normally short term, lasting anywhere from 6 to 18 months, with very high interest rates, around 5% to 10% higher than a traditional mortgage. So this method of buying a rental property with no money down is typically best if you have good credit and plan to do a cash-out refinance after the property is repaired and rented.
4. Live-In House Flip
Have you seen the house flipping shows on TV? Ever wanted to do that for yourself?
One of the best ways to get started with flipping is by turning your home into a flip. This technique is called the “Live-In Flip.” It takes advantage of one of the most profitable tax laws in the U.S.
It works by buying a home, moving in, and living there for at least 2 out of 5 years. Then you can sell the home for a profit and pay no taxes up to $250,000 as an individual or $500,000 as a couple who files taxes jointly.
That is a HUGE amount of profit tax-free! How long would you have to work in order to earn that much money after tax?
And like every strategy, it doesn’t come without some work and risk. But because you live in the house, you can reduce your risk by taking your time with repairs and waiting for the perfect time to sell.
You can also use the same low-down-payment loan programs for Live-In Flips that I explained in the house hacking example.
5. Live-In-Then-Rent
The Live-In-Then-Rent technique is a close cousin of house hacking. Essentially, you move into a house, get it ready to rent, and then keep it as a rental later on when you move out.
To make this strategy work, you’ll need to buy a more modest house that will also work financially as a rental.
Like house hacking, you can benefit from the small-down-payment loans for owner-occupants. But unlike a house hack, you don’t have to live next door to your tenants!
And because a house is typically bigger than an apartment, it makes this technique more beneficial to people with families.
Doing just 3 or 4 Live-In-Then-Rent properties can set you up with a nice portfolio of rentals for many years to come.
6. Real Estate Crowdfunding
Real estate crowdfunding is a relatively new entry into the real estate investing world. It allows you to invest a smaller amount of money (like $1,000 to $5,000) alongside a group of other investors (i.e. the crowd).
These crowdfunded investments can be rental properties (usually larger multi-unit properties) or loans to other real estate investors (i.e. hard money loans).
I have been experimenting with this strategy on my own for a couple of years. But because the legal structure and companies are so new, I’m still a little cautious.
For example, a company called RealtyShares basically shut down their business a few years ago. No money has been lost (yet!), but it shows the risk of investing with start-up companies that are strapped for cash.
So this means that while I like the overall concept, I’m keeping my investment to a relatively small percentage of my net worth, and I’m spreading it around to different companies for now.
7. REITs (Real Estate Investment Trusts)
Real estate investment trusts (i.e. REITs) are very similar to mutual funds. When you buy stock in a REIT, you own a small piece of many commercial, income-producing properties. A team of managers picks and supervises the investments within the REIT for a fee.
Similar to real estate crowdfunding, REITs are a truly passive investment once you buy it. But unlike crowdfunding, shares of a REIT are much more liquid – which means you can sell them quickly (like a stock or mutual fund) in order to raise cash.
REITs are not my specialty, and they are not something I have invested in personally. But you can get a good introduction to REITs in Where Do REITs Fit in a Portfolio and When Is the Right Time to REIT?
8. Short-Term Rentals
Airbnb is the mega-online marketplace that lets you rent out your home (or part of your home) for short periods of time. And you can use it as a low-cost way to get into real estate investing.
I regularly stay in Airbnb apartments when I travel because I love having my own kitchen and space. And I also converted 3 of my apartments (soon to be 4) into a short-term rental that generates extra income.
For most of you, this strategy could be a specialized form of house hacking where you generate income from your home or part of your home, too. But you could also grow it into a real business that generates a part-time or full-time income.
Some people also make connections with landlords who have trouble filling vacancies. It’s called AirBNB arbitrage. Where you convert their rental into an AirBNB and manage the process and take half or a portion of the profits.
9. Credit Partnership
When you don’t have the money yourself for a real estate investment, you can still get started by using money from a partner.
While there are many ways to partner, one of the simplest strategies is something called a “credit partnership.” It basically works like this:
- You find a good real estate investing deal and a passive investor interested in a good yield.
- Your credit partner investor puts up the down payment and gets a loan to buy the property.
- You lease the property from your credit partner with an option to buy it at a higher price.
- You sublease the property to a tenant, handle all the day-to-day management issues, and keep the difference between the rent you collect and the rent you pay.
Before your option to purchase expires, you can get a new loan to purchase the property yourself (hopefully, after the property has appreciated in value). Or, instead, you could sell your interest in the property to a new buyer at a marked-up price.
By using your brain and your hustle to put a deal together, you can essentially control the income and the appreciation of the property with very little money (perhaps a $100 to $1,000 option fee
10. Seller Financing
Seller financing is an approach to purchasing real estate where the seller can “become the bank” for you. Instead of getting a loan from a bank, the seller lets you purchase the property over time using monthly installments.
This is one of my favorite ways to buy real estate because these individuals aren’t bound by traditional bank lending requirements. Whatever terms you negotiate with the seller are what you pay.
It doesn’t always happen, but it is possible that you could negotiate a lower down payment with a seller. This is especially true if a property needs repairs because you can sometimes trade your sweat equity (i.e. your labor) instead of making a monetary down payment.
11. BRRRR Strategy
BRRRR stands for Buy, Remodel, Rent, Refinance, Repeat.
Like flipping houses, it’s all about finding fixer-upper properties, remodeling them, and increasing their value. But instead of selling, you keep the property as a rental and refinance to pull out some or all of your cash.
This plan is most useful when you’re trying to grow your rental portfolio rather quickly. Instead of running out of cash for upfront costs on multiple properties, you can carefully refinance to pull out your cash and recycle the funds to buy several properties in a row.
This is a technique that many investors have used for a long time.
And David Greene, co-host of the BiggerPockets podcast and a previous guest on the Old Dawg’s podcast, wrote a book about BRRRR investing that you should check out.
12. Borrow Your Down Payment or Get a Down Payment Grant
This is one of those strategies I considered not including in the list because I’m not a big fan of borrowing money for down payments. The interest you must pay on these borrowed funds usually creates negative cash flow from the very beginning.
BUT if you do it carefully and pay the funds off quickly, it could be a way to help you get started.
For example, if you have a home equity line of credit (aka HELOC), you could borrow money on the equity of your home for a down payment or for the entire purchase of the investment property. You could then work on paying the funds back quickly from savings and/or income from the property.
You can also borrow against your IRA or 401K.
There are also down payment grants available for people who qualify that you don’t have to pay back. Here are a few:
- Almost every state has down payment grants or assistance
- Good Neighbor Next Door Sales Program
- HomePath Ready Buyer
- National Homebuyers Fund (NHF)
- Mortgage Credit Certificates (MCCs)
Reducing or eliminating the down payment means getting into a home that much fasdter.
13. Become a Bird Dog
This strategy is called being a bird dog because you “sniff out” and “point to” deals like a bird hunting dog.
You don’t need much money or experience to get started – just a lot of extra time and energy to find these deals.
This strategy is very simple in principle. You just need to do two things very well:
- Find good deals
- Find several active investor buyers with money
You can often find buyers at local real estate investing associations (i.e. REIA groups) or on BiggerPockets local forums.
14. Wholesaling
Wholesaling is the business of finding deeply discounted deals and quickly reselling them for a profit to other bargain hunters. In many cases, you can use very little money but still make a profit on a wholesale deal.
Wholesaling and being a bird dog are slightly different. With wholesaling you actually get the property under contract or buy it before reselling it for a profit. But as a bird dog, your investor buyer is the one who buys the property. You then earn a fee.
The problem is that wholesaling is a sales business. This means you have to be able to generate a lot of leads, be very good at making offers and be OK with being rejected a LOT.
15. Find Tenants for Rental Owners (aka Leasing Agent)
If you want to eventually become a rental owner but don’t have the cash yet, consider becoming a leasing agent to earn money while learning the business.
As a leasing agent, you help to match a tenant with a particular rental unit. And you earn a fee – often 50% to 100% of a month’s rent – in exchange for your time.
I love this business model for future rental owners because you learn how to find and screen tenants, which is one of the essential skills of being a landlord. And you do it while earning money and taking very little risk yourself.
In most cases, you would work for a property management company in order to become a leasing agent. But you could also get your real estate license and just contact individual landlords to do their tenant placement for them.
16. Business Credit Cards
If you have a half way decent credit score, there are companies that will set you up with a separate business tax I.D. and actively apply for 0% interest business credit cards for you – sometimes up to $250,000in credit. They of course, charge $2,500 to $4,000 for the service but that comes out of your credit card balances, not out-of-pocket.
A word of caution! This is only a good method, if you can pay the card back before the high interest rates kick in – 12 to 18 months – down the road. This technique that is not necessarily the most desirable but it can be an easy way to access cash “temporarily” — and I emphasize the word “temporarily” if you pay the money back quickly. Otherwise, you can bury yourself alive under a huge debt that you take years to pay off. Flippers have been using this approach for years.
In Conclusion
You can start a part-time or full-time job within real estate like bird dogging, wholesaling, or a leasing agent. These are all good options because you earn while you learn.
You can also use creative financing strategies to buy or control real estate. Because you’re not applying for a loan with a bank, a seller or private individual may be more lenient with credit. These strategies include seller financing, credit partnerships, private money, and hard money.
While all of these options are possible, also keep in mind that saving money and fixing your credit should be a priority. Make it your goal to not HAVE to invest with bad credit or little money down in the near future!
Are you ready to start investing in real estate, even if you have little or no money? I hope you’ve found these strategies helpful.
If you apply your favorite ideas from this podcast and combine with persistence, energy, and a lot of hustle – it IS possible to make real estate investing work for you too!
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