How to Buy Rental Properties With Little to No Money Down
Nov 1, 2022
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 costs. Most people don’t want to lock their savings into an investment. Others simply don’t have the money at hand that they need for a down payment.
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 financial creativity, 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.
House hacking is a common investing method that involves buying a 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 or 8 unit building.
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.
Depending on your current primary residence, you may not even have to buy a rental property at all. Many 1st-time real estate investors choose to remodel and rent existing property in order to create an income stream. This space could be a basement, guest house, or a garage apartment.
But before making such an investment, you can improve the house with some basic repairs. For example, you could even add a kitchenette to your existing home to create a multi-unit living space like a duplex. Investors who have a low credit rating can take home repair loans with no credit check. It's a great opportunity to increase the house’s value and generate passive income.
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.
Hard Equity Line of Credit
Leveraging your property with a hard 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 current home as collateral towards the new home. 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 new down payment and acquire a rental 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.
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
Real Estate Partnerships
You don’t have to go into a real estate investment alone. 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.
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.
As you can see, it isn’t difficult to buy rental properties with little to no money down. Purchasing your first rental property is 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.
Contact us today to get started on your property investing journey and save thousands of dollars through our Buyer Refund incentive. That’s extra money to put into your new rental property, or use towards your next one!