One of the major obstacles which beginner investors face when they first decide to join the exciting world of real estate investing is finding the right source of financing. Actually many refrain from investing in properties altogether because they have little or no money to put down. The question “How to invest in real estate with no money?” seems to be one without an answer for beginners. However, as experienced successful real estate investors and moguls will tell you, investing in real estate with no money down is feasible as long as you know how to do it.
In order to help beginner real estate investors get started, we’ve put together the 11 top strategies for how to become a real estate investor with no money. Read carefully and decide which one is the best for you.
1. Real Estate Partnership
One of the best ways to invest in real estate with no money is to form a partnership. This method is a particularly good match for those who are just getting started in real estate. In addition to providing the financing for buying an investment property, working with partners offers beginner real estate investors the knowledge and expertise of more seasoned investors.
However, remember that you should also bring something to the table in order to attract real estate business partners. Since this is neither money nor experience, you should be ready to do the majority of the work related to finding a rental property, buying it, and managing it.
As far as the real estate market research and the investment property analysis are concerned, there is no reason to worry. High-tech real estate investment tools such as Mashvisor’s rental property calculator and property finder tool will help you find a profitable property in a top housing market in a matter of minutes, with the help of big data and predictive analytics. All you need to do is to sign up.
2. Real Estate Syndication
Another answer to the question “How to invest in real estate with no money?” is through property syndication. This is a specific type of a real estate investing partnership where the leading role is played by a sponsor, also called a syndicator. This is the person who is responsible for finding a property, raising the necessary funds, buying the property, and managing all aspects of the business.
The best part is that the sponsor usually invests only 5-20% of the rental property value, while the rest of the investment is provided by the other partners, called investors. However, the syndicator invests his/her time and efforts into the project, so real estate syndication is far from a passive real estate investing strategy. Moreover, it requires either some previous knowledge of the real estate business and the local housing market or the ability and willingness to learn really quickly. If you have what it takes to be a sponsor, syndication is a feasible way to advance your real estate career with little or no money down.
3. House Hacking
If you don’t own a home yet and would like to hit two birds with one stone, then house hacking is how to invest in real estate with no money. No worries, despite the sound of the name, this real estate investment strategy is totally legal and makes for a very smart way of buying a house with no money down (or nearly no money).
Can you house hack if you don’t have much savings and are haunted by a bad credit score? The answer is simple – “Yes, you can.” You can take an FHA loan for a duplex with a very low down payment (a minimum of 3.5% of the property price) and a low credit score (580 or sometimes even 500). Moreover, the FHA loan allows you to count the expected rental income from one of the housing units to help you qualify for the loan. This is the only owner occupied loan which facilitates real estate investing with no money through house hacking in this manner.
4. Lease Option
Lease with the Option to Purchase, or lease option for short, offers one more opportunity to buy a real estate property with little to no money. Also called option to buy, this is the more flexible variation of a broader real estate investing strategy suitable for beginners – rent to own. In residential real estate, under lease option, the property owner and the tenant (who will eventually become the real estate investor) agree that the latter has the option to buy the rental property at a set price at the end of the rental period.
In some cases, it is possible to enter into a lease option without any down payment. In other cases, the property owner charges the renter a one-time premium which varies between $100 and 5% of the purchase price, which is still significantly below the 20% down payment required for a conventional mortgage, making investing in real estate with no money (or very little money) feasible. In yet other cases, the eventual property buyer pays the premium on a monthly basis in the form of a higher rental rate.
While the investor has the right to choose whether to buy the rental property at the end of the rental period (usually between 1 and 3 years), he/she would lose the premium if he/she decides to opt out. This means that beginner real estate investors should go for lease option with care, only after establishing a solid plan for how to find the financial means to move forward with the purchase once the time has come.
5. Lease Purchase
Another, more limiting variation of the rent to own strategy is a lease purchase contract or a lease purchase agreement. It is also one more answer to the question of how to invest in real estate with no money. Unlike the lease option, under the lease purchase, the renter is obliged to buy the rental property at the end of the rental period, which usually lasts 2-3 years or more. The contract which the two parties sign at the beginning should include:
- Sale price: the locked-in purchase price of the real estate property
- Monthly rent: how much the renter will pay the property owner on a monthly basis
- Rent credit: how much of the monthly rental income will be put towards the down payment for the property
- Duration: the timeframe of the lease purchase agreement
- Terms and rules: who pays property tax, insurance, HOA fees, home repairs, and other recurrent costs for the time of the lease
The advantages of rent to own are obvious. With zero down payment, you get a home to live in for the next couple of years which can eventually turn into your first investment property. You should use the duration of the agreement wisely to save the money required to buy the property at the end of the rental period or to improve your credit score so that you can qualify for a mortgage loan. As a beginner investor, you should proceed particularly cautiously with lease purchase where you are obliged to purchase the property no matter if you can afford it or not.
6. Seller Financing
Another way to invest in real estate with no money is seller financing, also known as owner financing or purchase money mortgage. This strategy is excellent for buyers with a bad credit score history who cannot qualify for a conventional mortgage. Under seller financing, the investor receives the loan from the property seller rather than a traditional financial institution. A major benefit of this strategy is that the rules and terms are flexible – the seller and the buyer can agree on the size of the down payment, the size of the monthly payments, and the duration of the loan term. The trick, of course, is to be able to find an owner who is willing to delay his/her income from selling the property. Remember that this is feasible. Indeed, many successful investors started their real estate careers with this strategy.
7. Home Equity
If you already own a home or an investment property, you can capitalize on the equity you have on it to get a home equity line of credit (HELOC). You can then use the money from the HELOC as the 20% down payment on your second home.
Nonetheless, before you decide to become a real estate investor with no money through this strategy, you have to put together a detailed plan of how you will repay both the HELOC and the mortgage on your investment property. Otherwise, you risk losing your home and/or rental.
The first step to do that is to conduct careful investment property analysis in order to know exactly how much rental income you can expect to make from your investment property before you even buy it. The rental rate should suffice to cover the monthly mortgage payments as well as any other ongoing expenses related to managing the property and renting it out, while leaving enough positive cash flow to repay the home equity loan too.
8. Hard Money Lenders
If you are still looking for yet another way of how to make money in real estate with no money down, how about hard money lending? A hard money loan is a short-term loan secured by a real estate property and funded by individual investors or a fund of investors. The amount of the loan depends on the value of the property which the borrower uses as collateral which can be a real estate property (home or investment property) he/she already owns or the one which he/she is using the money to buy. The duration is usually a year, though the loan can be extended to 2-5 years.
Hard money loans make getting started in real estate investing feasible for people with no savings and bad credit. However, as you can probably imagine, hard money lenders require higher interest rates as well as short repayment periods. This means that real estate investors should go for this option only with relatively cheap investment properties that promise an exceptionally high return on investment. The cap rates must be double-digit!
To figure out what cap rates per city you can expect in 2019, read here.
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9. Private Money Loans
If a hard money loan is not your answer to the question “How to invest in real estate with no money?”, maybe a private money loan is. The idea behind private money lending is very similar to hard money lending. Once again, this financing strategy is perfect for beginner real estate investors with a poor credit score. The difference is that in this case the money is provided by individual, non-institutional lenders. Private money lenders can actually be your own family or friends as well as investors with lots of capital looking for passive real estate investing.
Because of this, you might be able to score better or at least more flexible terms for private money loans.
Needless to say, before you decide to proceed with this option, you should analyze the investment property in detail to ensure you can afford repaying the loan and have a high return on investment once you are done paying.
10. Real Estate Wholesaling
You can learn how to make money in real estate with no money even without buying an investment property. How? With wholesaling real estate. This is a very active real estate investment strategy in which you find a property for sale under market value, put it under contract, and find a property buyer to whom to assign the contract. You can become a real estate wholesaler with little or no money because you never own the property. The only funds you need are for marketing the property, and this can be done in cost-efficient ways with the help of social media, your real estate network, and other methods.
What makes this strategy perfect for new real estate investors is that it does not require a long-term commitment to an investment property. You can use it to get a flavor of the real estate business and decide if this is the right way to make money and build wealth for you.
To succeed with real estate wholesaling, you need to learn where to find off market properties, foreclosures, short sales, and bank owned homes as these are much cheaper than publicly listed properties for sale, so it will be easier to find buyers. Moreover, buying cheap real estate is important to optimize your return.
11. Fix and Flip
The last on our list of the best ways of how to invest in real estate with no money is flipping houses. This real estate strategy requires the investor to buy a cheap property in a poor condition, implement fixes and repairs, and sell the property to a homebuyer or another real estate investor at a significantly higher price.
The key to success is two-fold. First, you should be able to locate cheap homes for sale such as off market properties. Second, you have to make the most cost-efficient fixes which will result in the highest increase in the value of your property.
How about financing the fix and flip? Because of the short duration of this strategy, beginner investors have access to various short-term real estate loans such as private money, hard money, and special fix and flip loans. As the interest rates on such loans tend to be high, you need to analyze the deal carefully in advance to ensure a high return on investment.
How to invest in real estate with no money is no longer a mystery. You now know 11 ways for getting started in real estate investing with little or no money. This means that there is nothing standing between you and long-term wealth.