How to Invest in a Rental Property with No Money Down
Here are some of the best methods to get yourself a lucrative investment rental without putting a lot of money in on the front end.
Being a landlord investor in Colorado is incredibly lucrative and looks to be getting more lucrative as time passes. Rents in Denver are up 13% since last year, with a minuscule vacancy rate of 4.3%. Rents in Colorado Springs have risen more than 40% over the past five years. And as mortgage rates continue to rise, locking more people out of the home-buying market, demand for rentals will only go up.
If you don’t have any money for a down payment, it might seem impossible to get in on this rental gold rush. But for a savvy investor, it’s very possible to invest in a rental property with no money down. Let’s go over some of the best methods to get yourself a lucrative investment rental without putting a lot of money in on the front end.
This well-known investment method can get you your first investment rental for very little money down and let you live rent-free.
It works like this: You simply buy a small multifamily home as an owner-occupied property, which requires down payments that are much lower than for investment properties. An FHA loan, for example, requires only 3.5% down, with a qualifying credit score.
You then live in one of the units — say, one of the bedrooms, or an independent basement unit — and rent out the rest of the place. Your rental cash flow should cover your mortgage payment, as well as maintenance and other associated expenses, which means you’re essentially getting free housing, and can pay down your mortgage in record time. And once you’ve paid off the mortgage, you can turn around and sell the property to a company that pays cash for homes, or sell it yourself to avoid real estate commission.
Home Equity Loan or Line of Credit
If you already own your home and are open to using it to buy an investment property, a home equity loan, or a home equity line of credit (HELOC), could help you get in the game without putting any cash down.
If you have equity built up in your current home, you can take out a loan against this home equity, and put that cash down on an investment rental. One of the big advantages of this method is that, since you’re using your home as collateral for the loan, your credit score doesn’t matter. Home equity loans come with very low interest rates, though they also come with many of the same closing costs as mortgages.
A HELOC is a line of credit that’s borrowed against your home equity, so instead of a lump sum of money, like a home equity loan, it’s a line of credit that you can withdraw from as needed. One of the advantages of a HELOC is that, in contrast to a home equity loan, there are no closing fees, and you only pay interest on the funds you actually withdraw. The interest on those withdrawals tend to be higher than they are for a home equity loan, though.
We’re so used to thinking of bank mortgages as the only path to buying a house that we often forget there’s a way to buy a home without involving a bank at all.
Seller financing is exactly what it sounds like: You and the seller enter into a purchase agreement between the two of you, and you make payments directly to them. Because you’re negotiating the terms of the agreement between the two of you, you could simply negotiate zero down payment.
Most sellers will likely not be interested in this kind of agreement, but you can find motivated sellers who’ll be open to it. Sellers who know you personally, or sellers who are motivated to sell by personal circumstances or an unwillingness to perform needed repairs and maintenance on the property, are great candidates for seller financing. The main upside for them is convenience; after quickly drawing up a simple sale agreement, you start paying them right away. Don’t hesitate to ask a seller if they’re open to seller financing — the worst thing they can do is say no!
If you don’t have any cash to put down, gap lenders will cover the down payment on your investment property — but they do charge a moderately high price.
Gap lenders may take a second lien position behind your primary mortgage lender, a risky position (for them). Consequently, they’ll charge high interest and fees to blunt their risk.
Alternatively, they may take a partial ownership interest in your property, essentially becoming your partner. While that’s a pretty steep price to pay, it may make sense if you’re eager to get into a hot market, and don’t want to bother getting a full investment property loan.
Assume the Seller’s Mortgage
Similar to seller financing, this type of deal sees the seller simply passing on their mortgage to you. You’ll make payments on the existing mortgage (which probably has a much better interest rate than a new mortgage you’d acquire today) and pay the difference directly to the seller.
This approach can work well for unconventional buyers because it allows you to draw on many different funding sources to pay the seller — personal loans, friends and family, even credit cards — while a conventional loan generally won’t let you borrow money to make a down payment. And it may appeal to sellers who don’t want to take the trouble to learn how to offload their house in a turbulent market and would rather do a low-key, seamless transfer.
Just keep in mind that not all mortgages can be transferred between individuals, so it’s up to you to do your due diligence!
Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers, and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the L.A. Times, and more.