Getting a standard mortgage to finance a rental property might be the most generic path to start your real estate investing business.
But what if you don’t have the money to qualify for a mortgage loan? What are your options in this case? Do you just throw in the towel on real estate investing altogether?
Of course not! In this blog, we show you the best ways to finance income properties with little to no money.
Related: Investment Property Financing: What Are the Best Options for Real Estate Investors?
How to Buy a House with No Money Down in 5 Different Ways
- How to buy a house with no money down with a hard money loan
If a standard mortgage loan is not an option for you right now, consider pursuing a hard money lender to finance your prospective investment property. Hard money lenders do not look into your creditworthiness, but care more about the value of the rental property itself and focus more on the after repair value aka ARV. In the simplest terms, ARV is an estimate of what the property will be worth after the renovation phase.
You are probably thinking this sounds too good to be true, but what’s the catch? Well, the catch here is that hard money loans are too costly. The interest rate here is much higher because there is more risk for the lender than a generic bank loan. The cost of borrowing from a hard money lender is approximately 10% higher than standard mortgages. But the upside with hard money loans is the flexibility it offers investors; real estate investors have more room for negotiations over the loan terms. You can even use your personal assets i.e. your house as collateral if the worst comes to worst.
- How to buy a house with no money down with a home equity loan
Don’t discount home equity! If you are a homeowner, you can use the equity you accumulated over the years from owning your house. Equity means how much of your house you already own. So if you have enough equity down, you can use this to buy a rental property. Equity allows you to leverage a loan against the value of the home you actually own.
Home equity loans do not exceed 80% of the value of your home; the example below brings the idea home. With all this said, your best bet is to contact your bank to consider if this option is feasible for you.
Example: Home Equity Loan
Your home is valued at $200,000 with $70,000 worth of debt on the house. You can borrow up to 80% of the $200,000, discounting the $70,000.
($200,000 x 80%) = $160,000 → ($160,000 – $70,000) = $90,000 left to borrow from your equity and $90,000 of capital to buy your new rental property.
In this example, you are eligible to purchase a $90,000 investment property to finance another investment property.
- How to buy a house with no money down with a private money loan
Don’t discount family and friends to kickstart your real estate business. Consider borrowing money from a trusted friend or a loved one to finance your rental property. You need to commit to paying off the debt in a timely manner and stick to the terms of the agreement to avoid any fallout in your relationships. The interest rate, terms, and payment installments are up to you to negotiate and you can be as flexible or as strict with the terms so long as both parties are on board.
But beware of the risk involved in getting your friends and family involved in financing your rental property. It might end up breaking up your relationship if the terms of the agreement are not met.
Another way to getting a private money loan is through wealthy individuals/entrepreneurs who can lend you money and earn up to 12-20% return on investment. But they will need a lien on the property to guarantee their returns.
- How to buy a house with no money down by co-investing for a down payment
OR, find a partner to co-invest for a down payment. Find someone who has the capital means to provide the funding while allowing you to do the managing of day to day operations. To avoid legal disputes and courts, write up a contract that establishes who is responsible for what and how the profits will be split. But make sure to choose the right partner who will meet you halfway.
- How to buy a house with no money down by seeking out motivated sellers
When we say motivated sellers, we essentially mean sellers who are in desperate need to sell. Reasons for selling could be a bankruptcy, a divorce, death, relocating to a new country, bad health, in need of quick cash- the list is endless. Regardless of the intention behind the sale, this is good news for investors looking for a good bargain because these sellers will be more open to negotiate the price and even provide funding to close the deal quickly. To find these motivated sellers, your best person is your local real estate agent or real estate broker who can help provide information on who might be in this situation.
Related: Myth-busters: 6 Myths and Truths About Buying Foreclosed Homes
Conclusion
How to buy a house with no money down is not an impossible task. There are plenty of ways to invest in real estate with little to no money. Figure out the best option for you and hit the road running. The most important thing is to study your prospects before you jump in head first. Conduct a cost/benefit analysis to measure your return on investment and make sure to keep your expenses to a minimum. But whatever strategy you decide to take on, make sure it won’t cost you down the line.
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