Rental properties are a solid property investment choice that can help bring in a high return on investment through passive income. However, getting started in the world of real estate investing isn’t always an easy feat.
The biggest thing holding back many people from getting into real estate are the initial costs. Many people don’t want to tie up their cash in a property and others simply don’t have enough money for the down payment.
9 Ways to Buy a Rental Property With Little to No Money Down
Luckily, you don’t have to empty your bank account to purchase a rental property. Believe it or not, it is actually possible to buy rental properties with little to no money down. With a little bit of creative financing, you can easily purchase a rental property and start enjoying all the investment benefits. Here are a few methods you can use to buy rental properties.
1) 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.
2) House Hacking
House hacking is a common investing method that involves buying an investment property as a primary residence and renting out a portion of the property to tenants. This is most commonly done with a duplex but could also be achieved with larger multi-family properties like a triplex, 8 unit building or other types of rental properties.
House hacking has become a popular method for newer investors who want a passive income without having to make a 20% downpayment on a rental property. That's because when you buy a primary residence, you can purchase with as little as 3% down with a conventional loan or 3.5% with FHA. In doing so, you'll need to sign an affidavit of occupancy, which states that you plan to occupy the residence for at least 1 year.
3) Home Equity Line of Credit
Leveraging your existing home with an equity line of credit (HELOC) is another way to buy rental properties with no money down. HELOC loans allow buyers to use existing equity in their primary residence as collateral towards a rental property. Buyers will receive a lump-sum payment and repay the loan with a fixed-rate interest over a set period of time.
By accessing their home equity, buyers don’t have to pull money out of their pocket to buy a new property. Instead, they can use these funds to finance a the down payment and closing costs needed to acquire an investment property. With more rental properties and more capital growth, your equity will grow faster allowing you to acquire more properties and build your rental portfolio with ease.
4) Credit Cards
Using a credit card to buy a property may sound scary, but if done right, you can use one or more cards to pay for the earnest money deposit, closing costs or the down payment.
You'll want to avoid high interest rate cards and if possible, try to find a card with a promotional 0% interest rate.
5) The BRRR Method
The BRRR Method (Buy, Repair, Rent, Refinance, and Repeat) is a great way to buy a rental property with little money down. This method allows investors to buy a property, renovate it, rent it out, refinance it with a long-term investment loan after its value has increased, and then pull their initial cash back out. The amount that is pulled out is based on how much equity you have built into the home.
While this method does require a bit more money upfront towards a down payment, you will recoup the money once you refinance. Rehab projects are considered too risky by traditional lenders, so for your first project you may need to use one of your local hard money lenders. After refinancing, investors can use the cash-out refinance from their first rental property to fund the purchase of their second rental property. This essentially leaves them with little to no down payment for future property rentals should they continue this cycle.
6) 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
7) Partnerships & Private Money
You don’t have to go solo into the real estate investment space. Buying a rental investment property with no money down can also be done with a real estate partner. In a real estate partnership, you and your real estate partner agree to share ownership of a property. If you don’t have enough money to put down, you can find a trustworthy investing partner who can help you out financially.
A real estate partner could be family members, friends, or colleagues. You could also work with a private lending company. These companies offer loans similar to a bank but offer more flexibility. One of the best partnerships you could enter into as a first time investor is with a more experienced real estate investor that can help you out financially, as well help show you the ropes of rental properties.
8) Use a Hard Money Lender
Utilizing a hard money loan can significantly lower the initial financial cost outlay when buying an investment house. Hard money lenders focus on the asset value rather than your creditworthiness, making it a viable path if traditional financing isn't an option.
Many hard money lenders analyze the "debt service coverage" or DSCR to determine if the property is eligible for hard money financing. This is good news because the hard money lender will evaluate the property and its potential to generate rental revenue, rather than your personal credit worthiness as a borrower.
9) Assume Seller's Existing Mortgage
Assuming the existing mortgage of a seller is a maneuver that can be both cost-effective and advantageous in a higher interest rate market.
Here's how it works: instead of obtaining a new mortgage, a buyer takes over the seller's mortgage terms, including the interest rate and terms. This not only potentially grants the buyer a lower-than-market interest rate, but also significantly reduces closing costs.
Additionally, the process is expedited compared to securing a new mortgage - which means you can close faster. This approach can save investors on interest payments, streamline the buying process, and pave the way to acquiring a property with favorable loan terms even when market conditions are less than ideal.
Is Buying a Rental Property a Good Investment?
As you can see, it isn’t difficult to buy rental properties with little to no money down. Purchasing your first rental property can be a great investment and made even easier with a SimpleShowing agent on your team. Our local agents are here to help you find properties in your area, as well as assist where we can in terms of finding the right financing for you.
Once you have your finances lined up, it's time to start shopping for a property. Here are some of the top markets for rental properties as of the time of this article.
If you're looking to sell a rental property, we can help you save commission avoid capital gains taxes on your rental sale. Contact us today to get started on your property investing journey.
Conclusion
In wrapping up our impactful journey through the intricate pathways of rental property investing, it's evident that real estate investments can indeed flourish even with minimal initial capital. Rental income has the potential to provide a steady stream of cash flow, ensuring that real estate investors are positioned to reap considerable rewards.
As many successful rental property owners can attest, with the right strategies and tools at one's disposal, the realm of real estate offers a myriad of opportunities. For those diving into this venture, surrounding oneself with knowledgeable property managers and mentors can be a game-changer, further solidifying success in this rewarding field. Moreover, as the dynamics of the real estate market evolve, aspiring rental property owners shouldn't be deterred by monetary constraints.
Rental property investing, when approached with diligence and insight, can transform one's financial landscape, paving the way for long-term wealth generation. For budding real estate investors, it's about striking the right balance, leveraging available resources, and working in tandem with experienced property managers to maximize rental income and ensure consistent growth in their portfolio.
