Buying rental property can be a very profitable investment choice. However, getting started in real estate is not always an easy ride. There are many people who would like to get into real estate but fail to because they don’t want to lock their life savings into a real estate purchase or simply lack the capital needed for a down payment. Buying rental property with cash or a mortgage is almost impossible for some people.
However, this should not kill your dream of owning a rental property. Gone are the days when property investment was the preserve of the rich. It is still possible to buy rental property with little to no money down. With a little creativity, there are several ways you can reduce or even eliminate the down payment needed for buying your first rental property.
In this blog, I’m going to show you how to invest in real estate with no money down using 10 different strategies.
How to Buy Rental Property with No Money Down
1. House Hacking
Of all the ways of buying rental property with no money down, house hacking is arguably the easiest. In the house hacking concept, you purchase a small multifamily house, live in one unit, and rent out the rest. The rental income from the tenants covers your mortgage payments and other housing expenses. Therefore, you will be living for free. When you finally move out, it becomes purely rental and your cash flow increases.
Down payments for owner-occupied properties are usually lower than those of investment property loans. For instance, with an FHA loan, you will need a down payment of only 3.5% as long as you have a good credit score. If you are a first-time real estate investor, an FHA loan can be a great way to finance your investment property.
2. Seller Financing
Seller financing is an easy and fast way to acquire funding for rental property. Some sellers may choose to finance the purchase of their property. As the buyer, you will be required to make monthly payments to them. This is a good strategy for buying rental property with no money down if you are having trouble securing conventional financing. You will also be able to negotiate the terms, including not paying a down payment. This financing option works well if you find a motivated seller. For example, sometimes the property may be in need of repairs but the seller doesn’t have money to make them- this could be a motivated seller. However, not all property sellers accept this method of financing real estate investments. You can always ask.
3. Assuming the Seller’s Existing Mortgage
Not all sellers will be willing to finance the investment property directly. However, you can negotiate with a seller to assume their existing mortgage and make payments for them instead of a down payment. You will then come up with the remaining difference and pay the seller separately. This method of buying rental property with no money down is more practical when the mortgage has a low-interest rate. However, keep in mind that not all types of loans can be assumed by another person. Therefore, make sure you do your due diligence before using this financing strategy.
4. Rent to Own
If you are wondering how buying rental property with no money down is possible, you could also consider a rent to own arrangement. You can lease a rental property with the option to purchase it later at a set price. A percentage of the rent paid will go toward the down payment. Therefore, the rent will typically be above the market average. You will be expected to pay a certain amount of money to exercise your contract after which you can have tenants and collect monthly rents.
The advantage of this arrangement is that you will be able to get to know the rental property investment more before you actually buy it. If you find it’s unprofitable, you don’t have to buy it. However, you will lose the contract price and the rent you have paid. Alternatively, you can sell the contract to another real estate investor.
Related: Rent to Own vs Owner Financing: The Difference
5. The BRRRR Method
The BRRRR Method (Buy, Repair, Rent, Refinance, and Repeat) is another great way to get into rental property investing with less money down. Although this option requires some cash upfront to cover your initial down payment, you will recoup it after a short period. You purchase a fixer-upper, renovate it, rent it, refinance it with a long-term investment loan, and pull your initial cash back out. The amount of cash you pull out when you refinance will depend on the equity you’ll have created. This method works because the new long-term loan will be based on the after repair value of the rental property. For this strategy to be effective, you need to get a great real estate deal in the first place. Look for cheap investment property for sale so that the initial down payment will be lower than for a normal property.
6. Real Estate Partnerships
Buying rental property with no money down is also possible through real estate partnerships. In a real estate partnership, you agree to share ownership of a real estate investment with another party. If you don’t have enough money for down payments, you can find a partner to finance the real estate deal. This can be a colleague, friend, or family member who has money but lacks investing expertise or time. They will finance the deal and you do the legwork. The terms of the agreement and the responsibilities of each partner will be spelled out in the agreement.
Related: 5 Things You Need to Make a Real Estate Partnership Work
7. Home Equity Loan
Another great method for buying rental property with no money down is using existing equity in your home. If your current home has equity tied to it, you can borrow against this equity and use the funds to finance a new down payment and acquire a rental property. By accessing home equity, you won’t have to pull money out of your pocket to buy a new property. With more rental properties and more capital growth, your equity will also grow faster. This way, you will be able to acquire more investment properties and build your real estate portfolio.
Even with bad credit, you can still secure this loan because the house is used as collateral. However, you will need to prove that you can repay the loan. The drawback to using these investment loans is that you risk losing your property if you are unable to repay the loan.
Related: The Beginner’s Guide: How to Calculate Equity in Real Estate
8. Hard Money Lenders
Hard money loans are short-term loans offered by individuals or companies that you can use to fund the purchase of your income property. Hard money loans are viable if you are able to repay them within the fixed duration. You should only apply for them if you are certain that your rental will continually generate high cash flow. These loans can be used as a bridge loan to finance an immediate property deal and then other financing options can be used to repay it later.
Hard money lenders don’t consider your credit score. They look at the profitability of your intended real estate investment. Since your property will be used as collateral, it makes it quite risky for beginner real estate investors. The loans also have high-interest rates.
Start looking for and analyzing profitable investment properties that a hard money lender can’t say no to!
9. Private Money Lenders
Buying rental property with no money down is also possible through private money loans. Private money lenders are generally individuals with substantial amounts of money to invest who can offer short-term loans to real estate investors. They may be your own friends, family, or colleagues. Their interest rates are usually higher than investment property mortgage rates. However, their terms are typically more flexible. Before you decide to use this financing option, you should analyze the rental property to ascertain that you will be able to repay the loan and fulfill the deal’s terms.
10. Trade Something Other Than Cash
You could also acquire a rental property with no money down by trading it with something other than cash. This could be another house, land, jewelry, a boat, a car, etc. You need to find out what the seller needs that you have. You could also trade services that you can offer over time so long as you come to an agreement.
The Bottom Line
Rental properties can be expensive. However, you don’t have to empty your bank account to own one. Even if you are short of cash, buying rental property with no money down is still possible. You can use these 10 strategies to purchase your first income property with little to no money down. Just make sure you do your due diligence and compare different options to select a strategy that suits your goals the best. If you are in doubt, you could always save money for a down payment instead of borrowing it. It may take longer, but it’s still a viable strategy for many.