The mere idea of investing in real estate is appealing to many risk-takers and wealth-seekers. However, when the financing of an investment property is brought to the table, some might start to see real estate as daunting. Financing an investment property can be difficult, there is no doubt about that. Luckily though, there are many ways to finance a real estate property, regardless of your financial situation. Nowadays even if you have no money down, you can still buy income properties. That leads us to this blog’s topic: how to buy rental property with no money down.
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Owner-Occupancy Using Loan Programs
Whenever you ask the question “How to buy rental property with no money down?”, buying a real estate property as an owner-occupant will always be the first answer. That’s because this method is probably the easiest way to achieve this goal.
Using an owner-occupancy mortgage is an excellent way to obtain an investment property. For starters, credit requirements for owner-occupied loans are less strict than those for non-owner occupied loans (i.e., mortgages for rental properties). They also have lower interest rates and, sticking to our topic, lower down payments. The catch, though, is that the real estate property must be used as a residence for its first year after the purchase. Once that time has passed, the property can be used as a rental, with no changes to the loan terms.
Related: The Difference Between Buying an Investment Property and Buying a Home
How can you buy using owner-occupied loans with no money down? Apply for a loan program! Common and helpful programs include loans from the FHA, the USDA, and the VA. The requirements of these loan programs may vary, but by using them, you can significantly reduce your down payment, or even eliminate it altogether!
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Hard Money Loans
The previous point on how to buy rental property with no money down was a safe one. Hard money loans, on the other hand, do bring in a considerable risk. Still though, it could mean no down payment.
Instead of using good credit to evaluate your buying potential, a hard money lender will focus on your potential property’s fair market value. If the deal goes through, the buyer could receive a loan that covers most of the real estate property’s price. Sometimes, the loan can cover the entire purchase!
We don’t mean to rain on your parade, but there is a significant catch that comes with hard money loans. Their interest rates and fees are very expensive. Sure, the loan will take care of property financing temporarily, but it can suck up your bank account in the long term. This strategy is not advised for most real estate investors. However, if your rental property is expected generate high cash flow (which you can find out with Mashvisor’s investment property calculator) or you will rest assured that you can repay the loan on time, why not give it a shot?
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Private Money Loans or Partnerships
It’s commonly said not to mix friends and family in business. However, if you’re trying to find out how to buy rental property with no money down, it might be a good plan to deal with your beloved ones.
While you do not necessarily have to form real estate investing partnerships or take private money loans from friends and family, these are the ones investors seem to turn to first. You could always contact real estate investors from your network instead.
Related: Creating a Real Estate Investment Network: Who Do You Need?
It does not matter too much whom you turn to, what matters is that forming partnerships or receiving private loans is a smart way to buy investment properties with no down payment. The terms of the loan must be agreed upon by the two parties, which can give you the opportunity to finance the rental property without a hefty down payment. In the long term, you will be required to pay back according to the agreed-upon interest rates. A similar situation can arise when purchasing with real estate partners. The partners may agree to cover the down payment as long as you perform a service for the income property, like management. Partnerships and private loans are two great answers to our question of the day, “How to buy rental property with no money down?”.
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Purchase-Money Mortgage
On the surface, this might look as the strangest way for how to buy rental property with no money down. A purchase-money mortgage is essentially a loan given to the property buyer from the property seller to purchase a rental property. You read that right, the seller provides you with a loan to pay the seller.
Purchase-money mortgages are typically used when the buyer cannot qualify for a conventional mortgage. While this type of mortgage is beneficial to the buyer, it is pretty hard to find. Most sellers do not want to have business with their real estate properties once they sell them, especially if they have to refinance them. If you do opt for this plan, study it well and take it. Your down payment will most certainly be paid off.
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Lease with Option to Buy
The fifth and final answer to how to buy rental property with no money down is by leasing with an option to buy. This option is great if you also need a place to rent out. If you find a rental you’d like to rent out, and possibly purchase in the future, then leasing with an option to buy is perfect for you.
Essentially, the landlord and the tenant/buyer agree that a portion of the rental payments goes towards purchasing the real estate property. A timetable is also set for the buyer to make the full purchase. This method may not fully eliminate the down payment, but it can reduce it if agreed upon by the two parties.
Related: Lease to Own Option and its Pros and Cons for Buyers and Sellers
As you have seen, there are many ways for how to buy rental property with no money down. Some techniques are quicker and safer than others. Some of the riskier ones can offer great coverage initially, but with high payments in the long run. So, when you are wondering how to buy rental property with no money down, evaluate yourself, your condition, and the method you’d like to pursue.
For more on financing topics just like how to buy rental property with no money down, go read some posts on the Mashvisor blog! To plan your finances for an income property purchase, start your trial with Mashvisor!