How to Buy a Rental Property with No Money: 11 Proven Strategies
Ready to invest in real estate but lacking the money for down payments? You still have plenty of paths forward. Smart real estate investors know how to leverage creative finance strategies that require little to no money out of pocket.
In this guide, we’ll explore eleven proven techniques you can use to buy an investment property without draining your bank accounts. Whether tapping into unconventional funding sources or strategically using other people's money, these methods make buying property possible, even when you don't have any funds for a down payment.
You can often combine several no-money-down approaches for even greater purchasing power. By stacking these creative finance tactics, experienced real estate investors consistently acquire amazing deals without needing piles of cash.
Intrigued? Read on to discover step-by-step guides for these eleven rental property plays that circumvent down payments and open the door to new streams of wealth built on rental cash flow. Let’s dive in!
The how-to of purchasing a rental property with no money
Here are some of the top techniques for acquiring rental properties with little to no money out of pocket.
1. Cash-out refinance
Cash-out refinancing allows homeowners to leverage the equity in their primary residence to access investable cash. You refinance your existing mortgage with a new, larger loan and take the difference in cash.
Let's walk through how this financing method operates:
- Say you owe $100k on your mortgage, but appraisals value your home at $200k. You might refinance for $150k.
- The lender pays off your old $100k mortgage and gives you $50k in cash.
- You can now use this cash as a downpayment for your real estate deal.
The cash-out refinance method is attractive because mortgage rates are typically lower than other types of loans, making it a cost-effective way to borrow money.
Just be sure to consider the risks, such as increased mortgage payments and the potential of owing more than your home is worth if property values decline. As with any financial decision, you should consult with a financial advisor to understand the implications and make sure it aligns with your overall investment strategy.
2. Credit cards
Using credit cards to finance the down payment for a rental property is a high-risk strategy that involves leveraging available credit to access funds. You can do this by taking cash advances from credit cards, which can then be used as a down payment.
The advantage of this approach is immediate access to funds, which can be beneficial in competitive real estate markets; however, this method carries significant risks and downsides to consider, including:
- Interest rates: Credit card interest rates are usually much higher than those of mortgages or personal loans, making this a costly way to borrow money.
- Credit score impact: Large credit card balances can negatively impact your credit score, potentially affecting future borrowing capability.
- Terms: It's also important to consider the cash advance fees and the limits on how much you can withdraw, which are often lower than the card's credit limit.
Given these risks, using credit cards for such a large and critical investment should be approached with caution.
3. Gap lenders
Gap lenders offer a specialized form of financing that you can use to cover the downpayment on a rental property. This type of lending fills the gap between the available funds a borrower has and the total amount needed for a property purchase.
Using gap lenders is particularly useful in real estate transactions where the buyer has secured the majority of the funding through other means, such as a primary mortgage, but still needs additional funds to complete the purchase.
A sample case using this approach is:
- You find a good rental property listed for $300k and get approved for a primary loan covering 80% of the cost. However, you need $60k more for the down payment and closing costs.
- Rather than losing the deal, you utilize a gap lender to finance the $60k shortfall at a higher interest rate on a short 6-month repayment timeline.
- It bridges the gap between what you can finance traditionally and the funds required to buy the property now, allowing you to act fast and secure the asset.
- You then refinance into more affordable, long-term debt before the gap loan matures, keeping the real estate investment.
Be aware that gap loans usually come with higher interest rates and shorter repayment terms compared to traditional loans, reflecting the higher risk and the temporary nature of the funding. Additionally, securing gap financing requires a solid exit strategy, as lenders will want confirmation of repayment in a relatively short period.
4. Hard money loans
Hard money loans are a financing option provided by private money lenders, individual real estate investors, or groups. Hard money lenders have less strict lending criteria than traditional loans and place more emphasis on the value of the property itself rather than the borrower's financial history or creditworthiness.
A primary advantage of hard money loans is their accessibility to real estate investors who might not be eligible for conventional financing. This feature is particularly beneficial for those involved in house flipping or rehab projects, as hard money loans can provide funding for real estate investors to move forward with opportunities quickly, sometimes within days.
The recipe for this approach is:
- You locate a fixer-upper single-family home listed for $200k that needs $50k of rehab work. Similar homes in the area sell for $300k.
- The purchase and rehab budget exceeds what you can cover with your own money, and the distressed property makes it unlikely to qualify for traditional financing.
- By securing a 9 month hard money loan for $250k at a 10% interest rate from a hard money lender, you quickly close on the property and complete renovations.
- After 4 months, you sell the flipped home for the target price of $300k, repay the hard money loan's principal plus $8,333.33 in interest charges, and pocket $40k profit, despite high fees.
If you are looking at a hard money loan, be sure to carefully evaluate the terms, such as the interest rate, fees, and repayment timeline, to verify the investment's potential profitability justifies the cost of the loan.
5. House hacking
House hacking is a popular and smart real estate strategy that appeals to individuals looking to invest in property with limited funds for a downpayment. It involves purchasing a multi-unit home, such as a duplex or triplex, and occupying one unit while renting out the others.
This arrangement allows investors to generate rental income that covers their mortgage payments so they can live in the property for free or at a significantly reduced cost.
Here's how you can implement this tactic:
- You find a duplex listed for $400k. Similar units rent for $2k per month in the area.
- You secure a 3.5% FHA owner-occupant loan requiring only $14k down plus closing costs.
- You live in one unit while renting the other immediately for $2k per month, covering nearly the full monthly mortgage payment.
- Within a year, you save up enough to move out and rent both units at market rate, generating over $4k in rental income per month.
House hacking provided you with affordable access to prime rental real estate you can now use for ongoing passive income.
A key advantage of house hacking is that it offers attractive financing options, such as FHA or VA loans. Traditional lenders often provide lower down payment requirements for owner-occupied properties, making it easier for investors to get financing with a smaller initial investment. This accessibility is beneficial for those with limited funds who want to buy their first rental property.
Be sure to assess potential rental income, local market conditions, and property management responsibilities. It’s also key to understand and comply with local regulations to verify the long-term viability of the investment.
Purchasing investment properties through partnerships can be a highly effective strategy, particularly when investors lack the necessary funds for a down payment. This approach involves forming a collaboration with another individual or entity who can provide the financial backing for your rental property purchase. Partnerships allow investors to combine resources, capabilities, and expertise, overcoming financial constraints they might face alone.
Keys to this strategy include:
- Selecting the right partner: It involves finding someone whose goals, values, and skills align with yours, creating a successful partnership. Ideal partners should have the financial capacity for contributions like down payments and offer additional qualities and expertise that complement your own.
- Reliability: Consider partners with a reliable financial history, including good credit and stable income. Being careful in the selection process reduces the risks associated with financial partnerships and improves the chances of obtaining financing for the rental property.
- Partnership agreement: Create a partnership agreement. This document should detail the division of profits, responsibilities, and decision-making processes. Establishing a framework of transparency, fairness, and accountability helps to minimize conflicts and establish a smooth partnership.
7. Private money
Private money financing involves securing funds for real estate investments from private entities, such as friends, family members, or acquaintances, instead of going through traditional lenders like banks. This method provides an accessible alternative, especially for investors who may not meet the standard requirements of conventional financing.
The terms of private money loans are often negotiated directly between the borrower and the lender. It allows for a high degree of flexibility, accommodating unique needs and circumstances. Borrowers can tailor aspects like interest rates, repayment schedules, and other conditions, offering a customized solution that might not be possible with traditional loans.
Seeing the method in practice looks like this:
- Your aunt has always wanted to invest in real estate but lacked the experience. She has $100k sitting in a savings account.
- You find a good rental property opportunity listed for $300k that needs minor repairs. Similar units in the area rent for $2k per month. This rent would cover the mortgage, taxes, insurance, utilities, and other costs with room to spare.
- You convince your aunt to lend you the entire amount for 5 years at a 10% interest rate with the property as collateral, allowing you to buy and start renting the property right away.
- After a year of generating strong rental income, you refinance into a conventional loan at a lower rate, pay back your aunt, and continue profiting on the asset.
- Your aunt earned much better returns on her capital than the bank, and you could acquire your first rental with a private loan.
This type of financing typically falls outside strict lending regulations that govern conventional loans. As a result, private money can be an excellent option for investors facing challenges, such as a high debt-to-income ratio or an insufficient credit history, which might disqualify them from standard bank loans.
8. Seller financing
Seller financing, also known as owner financing or seller carry-back, is a method used to purchase an investment property without requiring an upfront cash payment. In this arrangement, the seller of the property acts as the lender, offering financing directly to the buyer instead of involving a traditional financial institution.
With seller financing, the buyer and seller enter into an agreement that outlines the loan terms. It includes establishing the interest rate, repayment schedule, and other pertinent details. The buyer consistently makes payments to the seller, usually every month, until fully repaying the loan.
Seller financing provides benefits for both parties involved:
For the buyer, it presents an opportunity to acquire the property and invest in real estate without the need for a substantial upfront cash payment. It can be particularly advantageous for buyers who may not qualify for traditional financing due to income or credit limitations.
On the seller's side, offering financing allows for a quicker sale of the property and the potential to earn additional income through the interest charged on the loan. It can also attract a wider pool of prospective buyers, including those who may not qualify for traditional mortgages.
The sequence investors would follow is:
- You find a promising rental duplex listed for $400k, but you don't have the $80k required for a 20% down payment.
- Rather than losing out, you convince the sellers to finance 100% of the purchase price on a 5-year interest-only loan at 10% interest.
- This creative seller financing helps you acquire the $400,000 rental without any money down.
- You make 5 years of interest-only payments to the seller while profiting and saving the rental income.
- After 5 years, you refinance into a conventional loan using the rental income you've saved to pay off the sellers and obtain full ownership.
- Seller financing enabled you to become a landlord without available capital using the seller's money.
9. Seller's mortgage
A seller's mortgage is a no-money-down strategy where the buyer takes over the seller's existing mortgage and assumes responsibility for making the mortgage payments.
One of the advantages of assuming a seller's mortgage is that it may come with a low interest rate, which can be highly beneficial for the buyer. The investor can avoid the need for traditional financing and the associated down payment requirements.
The blueprint for leveraging this tactic involves the following:
- You locate a 4-unit rental property listed for $800k. The seller currently has a 30-year mortgage on it with a 4% interest rate and $100k remaining principal.
- Instead of getting new financing, the seller transfers the existing mortgage to you when you purchase the property. It allows you to assume the remaining low 4% mortgage with no money down.
- By taking over the seller's mortgage, you avoid the expense and time of getting your own high-interest loan. You also avoided the down payment requirements typically needed to buy investment property.
- Before finalizing, be sure to confirm there is no due-on-sale clause that could invalidate the deal later or trigger an immediate payoff requirement by the mortgage lender.
- You simply continue making the agreed mortgage payments the seller had been paying until the loan matures, or you opt to refinance.
10. The BRRRR method
The BRRRR method — an acronym for buy, rehab, rent, refinance, repeat — is a popular strategy for investors looking to purchase rental properties with little to no money down. This approach begins with purchasing a property, often at a below-market price, and then rehabilitating it to increase its value.
Once the property is renovated, it is rented out to tenants, creating a steady income stream. The key step comes next: refinancing the property based on its new, higher value. The refinance often allows the investor to pull out most, if not all, of the original investment used for the purchase and rehab.
When applying this strategy in an example scenario, the key steps are:
- You purchase a rundown single-family home for $150k, well below market value.
- After renovations, your property is appraised at $250k. You rent it out for $2k per month.
- Based on the lease income and new value, you then refinance into a cash-out loan for $200k, paying off your purchase and rehab costs. You now have $50k to purchase another property.
- With those initial funds recycled, you repeat the process on another run-down property in a better neighborhood using the funds from the first property, plus additional borrowed funds to help you grow your portfolio.
- Now, you can leverage the increased property value and rental income from making improvements to continually finance new rental properties.
Note that this model requires market knowledge, renovation skills, and careful financial planning to make sure each step adds enough value to make the strategy successful.
11. Home equity line of credit
Using a home equity line of credit (HELOC) to purchase a rental property with no money down is a strategic way of leveraging existing assets. A HELOC allows you to borrow against the equity built up in your primary residence.
The HELOC functions like a credit card, providing an open line of credit that can be drawn upon as needed. For your rental property purchase, you can tap into these funds to cover the down payment, or even the full purchase price of a rental property, depending on the available equity.
You might apply it like this:
- You have $100k of available funds through a HELOC on your primary residence at an 8.5% interest rate.
- You leverage the full HELOC amount rather than contributing personal capital to cover the entire purchase price on a $100k rental property.
- As you collect rent, you save the income and then refinance the property at a later date with better terms.
HELOCs can have lower interest rates compared to other types of loans, making them a cost-effective borrowing option. Even better, the interest paid on a HELOC loan may be tax-deductible when the funds are used for investment purposes.
Take caution with this strategy, as leveraging your home's equity adds an additional layer of risk. If the investment fails or the property's value declines, you are still liable for the HELOC repayment.
How to buy a rental property with no money down
Purchasing a rental property with no money may seem impossible, but it's achievable with the right strategies and knowledge. Each method has unique advantages and considerations that let investors enter the real estate market without a significant upfront investment.
While these strategies can help you acquire a rental property with little to no money down, careful planning, research, and due diligence are still required. Understanding the market, analyzing properties, and having a solid business plan are necessary for success in real estate investing.
Work with professionals like real estate agents, lenders, and lawyers. Their guidance can help you make sound decisions, navigate hurdles, and maximize opportunities.
Educate yourself, take calculated risks, and stay persistent in pursuing real estate investments with no down payment. With dedication and the right approach, you can turn your dreams of becoming a real estate investor into a reality.
How to buy a rental property with no money FAQs
Is having prior real estate investing experience necessary to buy a rental property with no money down?
While previous experience can be helpful, it is not always necessary. With proper research, education, and professional guidance, individuals can learn and implement the strategies needed to purchase an investment property successfully with no money down.
Are there any tax implications associated with buying a rental property with no money down?
The tax implications can differ depending on factors such as the financing method, property ownership structure, and local tax laws. It's a good idea to consult with an accountant who specializes in real estate investments to understand the tax implications and obligations for your situation.
Are there government programs or incentives that can help me buy a rental property with no money down?
Some government programs, such as FHA loans, offer low down payment options for qualifying buyers. Additionally, certain grants and subsidies may be available, depending on your location and circumstances.