5 Ways to Purchase An Investment Property No Money Down With Creative Financing
Financing is a crucial component of any viable real estate investing business. While we would all love to buy our properties cash and never have to jump through all the loops to get financing it’s just an inescapable reality for most of us mere mortals. Luckily you don’t need to use your own cash most of the time but you do need to get creative when putting deals together. When most people think financing they think traditional bank financing. While bank financing is great, there are very few available options for real estate investors to purchase property zero-down. That’s where the “creative” part comes to play. But first, let’s talk about why banks don’t lend zero-down to real estate investors in particular.
If there was a way to get a zero-down mortgage on an investment property I’d have 200+ rentals by now. Maybe 500.
And I’m willing to bet that a lot of investors would follow suit. Entry and exit costs under this scenario are way too low. As an investor if I put out zero money on a cash-flowing property, I have diminished incentive to keep it if things go sour. If that were to happen a rational investor would just pocket whatever cash they made and send their investment property back to the bank.
Banks learned this lesson from 2008.
Did I buy a lemon? (problem property with costly fixes) “here you go bank!” Tenants getting annoying and not paying on time? Meh, don’t feel like dealing with it anymore. “Here you go bank!”
I imagine you can quickly see where this becomes a problem.
Banks are not in the business to hold houses. They want their money back plus interest.
This is why no conventional bank that I know of will give you zero-down on an investment property.
“Zero-Down” loans you may have heard of are probably the following":
VA loan. You qualify if you are a Veteran of the United States military.
FHA (Federal Housing Administration). Need certain income levels to qualify.
And some USDA type loans. Works for houses in certain settings. Mainly rural.
These zero-down loans are all focused on primary residences, where both your exit costs and incentives to stay are higher and thus lower risk to the lender.
That is why the interest rate on your personal home is going to be lower than that of an investment property. The rate reflects the risk to the lender.
So What “zero-down” Creative Financing Options Are out There for investors?
Turns out there are quite a few. And while you’ll need to do some legwork to pursue these financing avenues they’re well worth your time and effort.
This infographic sums up the main avenues you can use to creatively finance an investment property with little to no money out of your own pocket.
I’ve also included the list in bullet-point form for your viewing pleasure.
Partner up! Find an investor with a lot of money and very little time. (S)he puts up the capital, you do the leg work. Split the profit/equity. You’ll need to do a lot of networking to find private money lenders of this kind. Check out this article for more info on finding private money lenders.
Seller-financing - Find a motivated seller who will agree to carry a note on a zero-down loan. You own and control the property but make payments to the seller till the note balance is paid off. Sellers that do this are rare because we are in a sellers market with high demand. But they aren’t nonexistent. Just know you’ll be on a shorter than 30 year loan term and higher interest rate.
Buy the property “subject-to” the existing mortgage. Involves finding a motivated seller who needs cash now. You pay them an agreed upon amount to take title to the house while keeping the mortgage in their name. You make their mortgage payments. They rent back to you. I know of investors who have 30+ subject-to rental properties and it has worked well for them. You need to do a lot of networking and leg work to find deals but they are lucrative.
Use a HELOC to buy an investment property outright. Zero-down because you’d be buying cash without taking a loan. Keep in mind you are leveraging one asset to gain another, but this is still a great strategy. For one, you can negotiate better terms because you’re buying cash. Then once you’ve stabilized the property, refinance it and repeat.
“House Hacking” - I imagine you’ve heard of it. It’s been widely publicized by Biggerpockets. You can use an FHA type loan to purchase a duplex as your primary residence, then rent the other unit out. I know of many who did this with success.Alternatively you can buy an investment property from the MLS or the retail market and finance the purchase. You have options using a conventional loan.
But What about bank financing? There has to be a way!
If none of the above options appeal to you, you’re not out of luck yet! You can still get bank financing. But you will not get zero-down financing on an investment property with a conventional loan. You’re going to need to have some skin in the deal.
Your options for bank financing are:
Finance the purchase. Banks will generally allow you to purchase an investment property on the MLS retail market and require a minimum of 20% down.
Put down the minimum of 20%. Or 25%. or 50%.
Banks give a slightly better rate if you put down more money down vs 20% because it’s less risk for them.
If your goal is to max out cash-on-cash returns then put 20% down. If your goal is to prioritize capital preservation put 25% or higher down.
Cash-Out Refinance. Then Repeat.
You can refinance a property you’ve already purchased using a conventional loan once it is “stabilized” i.e. when all units are occupied and cash flowing. You’ll still have to leave 20-25% minimum equity in the property but at least you won’t be paying that money out of your own pocket. Hopefully if you’ve purchased the property at a good price point and didn’t overextend the renovation you’ll get all or most your money back when you cash-out. You can repeat this process to build a chain of rentals.
I hope this post helps you on your journey to purchase an investment property. Hopefully it opened your mind to new ways on how to put a deal together without using your own cash.
Have any of you pursued these financing strategies with success? I’d love to hear from you! Share your experience in the comment section!
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