How to Invest in Real Estate with No Money Down

How to Invest in Real Estate with No Money Down

Decide If Youre Cut Out to Be a Landlord

Being a landlord can be a good way to earn real estate income, but it’s not easy or glamorous. In addition to choosing the right property, prepping the unit, and finding reliable tenants, there are always maintenance hassles and headaches.

Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you or you could hire a property manager, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money.

Of course, that changes as you add more properties to your portfolio. Lawrence Pereira, president of King Harbor Wealth Management in Redondo Beach, Calif., lives on the West Coast but owns properties on the East Coast. As someone who says he’s not at all handy, he makes it work. How? “I put together a solid team of cleaners, handymen, and contractors,” says Pereira.

If you're not the handy type and don't have much spare cash, being a landlord may not be right for you.

Combine Mortgages

If you already own property, you could combine mortgages in order to provide the seller with cash at closing without using your own money. You could also suggest that the seller place a second mortgage on top of the first and keep the cash, while you, the buyer, assuming both loans.

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The bottom line

Real estate investing can seem intimidating at first. Not everyone has the time or ability to flip houses or handle having a tenant. The good news is there are options available for every level of investor, with each catering to different goals, skill levels, and time constraints. The most important thing to do is get started today and let your investment start compounding now.

Getting Started

While there are many variables to consider when purchasing your first investment property, you should start by doing your research. Look at housing prices and neighborhoods and begin saving for a down payment. And when you’re ready to dive head first into the real estate game, you can start by getting preapproved for a mortgage.

5. Look for a lease purchase option

If a traditional mortgage is not suited to your financial situation, another proven way to invest in real estate with no money is through what’s known as a lease option or a rent-to-own home.

Under lease options, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments. The excess rental fee will then be channeled towards the purchase price of the home.

With this type of agreement, you may be able to invest in real estate via a slightly higher rental fee.

How Do I Determine The Potential ROI For My Rental Property?

When looking for a great investment property, the first question you need to ask is “Can I actually make money?” If the answer is no, it’s obviously not a great investment. To see how much money your property could potentially make, you’ll need to consider the return on investment (ROI). The ROI can be calculated by first finding the property’s net annual income. This is the rent money that’s left over after you’ve paid the taxes, insurance, property management fees, expected repairs (plan to spend 1% of the property value on this), potential vacancy periods, HOA fees (if applicable) and any utilities that aren’t going to be covered by the tenant. To find the ROI, take the annual income and divide it by the amount you spent on the property. For example, if the net annual income is $7,500 and you spent $100,000 for the property, your ROI is 7.5%.Use this calculation to see if each rental property is a good potential investment.

Types Of Loan Is Best for An Investment Property?

As challenging as it may be to qualify for an investment property loan, you should still consider it if you’ve found an investment property that you think could be particularly rewarding. Here are the different types of investment property loans you should look into if this is the case:

Conventional Mortgages

Obtaining a conventional investment property loan from a private lender will require you to have a credit score of at least 720, although this number is flexible depending on other factors (such as your debt-to-income ratio and credit history). You will need to make at least a 20 percent down payment as well, and you can expect your interest rate to be between one to three percent higher than that of a traditional home loan. Fees will be higher as a result of the Fannie Mae risk-based pricing adjustment, which is an additional 0.75 percent. The LTV will need to be 80 percent or less. Finally, some lenders will require that you have liquid reserves of up to six months.

Be aware that if you have four mortgages to your name, you’ll no longer be able to take out a conventional investment property loan. You would have to go through a special program established by Fannie Mae, which allows investors to have between five and 10 mortgages to their name. To qualify, you’ll need to make a 25 percent down payment on single-family homes or a 30 percent down payment if it’s a two to four-unit property. If you have six or more mortgages, you will need a minimum credit score of 720.

Hard Money Loans

Hard money loans are also known as commercial real estate loans. They’re used most often by professional real estate investors and investors who want to buy fixer-uppers and flip them within a short period of time. What makes them particularly beneficial is that these types of loans are often approved on the same day the application is submitted and funding is generally available within three days of the approval. Additionally, as long as you can put down between 25 and 30 percent as a down payment, you may be able to qualify despite not having the best credit score or despite having more than four mortgages to your name.

As you can imagine, there are a few potential drawbacks. First of all, hard money loans are for short-term investors. You’ll have to pay them back within 1 to 2 years or 3 to 5 years. Interest rates tend to be quite high as well at 9 to 14 percent. Even upfront fees can be as high as 2 to 4 percent of the loan. These types of loans are obviously poor for long-term investors (such as if you’re purchasing a rental property).

Private Money Lenders

You don’t necessarily have to go to a professional money lender, like a bank. Private money may be available to you from individuals who have extra money and are looking for good ways to invest it. Such people could include family members, friends, co-workers, or other property investors. There are a number of advantages to borrowing private money. There are fewer formalities involved, conditions are much less strict, and interest rates are usually lower. The length of your loan will be more negotiable as well.

 Of course, you will need to secure the loan with the income property’s existing mortgage or with a promissory note, meaning that if you don’t pay the loan back, the lender can foreclose. While you risk foreclosure when you take out a professional loan, remember that if you borrow private money from someone you know, there is a risk that you could damage your personal relationship with them if you don’t pay your loan back according to the agreed upon terms.

Home Equity Loans

Instead of getting a loan specifically for buying an investment property, you could also take out a home equity loan against the equity you’ve built up in your primary residence. A home equity loan is easier to qualify for and will likely have better terms since your personal home will be used as collateral, reducing the risk that you will default on your loan. Generally, you’ll only need to have a credit score of 620 or higher, a debt-to-income ratio of 43 percent or lower, and a solid credit history in order to qualify.

The reason you can use a home equity loan for an investment property is that the loan is provided in a lump sum that can be used in any way you want, including on another property.  You could borrow up to 80 percent of your home’s equity value using a home equity loan. However, this will only work if the investment property isn’t significantly more expensive than your personal home’s value.

Commercial Investment Loans

Investing in commercial real estate is a different matter altogether. Commercial real estate tends to be more expensive to begin with, requiring a  commercial investment property loan. In addition to having to make a down payment of at least 15 to 30 percent and having a good credit score, you will also need to have a good business plan outlined. Lenders will want to see that you have a solid plan to ensure a steady cash flow. Keep in mind that such a loan is expensive–interest rates tend to be between 8 and 13 percent and most financing options are for terms that only last one to three years. 

Fix-And-Flip Loans

Fix-and-flip loans are perfect for investors who want to buy fixer-uppers, renovate them, and then sell them at a profit. Fix-and-flip loans are short-term loans that aren’t too difficult to qualify for, which means they are very similar to hard money loans. Lenders focus more on the potential profit of the property than the credit score and income of the borrower (although those factors remain important). There are some drawbacks for such a loan, however. The loan term is often quite short, sometimes as short as a year, interest rates can reach as high as 18 percent, and you can expect closing costs to be higher than conventional loans as well.

Should I Invest in a Condo?

Condos are often cheaper than comparable single-family homes, and they have fewer maintenance requirements. However, it can be more difficult to finance a condo, and you must consider the ongoing association dues and the potential for expensive special assessments. When considering a condo for an investment, be sure to investigate the financial health of the homeowners association and the current condition of the overall building—not just the individual unit.

Avoid Becoming House-Poor

There is a phrase in real estate and finance called “house-poor.” The term describes people who stretch themselves too thin when buying a home and are left without any emergency money. When unexpected events happen, such as a job loss or broken appliance, these homeowners are in such a tight spot financially that it is difficult to recover. Unfortunately, this is all too common when attempting to invest in real estate with no money.

There are a few ways to avoid being backed into a corner financially when purchasing real estate. It is always a good idea to keep your emergency fund separate from other money and not include it in your estimates when buying a house. That way, if anything were to happen, you have funds you can rely on. In some cases reserving your emergency money may force you to make a smaller down payment than you want. Remember that even if you are required to get mortgage insurance initially, you can always refinance down the road when you have more equity in the home.

Drawbacks of Poor Credit

A poor credit score won’t keep you from loan approval, but the interest rates are higher than traditional bank loans. Most interest rates range from 10% to 15%, depending on the lender. Hard money borrowers also have to pay “points,” which are a percentage of the loan. Points can range from 2% to 4% of the total loan amount.

So, you’ll pay heftier fees in exchange for convenience, but that’s okay given the potential profit you’ll walk away with.

Another obstacle is that they may not cover the full cost of buying the property. These lenders usually lend 65%-75% of the current value of the property. Some will lend based on the value of the property after it’s been improved, also known as the "after repair value" (ARV).

That leaves you to fund the difference or find another source of funding to bridge the gap.

Take on a Partner

Finding other cash buyers is another way to purchase a property with no money down. However, this could get messy as other hands get into the deal. To simplify this process, you can organize the deal on a smaller scale by bringing in one or two more people at the most. In return for their financing, you can promise to take on the responsibilities of putting together the deal and managing the real estate investment. You may also try to work out a similar deal with the current seller.

What Is An Investment Property?

An investment property is one that you purchase as a way to make money. It’s not a primary residence, secondary home, or vacation home. For example, many small investors will buy homes that need work done on them. They are undervalued because of the repair work and renovation work that’s required to get them into good condition. Investors know that making those repairs and renovations can help bring the value up. Afterward, the house is then flipped back onto the market for a profit. House flipping is a short-term property investment strategy. A more long-term strategy would be buying a property and renting it out while the property continues to appreciate in value, allowing you to increase the rent –and your profits– over the years.

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Rent to Own

If you want to buy a rental property but aren’t necessarily ready to commit to a down payment, consider a rent to own arrangement. Oftentimes, home buyers make buying arrangements with sellers in which they lease a property with the option to purchase it later at a set price. A percentage of the rent that is paid goes towards the down payment if you choose to purchase it.

In addition to potentially saving on a down payment, rent to own arrangements also allow you to see that value in the investment firsthand before you actually buy it. If the property isn’t as profitable as you hoped, you don’t have to buy. However, if you decide not to buy it, you will likely lose the

Benefits of a No Money Down Investment Property

The benefits of having more of your money as you take on an investment property aren’t too hard to imagine. For starters, you’ll be able to buy sooner. The biggest holdup for aspiring rental property owners is having the cash upfront to proceed. With no money down and 100% financing, you can get the money you need with the ability to pay it off gradually over time, allowing you to pull the trigger sooner — and more confidently.

This is especially true if you’re looking to flip Secondly, “cash is king.” It’s the most valuable investment tool you have. With more cash in your pocket, you’ll have better buying power to maximize your investment goals. You can better find a property you want in an area you want without upfront costs draining you dry. And by staying liquid, you’ll be able to prepare for the not-so-fun parts of owning an investment property. From pest control, maintenance, and repairs like a leaky faucet or broken light, to big emergencies like gas leaks or flooding, cash reserves keep you from diving into the red.

This is especially true if you’re looking to flip your investment. Between insurance, rehab fees, and permits, not to mention unwanted surprises hidden behind walls and under tiles, your total investment cost isn’t always predictable. It’s important to have a little extra for any unexpected costs.

And if the goal is to own another investment property in the near future, staying liquid could be the difference between buying in a year or waiting for another ten. When you’re not using all your cash to pay for this first investment mortgage, you can control when it’s time to invest again.

Seller Financing

Also known as owner financing, seller financing is a nontraditional form of financing in which the seller/owner of the property holds financing for the buyer. Seller financing gives the buyer more negotiating power. Many sellers have set financing terms they will accept when it comes to interest rates, down payment, or loan periods.

However, many of these terms can be negotiated depending on your seller and your negotiation skills. This can include negotiating financing with little to no money down in exchange for a longer loan period. Figure out your seller’s needs and come up with a solution that works for both parties.

Start investing in real estate now

Fortunately, you don’t need to be a seasoned real estate entrepreneur to get started in real estate investing.

With interest rates still near historic lows, as well as homes continuing to appreciate, now could be a favorable time to start investing in real estate.

You have financing options. Stop paying rent, living with your parents, or living with a roommate and get out on your own.

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