Real estate investing is a powerful tool to build wealth and a steady flow of income. It is one of the few investments out there that allows you to generate significant returns using other people’s money. No matter where you live or what you do, you need a place to call home. Supply and demand principals tell us that if you are buying real estate for investments, there will always be a demand for your product.
While buying real estate for investment has a great deal of potential success, there are risks involved, and typically, even though you can borrow for virtually any real estate purchase, most lenders expect you to have skin in the game. A general rule of thumb is that you need 20% down to secure a real estate loan. While conventional wisdom recommends you follow this standard, there are many ways for new investors to purchase their first property with little to no money down. This adds extra risk to the deal, but if you go into it with a clear plan and expectations, it can be a profitable endeavor.
Three Realistic Options for Buying Real Estate With No Money Down
In this article, we look at three very doable options for purchasing that first investment property. The following options will take work, but they are solid and time-tested methods for securing not only a mortgage loan but also the down payment required.
Private Lenders/Hard Money Lenders
Don’t let the name fool you. Hard money lenders may sound like you are dealing with a loan shark, but that is far from the case. Private lenders and hard money lenders are investors (not banks) who will loan real estate investors money. Since this money is loaned out by these investors and not banks (who are highly regulated), there are fewer documentation requirements, and the loan process is typically much shorter. These lenders will loan money based on the collateral (the home you are buying), as opposed to your ability to repay the loan.
There are some watch-outs with these types of loans. First, they will charge a premium for this loan in the form of points. These points are up-front fees based on the loan amount. In addition, most private lenders will only loan you 75% to 80% of the loan depending on the type. This may seem daunting, but these type of lenders are not concerned with how you get the money down. Some lenders will calculate the loan amount based on the improvements you intend to make to the property, increasing the amount you can borrow.
Down Payment Options
Banks want to make sure this money comes from funds you have saved, and will not accept borrowed money. For this loan, they don’t care where the down payment comes from as long as you come up with it. You can borrow from family and friends, or both. Another option is to cash in or borrow funds from your retirement account. If you have a 401K through your employer, you can borrow up to 50% of the face value, and the beauty of that is you will pay the interest back to yourself.
If you own a home already and are just looking to fund your first rental property, you can take out a HELOC (home equity line of credit) on your home. This is a line of credit that banks are happy to lend you because it is backed by the equity in your existing home. The risk is that you are putting the equity in your home on the line for your rental property.
There is one other sure-fire way to secure your down payment for a hard money or private loan, and that is to get a cash advance on your credit card. This should be a last resort, as the interest rates will be high, not to mention the additional fee you will pay for the cash advance. If you are looking at this option, make sure you can repay the amount within 12 to 18 months.
House hacking is one of our favorite options for dipping your toe into the real estate investment game. This option allows you to try your hand at being a landlord with less risk than other options. You purchase a multi-tenant unit, typically a duplex, and live in one side while renting out the other. Because this makes the property owner-occupied, there are many additional low down payment mortgage options with traditional lenders.
One of the best loans for this option is to secure an FHA loan. This is a loan specifically geared for the first time homeowners. The beauty of this loan is that the down payment is around 3.5%. Not only this, but if you purchase a duplex with this loan, the bank will consider your future rental income when calculating your ability to pay your loan.
The drawback is that you must have the 3.5% down in your own funds, but this is much easier to come by than the 20% with other loans. In addition, gifts are acceptable forms of a down payment, and such gifts can be worked out with family and friends. Besides, if you are purchasing a duplex for $150,000, your cash amount is only $5,250. This should be a realistic amount to come up with if you are considering buying real estate.
Seller Financing/Lease To Buy
If you have the right seller, purchasing your first property with little to no money down is easy. While most won’t or can’t offer this service, there are some circumstances that would make this option appealing to a seller, especially if they own the property outright. If the seller is financing the purchase, they are loaning you the money instead of a lender. The terms for payment and down payment, and interest rate, are determined solely by you and them.
In a lease to buy option, you sign a lease agreement with the seller, that states the length of the lease and the number of rent payments. This agreement also notes the future date on which you will purchase the property. This option allows you to secure the property you want, but still gives you ample time to come up with financing that works.
Can You Become a Landlord With No Money?
As noted, you can become a landlord with little to no money down. We recommend the FHA loan option on a duplex for your first experience as a landlord. While this option isn’t no-money-down, the down payment is minimal and realistic for most first-time buyers. If you work with an investor lender for your first rental property, make sure you take the extra interest expenses into your cash flow calculations. The property would have to be a good enough deal to cash flow the mortgage, and the loan you took out for the down payment.