How to buy rental property with no money in your pocket.
Before tech became the order of the day we know that the richest men in the world were those into real estate. Warren Buffet easily comes to mind. But even today few industry makes more billionaire than investment in real estate. In fact, billionaire Andrew Carnegie famously said that 90% of millionaires got their wealth by investing in real estate.
Maybe you’ve always pictured the future-you as a real estate investor, but you never had the cash flow needed to get started.
Believe it or not, that might not matter. Yes, you can actually buy rental property with no money down.
So if today you are a tenant or you live in your own apartment I want you to know that you can become real estate investors and start building wealth.
So today, I share with you how to buy rental property with little or no money at all.
What Does it Mean to Buy Rental Property With No Money Down?
When one purchase rental property with “no money down,” it means they’re buying real estate without putting much or any of their own money into the upfront costs of the investment property.
The truth is that as a real estate investor your odds of getting favourable returns on investment on rental properties when less of your personal money is used to fund ventures. That is why it is important to understand how to buy rental properties with no money. A few investors also try to navigate this using loan contingency.
10 Ways to Buy Rental Property With No Money
Of course, buying any property will require a cash investment. But with some financial and investment know-how, that money doesn’t have to be one you have saved. So you have to use other funding channels. Such channels could be home equity or co-borrowing.
Here are some options available to real estate investors who wants to buy a rental property with no money down:
- Make your primary residence a rental and buy a new home
- Tap into your home equity.
- Be a resident and a landlord with a multi-unit property
- Partner up with a co-borrower
- Look for a lease purchase option
- Assume a pre-existing mortgage
- Find seller financing
- Use hard money loan
- Turn to private lenders.
- Use your credit cards.
1. Invest in a new home and make your primary residence a rental
If you already own a home, you’re ahead of the game then.
One of the more common ways to become a real estate investor is by turning your current primary residence into a rental property.
There are significant advantages to “backing into your first rental property” this way.
- Traditional investment property loans require a larger down payment and come with higher interest rates. Often times, you can expect a 20% down payment requirement
- The interest rate on an investment property is generally higher than the rate on your primary residence by a half percent or more
So the investment strategy is: Rent out your current home, and finance the next home you buy as a primary residence (meaning, you’ll be living there full time).
That way, you pay a lower interest rate on both properties. And if you’re still making mortgage payments on that first home, you can use the income you make from rent to cover part or all of the mortgage.
2. Tap into your home equity
Using a home equity line of credit or cash-out refinance to buy property is another financing option for existing homeowners.
Whether you own an existing rental property or not, you have another financing capacity: your net worth. Also called equity, it is the difference between your home’s market value and your mortgage balance. Equity can also allow you to buy a property with no money in hand.
Equity is a creative form of financing that allows the homeowner to finance the purchase at a lower interest rate. Unlike other types of loans, the interest percentages of equity are reduced. As you pay off your mortgage, you build up equity which can be used for a second mortgage. This equity then enables you to obtain a new bank loan in order to finance the purchase of another property to make a profit.
There are several ways to access your equity:
• A home equity loan: This is a loan against the value of your home. You will be able to borrow a sum of money based on the value of your home or rental property. The lender will usually allow you to borrow up to 80% of the value of the mortgaged property.
• Refinancing your mortgage: To obtain a down payment, it is also possible to refinance your mortgage. Refinancing your mortgage simply means renegotiating your mortgage contract. If you decide to do this, you may have to pay a penalty for breaking your first contract.
In order words, if you have enough equity in your current home, you should be able to buy rental property with no money.
3. Be a resident and the landlord: Buy a multi-unit home
Your primary residence doesn’t have to be a single-family home. Multi-family homes can be a great way for novice real estate investors and aspiring property managers to get started buying properties that generate income.
First, with the help of a professional, find a good real estate deal on a 2-4 unit property. These homes are typically known as multi-unit properties.
While living in one unit, you’ll rent out the others. You can then use the rent payments to help offset your mortgage payment.
The key here is that you can buy a multi-unit property using an affordable financing option — like an FHA loan or VA loan— as long as you live in it, too.
Mortgage programs like FHA loans don’t just have good rates and terms. They also give you options for covering the down payment.
You may be able to obtain gift funds, or perhaps even down payment assistance. And you can use these programs to buy a rental property with no money from your bank account.
If not, thanks to Federal Housing Administration’s low down payment loan requirements, borrowers with good credit only need 3.5% of the purchase price for the down payment with either a traditional FHA mortgage or the FHA 203K loan, which is well-suited for fixer uppers.
You may be out-of-pocket with some upfront costs, but it will be less money than 20% down.
4. Partner up with a co-borrower
Partnering is also a creative way of raising funds to buy a rental property without money. It is a good way to bridge the monetary gap. Combining your talents with those of others can help you find a solution more quickly. This requires a lot of ingenuity though.
Maybe you don’t have enough money for a down payment or closing costs, but you want to start investing in rental properties. What’s more, you’re willing to do the research it’ll take to buy and manage these investments responsibly.
Your friend, on the other hand, has money for a down payment. But they don’t have time to learn the ropes of buying rental properties.
This scenario could be a win-win for both you and your friend. You can go in on the investment together by acting as co-borrowers.
You share responsibility for monthly payments on the house, and you can also share profits that come from rent payments or equity buildup.
A co-borrower doesn’t have to be a friend, either. It could be a family member, or even a stranger that would purely act as a business partner.
To maximize the use of partnership to buy rental property without money you need to do three things:
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Select the right partner(s)
To establish an effective partnership, you need to surround yourself with people who are as smart and ambitious as you are. They equally have to be people that share the same values as you do. They could be real estate brokers, accountants or renovation contractors. Surrounding yourself with these types of people will make you better equipped for your real estate transactions. It is therefore important to work with people who complement you.
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Play your role in the process
Establishing partnerships with all of these people also means you need to get on board. To become a successful real estate entrepreneur, you need to surround yourself with the right people. Keeping good business contacts will help you expand your professional circle. In order to achieve this, attend conferences and networking events.
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Have the perfect business plan
To convince someone to become a business partner or to invest in an opportunity you need the perfect business plan. Note that you are the one that is seeing the opportunity. The proposed partner is not seeing it yet. But with a perfect business plan you can make the vision clear to anyone and win them over. So with that you can buy the rental property of your choice even when you have no money.
5. Look for a lease purchase option
If a traditional mortgage is not suited to your financial situation, another proven way to buy rental property with no money is through what’s known as a lease option.
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.
With this type of agreement, you may be able to invest in real estate via a slightly higher rental fee.
6. Assume an existing mortgage
An assumable mortgage is one where the buyer can take over the seller’s mortgage, typically with little to no change in terms or interest rate. Basically, the buyer receives the title to a property in return for making monthly payments on the seller’s mortgage.
Using the seller’s existing financing can be especially effective if the current loan has a low interest rate. But keep in mind, this scenario requires a bit more research. In particular, you will want to make sure there is no due-on-sale clause. This type of clause prohibits the new buyer from assuming the mortgage. And more often than not, assuming a mortgage will require lender approval. So you’ll still have to prove your credit-worthiness and fill out some paperwork.
7. Look for seller financing
Another way to buy rental property with no money down is with help from the seller. This is known as “owner financing” or “seller financing.” And it is a type of loan is an agreement where the seller handles the mortgage process instead of a financial institution.
The borrower repays the loan as specified in its repayment terms that are detailed in the formal agreement.
This works especially well with sellers who have no mortgage.
For example, this can happen when someone inherits a property and does not want to keep it.
For sellers that are willing to take on the role of financier, owner financing can help sellers move a home faster with sizable returns on their investment.
8. Use Hard money loan
House flippers are known for using hard money lenders to help them house hack into a real estate deal.
Hard money loans are non-conforming loans that are generally provided by private lenders, individual investors, or groups who offer money upfront for short-term borrowing.
It’s private money lent with high interest rates and short terms, and this loan option allows investors to secure financing based on the property’s current or even future value.
Hard money lenders may pull your credit score, but the underwriting process is typically less strict than with a traditional mortgage loan.
If you find a deal on a fixer upper, and you qualify for a hard money lender’s loan-to-value guidelines, you may be able purchase with little or no money down.
“If you are buying an investment property, you will need collateral, such as a separate property, going this route,” says Meyer.
9. Turn to private lenders
There are several reasons why you might want to turn to a private lender today. For example, you might not have enough cash in your bank account, or you might have an unattractive credit history. Typically, private lenders’ criteria are not as rigid as those of traditional banks.
• Corporate private lenders: Banks do not like poor credit records. If this is your situation, you may be able to bypass the traditional bank and use other people’s money. Private lenders can be very useful allies when you want to buy a property but do not have the cash or credit score. Additionally, their processing periods are often much faster than that of banks. I experienced this myself when I bought my investment property, for which I borrowed $47,000 from three different lenders to increase my personal contribution to $72,000.
• Personal private lenders: Aside from corporate private lenders, you may have the option of getting a loan from a personal lender. This can be a good friend of yours, a relative or a long-time colleague. In short, anyone you know who might have the cash to complete your purchase. You may even be able to win them over by offering them an attractive interest rate. Extra money is always welcome.
10. Use your credit cards
Using credit cards may be another good way to buy a property without cash. Having a good credit score when you are a real estate entrepreneur in Canada is very important. Borrowing on my credit cards earned me an extra $25,000 to scale down my payment. However, I recommend that you carefully negotiate the interest rate on your loan to ensure that you can pay it off quickly.
Bonus Point: Use “love money.”
“Love money” refers to seed capital from family and friends that can help you start your business. Involving one’s relatives is another form of crowdfunding or participatory financing.
“Love money” enables you to increase your capital with the help of relatives or friends, but it is not free because they will have a share in your investment. Their share should be calculated according to the amount of their investment. In other words, they become shareholders in your property investment. Once the investment becomes profitable, they will also benefit. Love money has many advantages for its generators.
The main advantage of love money is that it creates a close relationship between the entrepreneur and the investors. It enables you to replenish the fund. Also, some will find this avenue to carry less pressure, as you will be working together with those who are close to you. Thus, there is trust between the initiator of the investment project and its investors. This initiative is a good creative financing technique if you are financially limited.
Start Today and Buy Your Rental Property Even With No Money
Fortunately, you don’t need to be a seasoned real estate entrepreneur to get started in real estate investing.
With interest rates still near historic lows, as well as homes continuing to appreciate, now could be a favorable time to start investing in real estate. You have financing options. Stop paying rent, living with your parents, or living with a roommate and get out on your own.
Conclusion on How to Buy Rental Property With No Money
Bank loans are the most recognized method to cover the cost of buying a property, however, these transactions can be complicated to process as banks require that you already have a certain amount of money available, which you may not always have. So how can you buy a property with no money in your pockets? By knowing how to use creative financing techniques, such as the following
Using these strategies, you can get started on the path toward investing in real estate, even with no cash on hand.
But let me also add that to start buying your own property you need to seek professional advice.