How to invest in a rental property with no money down

To be a proprietary investor in Colorado is incredibly lucrative and seems to be getting more lucrative as time goes on. Rents in Denver are 13% more since last year, with a minuscule vacancy rate of 4.3%. Rentals in Colorado Springs have increased more than 40% during the last five years. And as mortgage rates continue to rise, pushing more people out of the home buying market, the demand for rentals will only increase.

If you don’t have the money for a down payment, it can seem impossible to participate in this rental gold rush. But for a smart investor, it is 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 rental investment without investing a lot of money upfront.

House Hacking

This well-known investment method can get you your first investment rental for very little money i allows you to live rent-free.

Here’s how it works: You simply buy a small multi-family home as an owner-occupied property, which requires much lower down payments than investment properties. An FHA loan, for example, requires only 3.5% down, with a qualified credit score.

You then live in one of the units, such as one of the bedrooms or a separate 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, meaning you basically get a free home and can pay off 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 pay cash for housesor sell it yourself to avoid real estate fees.

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) can help you get into to the game without spending cash.

If you have equity built up in your current home, you can take out a loan against that home equity and invest that cash in 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 have very low interest rates, although they also have many of the same closing costs such as mortgages.

A HELOC is a line of credit that borrows against the equity in your home, so instead of a lump sum of money like a home equity loan, it’s a line of credit which you can withdraw as needed. One of the benefits of a HELOC is that, unlike a home equity loan, there are no closing fees and you only pay interest on the funds you actually withdraw. However, the interest on these withdrawals is usually higher than on a home equity loan.

Seller financing

We are so used to thinking that bank mortgages are the only way to buy a house that we often forget that there is a way to buy a house without involving a bank at all.

Seller financing is exactly what it sounds like: you and the seller sign a purchase agreement between the two of you, and you make payments directly to them. Since you are negotiating the terms of the agreement between the two of you, you could simply negotiate the zero down payment.

Most sellers likely won’t be interested in this type of deal, but you may find motivated sellers who are open to it. Sellers who know you personally, or sellers who are motivated to sell due to personal circumstances or an unwillingness to perform necessary repairs and maintenance on the property, are excellent candidates for seller financing. The main advantage for them is convenience; after quickly drawing up a simple sales agreement, you start paying them right away. Don’t hesitate to ask a seller if they are open to seller financing; the worst they can do is say no!

Lenders Gap

If you don’t have the cash to pay, gap lenders will cover the down payment on your investment property, but they charge a moderately high price.

Gap lenders may have a second lien position behind your primary mortgage lender, a risky position (for them). Consequently, they will charge high interest and fees to reduce risk.

Alternatively, they may have a partial ownership interest in your property, essentially becoming your partner. While that’s a pretty steep price, it might make sense if you’re looking to get into a hot market and don’t want to be bothered. get a full real estate investment loan.

Assume the seller’s mortgage

Similar to seller financing, this type of deal has the seller simply transfer their mortgage to you. You’ll make payments on your existing mortgage (which likely has a much better interest rate than a new mortgage you’d buy today) and pay the difference directly to the seller.

This approach can work well for non-conventional buyers because it allows you to use many different sources of financing to pay the seller (personal loans, friends and family, even credit cards), while a conventional loan generally won’t allow you to borrow money to get a loan. deposit. And it might appeal to marketers who don’t want to go to the trouble of learning how to do it download your home in a turbulent market and would prefer to make a simple and 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 Smart 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 published in BiggerPockets, Inman, the LA Times and more.

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