How to Buy a Rental Property With No Money Down
Although there are always fluctuations in the real estate market, purchasing property remains a safe, high-yield investment. Plus, you can passively grow your yearly profits if you utilize the property for rental income. Still, buying rental property tends to require a significant upfront investment, but what if you don’t have the cash? Here, we’ll go over some tips on how to buy a rental property with no money down.
Down Payment Requirements for Investment Properties
Investing in real estate is a great way to diversify your income, especially if you plan to acquire one or more rental properties. However, single-family homes will require a down payment of about 20% to 25%, depending on the area and overall sale price. In some places, lenders may even need more of a down payment since investment properties can carry a higher risk. Your credit score will also factor in the down payment requirements, which is pretty standard across all property purchases. Due to the unique differences in each situation, it’s important to work with a professional to fully understand your options.
6 Strategies to Buy a Rental Property With No Money Down
Investing in rental properties can be a fun way to diversify your income and secure long-term wealth. However, not everyone has the money to purchase a rental property on their own. So, if you’re planning to buy an additional type of property but don’t have much money to put down, here are a few strategies to consider.
1. Find a Strategic Partner
One creative way to buy an investment property or rental home without any money down is to find a strategic partner. This approach involves collaborating with someone who can provide the financial resources you lack, such as the down payment or upfront costs, in exchange for a share of the profits, equity, or other agreed-upon benefits.
The most important part of this strategy is to find the right property partner, so to speak. You should find someone you trust with the cash flow necessary to cover the upfront costs associated with a rental investment. You’ll then need to create a legally binding partnership agreement that covers everything from property taxes and upkeep to finding tenants and collecting rent. Ideally, if you are becoming a partner in the investment property with no money down, you’ll take responsibility for the day-to-day actions, such as property management and tenant relations.
2. Secure a Loan With a Local Bank
If the right circumstances are met, it may also be possible to secure a no-money-down loan with a local bank. Typically, small or local banks have more flexibility with their loan terms and may be more willing to invest in local ventures—i.e., an aspiring rental property owner. However, one of the most critical aspects of this is the need for a strong business plan and some additional collateral. You need to show the bank how your property will generate income and the timeline for income generation to be considered for a no-money-down loan. This also varies based on where you live and the bank in question. It’s not a guaranteed option, but it’s worth looking into.
Some things that can help you get approved include experience in rental property investment, a good loan repayment history, additional income sources, and a business plan explaining why the property has high cash flow potential. You’ll also be more likely to succeed if you already have a good relationship with the bank and a strong financial portfolio.
Additional forms of collateral may be requested, but these can vary from other properties to a fully paid-off vehicle. You may also be able to use things like stocks or mutual funds as collateral, depending on the cost of the loan you’re requesting.
If you have less experience or do not have the best financial portfolio, a co-signer with strong credit and financial stability can help you qualify for a loan with more favorable terms.
3. Use a Hard Money Lender
Hard money loans are short-term, asset-based loans provided by private lenders or investment groups rather than traditional banks. Unlike conventional loans, hard money loans are primarily based on the value of the purchased property, not your financial history, credit score, or income level. This makes them an attractive option for investors who need funding quickly or don’t qualify for traditional financing.
But how do hard money loans work, exactly?
First, the loan is secured by the property you’re purchasing rather than your creditworthiness. The lender evaluates the property’s value and then uses it as collateral. Due to this approach, approval times are often much faster than traditional loans—sometimes even within a few days. They also have shorter commitments for term length, so you can either flip a property or refinance into a traditional mortgage once you get some extra cash.
While hard money loans can be approved without a down payment, the interest rates tend to be significantly higher. Therefore, it’s important to consider your options and whether or not this is the right choice for long-term real estate investing.
4. Consider Seller Financing
Seller financing, also known as owner financing, is a creative financing option where the property’s seller acts as the lender. Instead of taking out a mortgage from a traditional financial institution, the buyer makes payments directly to the seller over time. However, this isn’t always an option, as the choice ultimately depends on the seller.
In this arrangement, the seller retains legal ownership of the property (via a lien) until the buyer pays off the agreed-upon amount. The terms, including interest rate, repayment period, and any down payment, are typically negotiated between the buyer and seller.
While this can be a good option to purchase an investment property without putting money down, there are pros and cons. The most significant advantage is the flexibility with money down, but the high interest rates on the purchase price may result in a lower return on investment over the years. Plus, if the property value drops, you may overpay, as you’ll need to adhere to your original price agreement.
5. Get a Home Equity Loan or Home Equity Line of Credit
If you already own a home and have built equity in it, you can tap into that to fund the purchase of a rental property. Both home equity loans and home equity lines of credit (HELOCs) allow you to borrow against the equity you’ve built, but they work in slightly different ways.
A home equity loan gives you a lump sum of money upfront, which you repay in fixed monthly installments over a set term. It’s often referred to as a second mortgage because it’s secured by your existing property. The amount you can borrow depends on your home’s current value and your mortgage balance. Property owners typically get up to 80% to 90% of their home’s value.
A HELOC works more like a credit card. Once approved for a credit line, you can draw out as much money as you need throughout the “draw period,” which is usually about five to ten years. After the draw period, you’ll enter a repayment period, where you begin paying back the principal and interest.
For both home equity loans and HELOCs, no cash is required. Plus, the interest rates tend to be lower than hard money loans and other types of finances. This makes it a great option when buying your first rental property. Still, you should be careful not to take out too many loans against your primary residence to avoid potential issues with the mortgage payments in the future.
First Star Realty is here if you’re interested in new real estate investments or need a property manager to help cover existing properties. First Star Realty has several residential and commercial listings for potential buyers and real estate investors. We also have land for sale if you want to start from scratch. As an experienced property management company, we can help you save time, resources, and energy. First Star Realty always puts our client’s needs first, and we’re committed to maintaining ongoing communication so you can make informed real estate investment decisions. To learn more about our different property management services, contact us today
