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SHOW NOTES FOR EPISODE 430: 7 WAYS TO BUY RENTAL PROPERTIES WITH LITTLE OR NO MONEY DOWN
Can or should you try to put as little down as possible on an investment property? Can you still acquire investment properties for little or no money down? In this podcast, Bill shares seven ways you can acquire rental properties with little or no down payment.
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Learn to Track and Improve Your Credit Score
Before you start discussing how to finance investment properties, you need to take a good look at your credit score. Your credit score basically determines your buying power. The last thing you want is to be denied or forced into paying extremely high-interest rates as a result of poor credit. While it may take some time to bring up a low credit score, it is doable if you begin by taking an in-depth look into your credit report. If there are any errors or incomplete information, consider disputing them by contacting the credit bureau. Even if they are small mistakes, they can make a difference when it comes time to invest in your first property!
Once you’ve thoroughly reviewed your credit report, you need to have a solid understanding of exactly how you plan to improve your credit. If you’ve been slacking with paying bills on time, make a payment calendar to stay on top of due dates. Work on rebuilding your credit by adding positive references to your account, such as secured credit cards or credit builder loans. If you pay those accounts on time, it will boost your credit score in the long-run. You should ultimately aim for a credit score above 640. A bad credit score isn’t the end of the world, and it certainly doesn’t mean you can’t become a real estate investor. However, it’s important that you identify any credit issues beforehand and productively work towards a solution. That way, you’ll in good shape when it comes time to finance!
7 Ways to Buy Rental Properties with Little or No Money Down
While having a nice chunk of change to buy rental properties with will help propel your investing career, it’s not the only way. There are ways of buying a rental property with no money down or very little money down. If you’re tight on funds or just like to get creative when you buy real estate, take a look at these seven ways of real estate investing with little or no money upfront.
What does it mean to buy real estate with no money down?
Traditional lenders, like a bank or credit union, require a down payment when you buy rental properties, which is typically 20% or more of the purchase price. That can equate to tens of thousands of dollars just to get your foot in the door to owning your first rental property.
When someone says they are buying real estate with “no money down,” they are referring to putting none or very little of their own money into the investment upfront. Some real estate investors use other people’s money for a down payment or creative financing options to eliminate a down payment altogether, putting very little to none of their own money into the real estate investment.
The less money you have invested in a property, the higher the likelihood of an increased return. That’s why savvy real estate investors use a number of the following methods to reduce how much they bring to the transaction:
- House Hacking
- Make your primary residence a rental.
- Leverage other property.
- Use seller financing.
- Assume a seller’s mortgage.
- Get a hard money loan.
- Partner on an investment.
1. House Hacking
House hacking is the easiest way to buy your first rental property. And in the bargain, you get to live for free!
The traditional house hacking concept is simple: you buy a small multifamily (2-4 units), move into one of the units, and rent out the other(s). Your neighboring tenants’ rent covers your mortgage and other housing costs, for effectively free housing.
And when you move out, you keep it as a pure rental property, and the cash flow only improves from there.
How does this help your down payment? Mortgage lenders require far lower down payments on owner-occupied properties than investment properties. It’s a simple risk calculation for them: borrowers are far less likely to default on their home mortgage than a rental property loan.
One popular low-down-payment loan program is FHA, which allows a 3.5% down payment as long as your credit score is over 580. (And let’s be honest, if your credit score is under 580, you should probably work on paying down debts before buying a rental property.)
But FHA isn’t the only option – there are loan programs out there that require even less money down, and sometimes no money down at all. Talk to at least three local mortgage lenders or brokers about different program options, before settling on a lender and loan program.
As a final thought, keep in mind that multifamily house hacking isn’t your only option to live for free. Try these other house hacking ideas as well to live for free!
2. Make your primary residence a rental
Who says your home has to be a single-family house? House hacking, which is the process of buying a multi-unit property to live in as your primary residence and renting out the remaining units, is becoming a popular method for new and young real estate investors to get started in rental property investing with very little money down. Using down payment assistance programs or low down payment loans like the Federal Housing Administration (FHA) and 203k loan, you can buy a property for as little as 3.5% down. While it’s still money out of pocket, it’s a lot better than 20%.
3. Leverage Other Property
If you have a high credit score and own other property with equity, you can leverage the property’s equity by getting a home equity line of credit (HELOC) or home equity loan. This special type of financing allows you to take out a loan or line of credit up to 75% or 80% of your property’s equity, as determined by a formal appraisal.
For example, if you own a property worth $200,000 and you only owe $100,000, you could pull out $75,000 to $80,000 of your property’s equity in cash. You could then use that money to buy another property. Depending on the amount of equity you have in your real estate business, you can easily buy property with zero or no money down.
4. Use Seller Financing
Seller financing, also called owner financing, is a nontraditional form of financing in which the seller or owner of a property holds financing for the buyer. The seller or owner of the property acts as the lender for the buyer instead of them going to a bank to get traditional financing. The buyer repays the loan over time according to the repayment terms outlined in a formal agreement, like a note and mortgage.
Some sellers will know exactly what terms they will accept or hold for the financing, such as a specific interest rate, down payment, or loan period, while others are open to negotiation. If you are a strong negotiator and are able to determine the seller’s needs, it is possible to negotiate financing with no money down or have the seller carry a second mortgage, while getting a first mortgage from a bank. Usually, this only works when the need to sell or reach the desired sales price exceeds the owner’s desire for a down payment.
5. Assume a Seller’s Mortgage
Another option for buying an investment property using little money down is by assuming the seller’s current mortgage, also called buying “subject to.” In a subject-to deal, you buy a rental property subject to the terms of the owner’s current mortgage. This option generally requires a small down payment. But, depending on the seller’s needs, it may be possible to assume a loan for no money down.
For example, if the property is worth $100,000 and the current mortgage balance is $80,000 with 12 years remaining, you pay the seller $20,000 to sell the property, taking over their $80,000 mortgage, paying the monthly principal and interest payment to the bank. The investor avoids having to find alternative financing from another lending source and gets to benefit from paying down a loan further in the appreciation schedule.
Buying subject to is a super creative way to buy distressed properties, but it isn’t always an option. Depending on the lender, the loan may not be assumable. Some lenders include a “due on sale” clause, which means the entire loan balance is due if the property is transferred or sold. While rare, some lenders will allow this.
6. Get a Hard Money Loan
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.
7. Partner on an Investment
One of the most common methods of investing in real estate with no money down is to buy an investment property using other people’s money (OPM). You can find a private lender or funding partner willing to partner on the investment, giving you the funds needed to purchase the property. This could be the down payment alone or the entire purchase price in cash in exchange for a return on their investment.
Partners could be family members, friends, or colleagues, and there are a variety of ways to structure their return, like:
- A joint venture (JV), where ownership of the property or company is shared in respective percentages. Rental income, equity, and appreciation are typically shared with the partners respectively.
- A lending agreement, where the investor receives a preferred return on their initial investment
- A private loan, where the partner is repaid with a monthly payment, which could be interest-only with a balloon, or a principal and interest payment.
- A combination of the above.
In Summary
Most successful real estate investors will use a variety of the methods above to structure an offer to a prospective seller. It’s likely you’ll experience a lot of no’s in response, but it’s also not a rarity to buy a property with very little to no money down. I’ve interviewed a number of real estate investors who purchased many of their investment properties with no money down. And if you can do it once, it gets easier each time after that.
In some deals, it will make sense to put more money down in exchange for a lower monthly payment and often a better interest rate – a lot just depends on the deal. The key is to carefully analyze each investment opportunity first to see if these creative strategies make sense for the purchase of the real estate property you’re looking at. Buying rental property with no money down is not the easiest method of buying real estate, but it can be worth it – and it is possible.
DISCLAIMER: Many of the above strategies take knowledge and have a higher degree of risk. You need to do your research and/or work with someone who is experienced to reduce your risk.
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