How To Invest In Real Estate With Little Or No Money

1. Rental Properties

Owning rental properties can be a great opportunity for individuals who have do-it-yourself (DIY) renovation skills and the patience to manage tenants. However, this strategy does require substantial capital to finance upfront maintenance costs and to cover vacant months.

Pros Provides regular income and properties can appreciate Maximizes capital through leverage Many tax-deductible associated expenses Cons Managing tenants can be tedious Potentially damage property from tenants Reduced income from potential vacancies

According to U.S. Census Bureau data, the sales prices of new homes (a rough indicator for real estate values) consistently increased in value from the 1960s to 2007, before dipping during the financial crisis. Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels. The long-term effects of the coronavirus pandemic on real estate values remain to be seen.

Source: Survey of Construction, U.S. Census Bureau

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

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8. Wholesale Properties to Investors

Think about the amateur-looking signs on the side of the road that say, “we buy houses” or the postcard you get in the mail pitching, “a lump sum cash payment for your home in 30 days with no showings or closing costs.”  As a wholesaler, you find motivated sellers and promise to buy their house for cash in 30 days—but you’re not the one ponying up the cash.

Instead, you negotiate a cash price in “as is” condition and provide them with an “assignment” contract which allows you time to get a cash buyer to purchase the house for the price you promised the seller (plus your fee) and “assign” the contract to them.

To be successful, you need to know what cash price will make the seller happy while allowing enough “spread” for a rehabber to make a profit after he pays the acquisition price, renovations and repairs, holding costs and selling costs. To do that, you must recognize what rehab needs done, know the local markets, be able to accurately estimate the numbers (such as repair costs, property market values before and after repair, closing costs, etc.) and be a good negotiator. Wholesaler fees between $5,000-$15,000 per deal are typical. Some wholesalers make $25,000-$30,000 per deal.

To be successful, you need a lot of hustle and you will need a budget for advertising—most wholesalers find motivated sellers through direct mail and cold-calling.

Take on the Seller’s Debts

If you find a seller who needs cash to pay off other debts, you can offer to assume those debts instead of making a down payment.

6. Borrow Your Down Payment, But Be Cautious 

Borrowing 100% of the money you need to buy a home is risky, as anyone who lived through the aftermath of the housing bubble a decade ago may recall. Lenders will say you cannot borrow your down payment.

Still, there are ways to do it. You can tap into your 401(k) and borrow against your own retirement savings. Because you are essentially acting as the creditor when borrowing from yourself, most lenders don’t count the payment against your overall debt burden when qualifying you for a mortgage. Of course, borrowing from your 401(k) reduces your retirement savings and if you leave your employer, you may have to pay off the loan in full and/or face tax penalties.

With advance planning, you may be able to get around the lender’s requirements and borrow your down payment. You could, for example, take out a personal loan for emergency cash and drop it into your checking account. Let it sit in your account for a few months and then apply for your mortgage. The lender is going to consider what’s in your account as “yours” if it’s had time to “season.” Those borrowed funds could become your down payment.

6. Assume an existing mortgage

An assumable mortgage is one where the buyer can take over the seller’s mortgage, typically with little to no change in terms or interest rate.

Basically, the buyer receives the title to a property in return for making monthly payments on the seller’s mortgage.

Using the seller’s existing financing can be especially effective if the current loan has a low interest rate.

But keep in mind, this scenario requires a bit more research.

In particular, you will want to make sure there is no due-on-sale clause. This type of clause prohibits the new buyer from assuming the mortgage.

And more often than not, assuming a mortgage will require lender approval. So you’ll still have to prove your credit-worthiness and fill out some paperwork.

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.

Exchange Your Skills

A buyer may be able to offer skills instead of cash. Accountants, contractors, mechanics, plumbers, doctors, lawyers, and so on, all have tradable skills that would be useful in lieu of a cash down payment.

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1. Invest in a new home and make your primary residence a rental

If you already own a home, you’re ahead of the game.

One of the more common ways to become a real estate investor is by turning your current primary residence into a rental property.

There are significant advantages to “backing into your first rental property” this way.

  • Traditional investment property loans require a larger down payment and come with higher interest rates. Often times, you can expect a 20% down payment requirement
  • The interest rate on an investment property is generally higher than the rate on your primary residence by a half percent or more

So the investment strategy is: Rent out your current home, and finance the next home you buy as a primary residence (meaning, you’ll be living there full time).

That way, you pay a lower interest rate on both properties. And if you’re still making mortgage payments on that first home, you can use the income you make from rent to cover part or all of the mortgage.

“Be prepared to provide a letter of explanation,” notes Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “It may be requested depending on how long you have been in the original home.”

Can You Invest In Real Estate With Bad Credit?

You can certainly invest in real estate with low or bad credit; using some of the strategies described above, such as

  1. House flipping
  2. Live-in flip
  3. House hacking
  4. Airbnb
  5. Lease option
  6. Seller financing
  7. Equity partnership
  8. Wholesaling
  9. Bird dogging
  10. REITs
  11. Crowdfunded Real Estate
  12. Real estate Agent

However, I do not recommend this approach. Once you start investing in real estate, you will realize that at any point, you need cash reserves to cover unexpected expenses. And there will always be challenges such as missed rental payment, broken water heater, roof repairs, etc.

Not having an excellent credit score is usually a symptom of not having managed finances in the past. No matter the cause, lenders don’t look upon it favorably. In the worst case scenario, you might lose your rental investment, which you have worked hard to get.

A better strategy would be to spend the time learning about real estate with books, networking, and getting good at analyzing rental properties while improving your credit scores. There would always be rental properties available in the future to buy. Plus, after you improve your bad credit score, you can get better loans.

Conclusion

So there you have it – 15 ways to get a rental property with no money down (or in some cases very low money down).  If you want to learn how to invest in real estate at every price point, check out my article on the topic here.

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.

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.

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The Bottom Line

Whether real estate investors use their properties to generate rental income or to bide their time until the perfect selling opportunity arises, it's possible to build out a robust investment program by paying a relatively small part of a property's total value upfront. And as with any investment, there is profit and potential within real estate, whether the overall market is up or down.

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