Is it really possible to invest in real estate without putting any money down? There’s been a lot of buzz about zero down payment loan programs, and if you’ve heard it, you’re probably curious about how they work. You’re not alone.
With a significant increase in rental property demand over the last few years, more and more people are investing in these properties with very promising returns. But if you’re short on cash, that doesn’t mean your chances to get in on the real estate investment game are out of reach. In fact, most people either don’t have enough money for a down payment or simply don’t want to put all their cash toward the purchase of a property.
So how can you buy a second home with no down payment? Here’s everything you need to know about no money down financing.
How to Invest in Real Estate with No Money Down
When you have to put 20% cash down on an investment property, there’s a lot less of your cash available to you for when you need it. When you get a call from your tenant about a furnace emergency, having this money is a game changer. But it’s important to note that in most cases a lender won’t just give you money with no money down, nor will a seller will agree to forgo this extra cash either. The truth is, the money has to come from somewhere. In order to make a no money down option possible, there are a couple of ways to do it:
1. Borrow the Money
One of the most flexible no money down strategies to take is borrowing the money from someone in your personal network. When you’re getting financing from an individual you know and trust, it’s easier to negotiate softer, more simpler terms — like no payments for the first year or no monthly interest. Friends, family, neighbors, or co-workers may have extra money and are looking for a good return on investment. If you’re having difficulty securing lending from banks, this is a great way to get a loan with fewer formalities and more lenient conditions.
Keep in mind, these loans should be secured by a loan contract — similar to a promissory note — establishing the amount borrowed, repayment terms, and the lender’s recourse if you are unable to repay, so that both parties are protected. Borrowing money from someone without a contract is just asking for trouble, so make sure to protect your relationships and lay out the terms of the loan upfront.
2. Assume an Existing Mortgage
Not all mortgages are assumable, but if you consider the eligible options when purchasing your investment property, it could offer a way to not only avoid a big down payment, but also lower your interest rates and closing costs.
With this option, the buyer steps into the seller’s current mortgage, assuming the current interest rate in effect. And unlike a new mortgage where closing costs can amount to several thousand dollars, assumable mortgages often impose limits on assumption-related fees, saving you even more cash.
Assumable mortgages include: FHA loans, VA loans, and USDA loans.
3. Seller Financing
One option many people aren’t aware of is a Purchase-Money Mortgage, or seller financing. In this scenario, the seller of the property directly finances the buyer as part of the purchase transaction. They offer the buyer a loan to purchase their property, while the buyer provides a financing instrument to the seller as evidence of the loan, which is typically recorded in public records to protect both parties.
While purchase-money mortgages are a popular type of 100% financing, it requires finding motivated sellers who are willing to finance their property. But one of the best parts about seller financing is that the buyer can often choose from different loan terms and payment options (fixed-rate, amortization, less-than-interest, and so on) based on the seller’s discretion. The seller’s criteria for qualifications is also likely to be more flexible than most lenders.
4. Hard Money with No Money Down
Unlike traditional lenders who will look at your credit score, borrowing history, and income, hard money lenders are only concerned with the collateral securing the loan — or the property being purchased. To these lenders, the value of the collateral is more important than your financial position because if you’re unable to make payments, the lender will get their money back by taking the collateral and selling it.
These loans are generally short-term — from one to five years — and the borrower is expected to pay monthly interest until the loan is paid back in full.
This option offers a much faster loan application process since there are fewer details to go through in order to get approved. These agreements are also more flexible as each deal is looked at individually, versus through a standardized underwriting process. A hard money lender will lend as much as the property is worth, but typically they’ll keep loan-to-value ratios fairly low, so they know they have a good chance at getting their money back in case anything goes wrong.
5. Private Loan for Investment Property
Wait, aren’t private lenders and hard money lenders the same? Contrary to popular belief, they’re actually very different. Private lenders use a much different process for reviewing potential borrowers. This process involves the 3 C’s: Credit, Capacity to Pay, and Collateral. Unlike a hard money lender who only focuses on collateral, private lenders are looking for:
|Credit — Your minimum credit, as well as your history of late mortgage payments, bankruptcies, and other unfavorable items that could make you a risky candidate|
|Capacity to Pay — Your income and cash flow, as well as debt-to-income ratio (DTI) to determine your ability to pay the loan.|
|Collateral — The value of the property, which is seen as merely a backup plan for repayment. However, private lenders may be willing to lend you more if they are confident in your ability to repay.|
Private money lenders are typically more involved throughout the lending process and more willing to work out any problems that may arise. They are also traditionally able to offer more favorable terms that fit the borrower’s needs when structuring the loan since they are able to mitigate their risk by underwriting their borrower financially.
Rehab Financial Group has worked with thousands of aspiring and qualified investors to offer competitive rates, interest-only payments, and no repayment fees so that there are fewer financial hurdles between you and your real estate goals.
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.
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.
Working with a Lender for an Investment Property Loan
With the right lender, you can find the financing option that best suits your investment goals and reduces that financial barrier to entry. Now that you know you have options, the next step is figuring out which is right for you.
By working with a lender who not only offers 100% financing solutions but has the experience and expertise specifically in real estate investing, you can get an edge on competitors in your market and learn from investing mistakes of those who have been there, instead of learning them the hard way.
Did you know Rehab Financial Group is one of the few 100% financers in the industry? In addition to helping you find the right no money down option for you, our team of knowledgeable and creative real estate lenders can help you get the financing you need for your investment. Enjoy a full learning center with business plan templates, investment strategies, house flipping calculator and more. Contact us directly for more information as you get started!