Most banks will require investors to put at least 20 percent down when they buy an investment property. However, there are many ways you can buy investment properties with a much smaller down payment. The easiest way to buy an investment property with less than 20% down is as an owner occupant, but there are other options for investors as well.
Using a line of credit, refinancing your home or even credit cards can also provide ways to buy investment properties for less money. Seller financing is a great way to put less money down on a rental property, if you can find willing sellers. A more advanced technique is to usehard-money financing, which can be refinanced into a conventional loan.
For more information on my 10 rental properties and investing strategy check out my complete guide to purchasing long-term rental properties.
What does it cost to finance a typical investment property?
If an investor wants to buy a property from a typical bank, they will have to put down at least 20%. If you own more than four properties that figure can increase to 25% down for large banks, if they will even finance more than four properties. On top of the down payment, an investor will have to pay closing costs which can range from 2 to 4 percent of the loan amount. It is very expensive to buy an investment property using financing from a typical bank. I have found a great portfolio lender who will finance as many properties as I want with 20% down and I tell you how to find a great portfolio lender here. Here is a more detailed article on how much money is required to buy a rental property including repairs and financing costs.
How to purchase an investment property with little money down as an owner occupant
There are some ways to get started buying investment property for less. The easiest way is to buy a property to live in as an owner occupant, then rent out and keep the property as an investment after you have satisfied your loan requirements. Most owner occupant loans need you to occupy a home for at least a year. There are even ways to buy owner occupied homes with no money down! USDA and VA have great no money down programs and I talk about them in my article what types of loans will let you buy a house with little money down. Those programs also have little to no mortgage insurance. Mortgage insurance is typical on most loans that have a loan to value ratio of more than 80%. Here is a more detailed article on what loans will allow for a small down payment as an owner occupant. Mortgage insurance can add hundreds of dollars to your house payment and eat away at your cash flow. The process for turning a house you are occupying into a rental is fairly easy.
- Buy a house as an owner occupant that will cash flow if you were to rent it out.
- Move into the house and live there for at least a year.
- After the year is up, find another house that will cash flow well and purchase that home as an owner occupant.
- Move out of the first house and keep it as a rental. Move into the new house and keep repeating the process every year!
Eventually you will be building up equity and extra cash flow that will enable you to buy properties with 20% down. If you could repeat this process 10 times, that would be an excellent way to get started, but no one wants to move ten times in ten years. If you have a family it can also be tough convincing them to live in a home that would also be a great rental. Here is an idea of how much money you can make by purchasing multiple rental properties. Check out sites like Realtor.com or Zillow.com to find homes that are listed for sale.
How to buy investment property with no money down
There are many books and programs out there on how to buy houses with no money down. I have not used these techniques and I am not an expert in this field. Many of these no money down deals, involve high interest rate notes or simply delaying the cash you will have to invest for a few months. These strategies do not work well for me since my goal is long-term cash flow, but if you have no other options it may be worth looking into. Ben Leybovich has a program that teaches buyers how to buy property with little money down called Cash Flow Freedom University. With CFFU, Ben teaches people how to use private financing to buy properties with little money down. Ben is an investor himself and owns many multifamily complexes. Here is a review I wrote on CFFU that explains what is included in his program.
How to buy rental property with no money down using hard money
Using hard money can be more expensive than paying 20% down in the long run, but it can save you a ton of cash in the short-term. Fannie Mae lending guidelines allowyou refinance a home with no seasoning period. No seasoning period means you do not have to wait 6 months or a year after your bought the home to refinance at a higher value than you bought the home for. Fannie guidelines base the refinance amount ona new appraisal and they will allow a 75% loan tovalue ratio. Fannie Mae guidelines will not allow a cash out refinance, but the guidelines allow the refinance to pay off any existing loans. Many hard-money lenders will allow a buyer to borrow up to 100% of the purchase price of a home plus repairs.
Since Fannie Mae guidelines allow a 75% loan to value refinance, theoretically an investor could buy a home for $100,000, get a loan with a hard-money lender for $100,00 plus 30,000 in repairs for a total loan amount of 130,000. The investor can then refinance the home for as much as 75% of a new appraisal. If the appraisal came in at $180,000, then 75% loan to value would allow a refinance of $135,000. Fannie will not allow a cash out refinance, but the investor could refinance the full 130,000 loan amount. This strategy can be costly due to hard-money fees, but it allows the investor to refinance the entire purchase price and repairs!
This strategy can be very risky, because you are depending on a high appraisal to get your money out. Refinance appraisals are not always as high as we would like them to be. Make sure you have an exit strategy if the appraisal comes in lower than you expect. Here is an article with more information on hard money lenders.
For great information on how to get a great deal on investment properties, check out my book: How to Buy Real Estate Below Market Value available at Amazon as a 116 page E book or here as a PDF.
How to purchase investment property with less cash by becoming a real estate agent
There are many advantages to having your real estate license, but the biggest benefit is you can keep your commission on almost every house you buy. On a $100,000 house your commission could be $3,000 dollars or more. Here is an article that details why it is an advantage to become a real estate agent if you are an investor. Being a Real Estate agent, also gives me an advantage when finding and purchasing great deals. I detail how hard it is to get your Real Estate license here.
How to buy a property with little money down using a turn-key rental property provider
A new trend in the US is buying turn-key rental properties that are purchased, repaired, rented and managed by a turn-key provider. Turn-key properties are a great opportunity for investors to buy rental properties out-of-state, because homes may be too expensive in their area. There are also turn-key providers who offer as little as 5% down for investors. Here is a great article about turn-key providers or send me a request here for turn-key providers I know of.
How to use line of credit to buy investment property with no money down
I was able to get a line of credit on my personal residence earlier this year. That line of credit was for $60,000 and required no appraisal and only cost me $26! If you have equity in your home, a line of credit is a great way to get some extra cash to invest in rental properties. You can pull money out of your line of credit for any reason and the money is available almost immediately. With my lender they were able to tell me how much they line of credit could be instantly and for no charge. Here are the details on my line of credit.
Use seller financing to buy investment property with little money down
Some sellers may be willing to finance a 2nd loan on a home to allow a buyer to put less than 20% down. If your bank is wiling to offer 80% loan to value, the seller may offer to loan the other 20%, which would equal no money down for the buyer. The seller may also offer a number of other loan to value percentages that will help a buyer get into to a home for less than 20% down.
Finding seller-financed properties is the tricky part. Most sellers are not looking to finance a loan when they sell. In order to find seller financed listings look for homes that have no loans against them and terms in the listing description that say seller financing available. The seller’s terms can vary greatly depending on how desperate they are to sell and what exactly they are looking to get out of the deal. Don’t expect to pay 4% interest on a seller financed loan, they will want a premium on any money they lend. It is also harder to find great deals with seller financing, which is a key to my strategy.
Use proceeds from a refinance to buy investment with no money down
If you already have a home, you may or may not have equity after the recent market downturn. In most areas around the country, home values are rising and interest rates are at record lows. You may be able to refinance your home and get enough money to buy an investment property. Once you are able to buy an investment property, you can refinance the investment property in one year. If you bought the home below market values, you should be able to take out as much as you put into the house and still cash flow with rates as low as they are. I use the refinance technique all the time and offer more details here. Getting lenders to do a refinance is tricky when you own multiple investment properties. I use a portfolio lender who has allowed me to use a cash out refinance on as many properties as I want.
Buy a turn-key property to reduce the amount of money spent on repairs
A turn-key property means all the repairs are completed and it is ready to rent as soon as you buy the home. There can be many advantages to buying a turn-key property, the biggest being you don’t have to pay anything for repairs. You also don’t have to spend time waiting for repairs to be made, which saves money on mortgage payments, utilities and other carrying costs. The downside on a turn-key property is they are usually more expensive and provide less cash flow than a home that needs work.
Buy a turn-key property with a 5% down payment
Not only do turn-key rental properties offer less up front money you need to spend on repairs, but there are turn-key programs that allow as little as 5% down thanks to seller-financing. Please check out my turn-key rental property article to learn more.
Use credit cards to purchase rental property with little money down
There are a few other ways to get quick cash that can be very expensive and are usually reserved for people looking to do a quick flip. If you have a killer deal you can’t pass up you may consider these options, but I don’t recommend it unless absolutely necessary. The easiest way to get quick cash is through credit cards. You can get a cash advance or pay for repairs using your credit card. If you do use a credit card to finance your down payment or repairs and can’t pay it off right away, don’t pay the 17% interest rate. Do your best to get another card that will allow a balance transfer. Many times you can transfer all of your balance and pay little to no interest for up to a year. Hopefully that will give you enough time to pay off the card and you won’t get stuck with a high interest rate eating all your profits. I also suggest using a rewards card for repairs on your investment properties. This is a great way to make a little extra money if you pay it off every month.
Buying investment properties with no money down using a self-directed IRA
If you have money invested in an IRA you are not limited to investing in stocks or mutual funds. There are special self-directed IRAs that can be invested in investment property. You can use money from your IRA for down payments and repairs and then collect rent in the IRA. Here is a site with much more information.
Buy investment properties for 10% down using Fannie Mae Homepath program
Fannie Mae has a program on their REO properties that let’s investors put only 10% down! This program is called Homepath and allows up to 20 financed loans in one persons name, which is also a huge bonus. It is very difficult for many investors to get loans on more than four properties and this is a great program.
Conclusion
Rental properties can be expensive to buy, but there are ways to get into them with less than 20% down. If you are short on cash, buyingpropertieswith little money downcan accelerate the purchasing schedule and increase your returns.