Many people would like to buy investment properties for sale because of the great returns they can provide. However, they either haven’t saved enough money for the 20% down payment which most banks require, or they don’t want to lock their own cash into an investment property. While experts advise having some money in reserve at all times, it’s still possible to invest in real estate with little (or no) money. In fact, the ability to use other people’s money to get into real estate investing is the hallmark of successful investors. They understand how to buy rental properties with no money of their own! If you’re financially strapped and looking for a way to start investing and making money in real estate, you’re in luck. In this article, we explain the 5 best ways to buy a residential investment property for sale with no money of your own.
1- Seller (Owner) Financing
Who says that you must go to the bank to get investment property financing? What some beginners don’t know is that you can have the seller act as the bank instead. This is known as seller or owner financing and it basically means that the seller will finance the property for you! As you can expect, not every seller is open to this, but many are. This can be an effective way to buy homes for sale by owners who have no mortgages or have inherited the property and don’t know what to do with it.
Owner financing allows real estate investors to make payments directly to the seller and to negotiate any terms they want including the possibility of no down payment. Often, sellers are happy to accept regular monthly payments for the property (with higher interest). After 3 to 5 years, you make a lump sum payment to the seller and become the owner of your first rental property.
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2- Lease Option (Rent-to-Own)
Another way to buy investment properties for sale with no money down is through a lease option. A lease option (also known as lease-to-buy or rent-to-own) allows you to rent the property with an option to buy it after a few years. The way this method of financing works is simple. As a real estate investor, you negotiate with the property seller and agree on a sum to be paid for renting the property. The property owner may charge a monthly or yearly premium in the form of higher rental payments. Usually, a portion (and sometimes all) of the rental payments will be channeled toward the purchase price. And at the end of the lease, you have the option to buy this rental property and claim ownership.
This way of how to buy rental property with no money down is one of the best ways for beginner investors to get a foot in the door of real estate investing. You can buy investment properties using a slightly higher rental fee. While renting the investment property, you can use the time you have to build/fix your credit or save for a down payment. This time can also help you gain insight into the property, why it’s a profitable investment property, what maintenance challenges it may have, and how to make it better. Hence, this is a very smart way of starting a rental property business.
Related: How to Start a Rental Property Business – 5 Simple Steps
3- Real Estate Investment Partnership
One of the most common answers to how to buy real estate investment properties for sale with no money is to form a partnership. Investing in rental properties doesn’t have to be a one-man show. If you’ve found a profitable rental property for sale but you’re tight on cash (or the purchase price is out of range), then an equity partner might be exactly what you need. An equity partner is an individual whom you bring into a real estate deal to help finance the income property. It could be another real estate investor or simply a friend or family member who has money for a down payment but no time to buy and manage rental properties.
Buying an investment property with a partner is the perfect solution! Your partner will provide the down payment for buying property for sale. In return, you’ll take on the responsibilities of closing the deal and managing the real estate investment. You’ll end up splitting profits with your partner who will be happy to receive the passive income (who doesn’t like passive income?!). So, if you know someone who’s looking to invest some money in real estate for sale, don’t be afraid to suggest a partnership. Some of the most profitable rental properties are based on great real estate partnerships.
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4- Borrowing Money/Loans
Probably the easiest way to buy your first investment property with little or no money is by borrowing the down payment. Many experts in real estate believe that borrowing money to start investing makes sense. In fact, there are lots of ways you can follow to successfully borrow money to buy investment properties for sale. For example, you can borrow from friends and family, from your 401K, from your credit card, and even from your life insurance policy.
Moreover, taking out a loan (borrowing from a bank) can sometimes be the only option available to close a real estate deal if you don’t have the money. This is not a bad option, of course, as real estate investors have been using loans to finance rental properties for as long as we can remember. However, there are several types of loans that you can use for buying real estate. Hence, it’s crucial that you understand and compare your options before approaching a lender. Some of the best loans offered to real estate investors include hard money loans, private money loans, government loans, home equity loans, and microloans.
For more details, read the 6 Types of Loans for Investment Properties in Real Estate.
5- Owner-Occupant Loans
The final (and probably the best) way to buy investment properties for sale with little money is to buy as an owner-occupant. Why? Simply because mortgage lenders require far smaller down payments on owner-occupied properties than investment properties. There are owner-occupied loans with down payments ranging from 0 to just 5 percent! Some examples of owner-occupied loans are FHA loans, VA loans, USDA loans, conventional mortgage loans, and NACA loans. Most of these require real estate investors to occupy the home for at least one year. But when that year is up, you can turn the house into a rental property and keep it for making money in real estate.
This financing method is perfect for those planning to start investing in real estate through house hacking. The way this investment strategy works is simple: you buy a small multi-family property (2-4 units), live in one unit, and rent out the others. The rent you collect can cover your mortgage and other housing costs to make cash flow and allow you to live in the house for free! A year later, find another investment property for sale to buy. Then move out of the first property and keep it as a pure rental, move into the new house, and repeat the process. As you can see, buying as an owner-occupant to house hack real estate properties is one of the best strategies for making money from your first rental property and, eventually, growing your investment portfolio with little money!
To learn more, here’s The Ultimate Guide to House Hacking.
The Bottom Line
Homes for sale can be expensive, but there are ways to buy them as real estate investments with little to no money. If you want to buy residential investment properties for sale with no money of your own, then you need to recognize, understand, and even take advantage of other people’s money. Moreover, this gives you the leverage to buy more rental properties and grow your real estate business in no time. If you are short on cash, consider the above financing methods for starting a real estate business. And if you’re looking for your first investment property, remember to check out Mashvisor’s investment tools.
To learn more about how we’ll help you make faster and smarter real estate investment decisions, click here.