Buy Rental Property With No Down Payment
In this scenario, the money advanced to you by a cash-out refinance can be used to make the down payment on an investment property. In other words: If you have enough equity in your current home, you may be able to start investing with no money out-of-pocket.
buy rental property with no down payment
Under lease options, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments. The excess rental fee will then be channeled towards the purchase price of the home.
House hacking is a common investing method that involves buying a property as a primary residence and renting out a portion of the property to tenants. This is most commonly done with a duplex but could also be achieved with larger multi-family properties like a triplex or 8 unit building.
House hacking has become a popular method for newer investors who want a passive income without having to make a 20% downpayment on a rental property. That's because when you buy a primary residence, you can purchase with as little as 3% down with a conventional loan or 3.5% with FHA. In doing so, you'll need to sign an affidavit of occupancy, which states that you plan to occupy the residence for at least 1 year.
Depending on your current primary residence, you may not even have to buy a rental property at all. Many 1st-time real estate investors choose to remodel and rent existing property in order to create an income stream. This space could be a basement, guest house, or a garage apartment.
Also known as owner financing, seller financing is a nontraditional form of financing in which the seller/owner of the property holds financing for the buyer. Seller financing gives the buyer more negotiating power. Many sellers have set financing terms they will accept when it comes to interest rates, down payment, or loan periods.
However, many of these terms can be negotiated depending on your seller and your negotiation skills. This can include negotiating financing with little to no money down in exchange for a longer loan period. Figure out your seller's needs and come up with a solution that works for both parties.
Leveraging your property with a hard equity line of credit (HELOC) is another way to buy rental properties with no money down. HELOC loans allow buyers to use existing equity in their current home as collateral towards the new home. Buyers will receive a lump-sum payment and repay the loan with a fixed-rate interest over a set period of time.
A real estate partner could be family members, friends, or colleagues. You could also work with a private lending company. These companies offer loans similar to a bank but offer more flexibility. One of the best partnerships you could enter into as a first time investor is with a more experienced real estate investor that can help you out financially, as well help show you the ropes of rental properties.
The BRRR Method (Buy, Repair, Rent, Refinance, and Repeat) is a great way to buy a rental property with little money down. This method allows investors to buy a property, renovate it, rent it out, refinance it with a long-term investment loan after its value has increased, and then pull their initial cash back out. The amount that is pulled out is based on how much equity you have built into the home.
While this method does require a bit more money upfront towards a down payment, you will recoup the money once you refinance. Rehab projects are considered too risky by traditional lenders, so for your first project you may need to use one of your local hard money lenders. After refinancing, investors can use the cash-out refinance from their first rental property to fund the purchase of their second rental property. This essentially leaves them with little to no down payment for future property rentals should they continue this cycle.
Down payments aside, conventional loan options also come with lower interest rates, for lower monthly mortgage payments. Compare interest rates and loans on Credible, and talk to at least three traditional mortgage lenders or brokers before settling on a lender and loan program.
It works like this: you buy a fixer-upper with a purchase-rehab loan, which does involve a down payment. You then renovate the distressed property, financing the upgrades with the purchase-rehab loan (try Kiavi or LendingOne for the initial renovation loan).
When the renovations are finished, you refinance the property with a long-term landlord loan (try Visio) and pull your original cash back out. It works because the new landlord loan is based on the new, after-repair value (ARV) of the property, not what you initially paid for it. So, if you created sufficient equity, you can pull some cash out when you refinance, to cover your initial down payment.
Plan on coming up with a down payment of at least 20% for a long-term landlord mortgages and hard money loans. As a note on terminology, hard money loans refer to short-term purchase-rehab loans, while portfolio loans refer to long-term landlord loans that the lender keeps within their own portfolio rather than selling. Often the same lenders offer both loan types. Try LendingOne, Kiavi, or Visio as reputable options.
By using a landlord lender or other collateral-based lender, you can borrow the down payment from elsewhere. Friends, family, credit cards, personal loans, the seller, your retirement account; wherever you want.
Some investors take out a personal loan to cover the down payment several months in advance, then borrow the purchase-rehab or landlord loan from a private lender like Visio whenever they find a good deal. The money for the down payment is already waiting and ready in their checking account.
Gap lenders specialize in covering the down payment for your next real estate investment. They take second lien position behind your main lender, and charge extremely high interest and fees to cover their high risk.
Imagine you buy a $100,000 rental property, and get a landlord loan for $80,000 of it, leaving a down payment of $20,000. You pull $20,000 (or whatever you can) as a cash advance from your credit card, pay a 2.5% wire advance fee, and get 1.5% of that back in the form of rewards.
Second mortgages (AKA home equity loans) are less flexible but can still be used to cover your down payment on a rental property. Get quotes for second mortgages from multiple lenders through Credible.
Great article & content. WE have aquired properties by working with property owners who want to retire & maintain their income. By offering a property management agreement along with a Master lease Purchase Option Agreement we have been able to aquire multiple properties. #TNREIA
Leveraging is a great tool if you have no money sitting in your hand. It is really good way to build up your rental portfolio but you should also stay cautious while using some kind of leverage. Leverage works best when the property rates in your area are appreciating. But if the rates depreciate, leveraging can work against you and you can even lose your money you have put in down payment. 2008 market crash was the real example.
My favorite part is where you mentioned that rental properties offer strong returns with minimal risks. It might be a better option than stocks, even if they require a higher downpayment. Once purchased, I also think that I can just easily hire a property manager who can do all the tiring work for me.
What great ideas. I used to buy with no money down and grew up a lot, lost a lot too (LOL) and looking to come back again. I love real estate, especially apartment buildings. What a way to grow.Do you know of any groups I can join to meet people interested in the same subject? Thank you for everything.
This is a fantastic post on how to buy your first rental property with no money down. Obviously, there is no one-size-fits-all solution, but by combining various approaches, you can reduce the amount of money required to purchase a rental property. Keep posting!
These are great ideas we used to have a house that i grew up in ad willing to buy it back. the owner is a friend we know. And currently has a tenant. We plan to move back in soon. I was thingking a way to buy it back with the tenant still inside and earn rental income until the tenant moves out.
Buying investment property with no money down is a fairly common real estate investing practice. People call the practice using other people's money (OPM for short). It might sound like a proposition too good to be true, but there are some techniques that work. You just need to learn what they are.
Once you have enough equity in your home, typically 15% to 20%, you can apply for a home equity line of credit. Depending on the amount you're approved for, you could buy an investment property outright, or you could use the HELOC money as a down payment on a property. If you'll use the HELOC for a down payment, you might not have any cash flow until you pay back the HELOC. You'll need to run the numbers to decide if the deal is worth it.
Another method to use when you have about 20% equity in the home is to take out a new mortgage for more than what you owe, called a cash-out refinance. You use the extra money to either buy another property outright or as a down payment on a property.
Let's say you're currently renting a single-family home. You could ask your landlord if they'd be interested in selling you the house. If you've been paying rent faithfully, your landlord knows you have the means to do the deal. A real estate attorney can write up a promissory note, used in place of a mortgage, which lists the terms of the deal. You'll probably need to give the owner a down payment of around 10% of the home's price to get the deal done. The owner will also probably expect a payoff of the home in about five years, but the payments would be amortized, usually at 30 years. You'd then get a mortgage to pay the balance.
This works if you have the time and expertise but not the funding. You would do the work of finding the property, getting a tenant, and managing the property. Your partner provides the down payment to acquire the property. You would split the profits depending on the sort of deal you and your partner negotiate. 041b061a72