Passive income from rental properties can help investors earn a high rate of return on their investment. However, we have to admit that starting off in real estate investing isn’t always an easy task.
Many people are very hesitant to invest in real estate because of the high costs. As a general rule, most people do not want to put their money into an investment that could lose money. It’s not actually very uncommon for people to not be able to put a down payment down because they lack the funds.
Now, the good thing is that you don’t really have to spend a fortune to own a rental property. Rental homes can be purchased with little or no money down, despite what you might think. Yes, you don’t need a lot of money to buy a rental property and start reaping the financial rewards.
Here are 6 ways to buy rental property with little to no money down.
Before we even get to our list, let’s answer this question first: What does it mean to purchase a rental property without having to put any money down?
When flippers, home buyers, and investors buy rental property with “no money down,” it means they don’t put much or any of their own money toward the upfront costs of the investment property.
Real estate investors may have a better chance of getting a good return on their money if they use less of their own money to fund their ventures.
People who want to know how to buy a rental property with no money down like to use these investment strategies:
- Rent out your primary home and buy a new one.
- Use the equity in your home to buy a rental property.
- Buy a multi-unit home and be the landlord.
- Co-sign a loan with someone.
- Look for seller financing.
- Hard money loans
Let’s talk about each one in detail.
Rent Out Your Primary Home And Buy A New One
You’re one step ahead of the rest if you already own a home.
One of the most common ways to start investing in real estate is to turn your own home into a rental property.
“Backing into your first rental property” in this way has a lot of benefits. Traditional loans for investment properties have higher interest rates and need a bigger down payment. Most of the time, you’ll have to pay a 20% down payment.
Most of the time, the interest rate on an investment property is half a percent or higher than the rate on your main home. So, the investment strategy is to rent out your current home and finance the next home you buy as your primary residence, which means you’ll be living there full time.
That way, the interest rate on both properties will be lower. And if you still have to pay the mortgage on your first home, you can use the money you get from renting to pay for some or all of it.
Use Your Home Equity To Buy A Rental Property
Existing homeowners can also buy a property with the help of a home equity line of credit (HELOC) or a cash-out refinance.
If you already own an existing home, you might be able to use its equity as a deposit for another house.
One way to do this is to borrow money against the value of your home. Homeowners may be able to get a standard home equity loan, or HELOC, to pay for a down payment.
With a HELOC, you can use your home to get a line of credit that you can use whenever you need cash. And you can start paying back the loan with money from the rental.
Cash-Out Refinancing
Cash-out refinancing is the other form of loan that lets you use the value of your home as collateral.
Cash-out refinance is a technique that allows you to refinance your mortgage for a sum that exceeds the amount you owe. Then, you take out that extra loan amount all at once.
In this case, you can use the money you got from a cash-out refinance to put down on an investment property. If you have enough equity in your own property, you can also start investing without putting any money down.
Buy A Multi-Unit Home And Be The Landlord
You don’t necessarily have to live in a single-family home. Multi-family homes are an excellent way for first-time real estate investors and people who want to become property managers to start buying income-generating properties.
The first thing you’ll have to do is find a good deal on a property with two to four units with the help of a real estate agent. You will then rent out the other units while you live in one. Then, you can use the rent money to help pay for your mortgage.
You can buy a multi-unit property with a low-cost loan, like an FHA loan or a VA loan, as long as you also live in it. FHA loans and other mortgage programs offer more than just reasonable rates and terms. They also offer different ways to pay for the down payment.
Co-Sign A Loan With Someone
Okay, so let’s say you don’t have enough funds for a down payment or moving costs, but you still want to make investments in rental properties. You are also willing to do the research you need to do in order to buy and maintain these investments in a responsible way.
On the other hand, your friend has money for a down payment. But they don’t have time to figure out how to buy properties to rent out.
Both you and your buddy could benefit from this situation.
By being co-borrowers, you can both put money into the investment. You both take care of the house’s monthly payments, and you can also split any money you make from rent or equity.
Take note, though, that your co-borrower doesn’t have to be a friend. A business partner could be a friend or family member, but it could also be a stranger.
Look For Seller Financing
You can also buy a house with no down payment if the seller helps you.
This type of loan is also called “owner financing” or “seller financing“. The seller usually takes care of the mortgage process instead of a bank. The borrower pays back the loan according to the terms written into the official agreement.
This works best for sellers who don’t have a mortgage.
This can happen, for example, when one inherits a house but doesn’t want to keep it. If, for instance, a seller is willing to act as a lender, owner financing can help them sell their home faster and get a good return on their money.
Hard Money Loans
People who buy and sell houses often use hard money lenders to help them get into a deal.
Hard money loans are non-conforming loans usually given by loan companies, individual investors, or groups who give money up front for short-term borrowing.
It’s private money lent with interest rates and short terms. This type of loan lets investors get money based on the property’s current or even future value.
Your credit score may be checked by hard money lenders, but the underwriting process is usually less strict than with a regular mortgage loan. If you find a good deal on a house that needs work and you meet the loan-to-value rules of a hard money lender, you may be able to buy the house with little or no money down.
Key Takeaway
Buying any property involves a financial commitment. Nonetheless, you don’t have to use your personal savings account if you know what you’re doing. Even if you don’t have a lot of money saved up, there are several ways to get started in rental real estate investment.
