How To Buy Rental Property With No Money Down
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Summary:
There are several ways to buy a property with no money down, such as “house hacking,” tapping the equity in an existing property, or organizing alternate financing routes. It’s important to note, however, that interest rates are an important factor when deciding to refinance an existing home loan and take out a new mortgage. Furthermore, investment property mortgages come with different terms than primary residence mortgages, so the deal needs to make sense.
Sometimes you see a real estate deal, and you just “can’t say no” but have no money in your bank account and not a penny in your pocket with which to purchase the property. Unless you are a military veteran or qualify for a special loan, it’s difficult to buy a property with no money down.
This becomes complicated when building a property portfolio, as that money for the down payment has to come from somewhere. If you have an investment property and you don’t have the money for it, there are indeed options, no matter how old you are.
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How to buy rental property with no money down
- Release the equity in an existing property
- House hacking
- House hacking conversion
- Alternative financing structures such as personal loans, seller financing, or taking on a mortgage
You should first look at releasing the equity in an existing property to buy a new one. The second step is to consider restructuring your existing property so that you can both rent it out and live in it, otherwise known as “house hacking.” The third route would be to look at alternate financing methods, such as seller financing or even different types of loans. There are important factors to consider in all these scenarios, including the interest rate, time frame, and overall return on investment.
Releasing equity from an existing property
If you have an existing property that has gone up in value, then you are in luck. You can now tap into the existing property’s equity for real estate investment and have enough for a down payment on a new home. Using the equity from a home is a great way to obtain either your first rental property or even a portfolio of rental properties. It’s important to note that for most secondary properties that are meant to act as investment properties, lenders are looking for a minimum of a 20%-30% down payment.
Home equity loan
A home equity loan is also known as a second mortgage. You have built up equity in your home, and you release that equity by taking on another mortgage. Below is an example:
| Existing Property Value | $500,000 | New Property Price | $400,000 | |
|---|---|---|---|---|
| Existing Mortgage | $150,000 | |||
| Downpayment Needed | $80,000 | |||
| Existing Equity | $350,000 | |||
| 80% Home Equity Loan | $280,000 | Surplus | $200,000 |
In this scenario, your property is worth $500,000 with an existing mortgage of $150,000. This means you can tap into $350,000 of equity via a second loan. If you can get an 80% home equity loan, you can then access $280,000. That $280,000 will pay for the second property’s 20% down payment and leave a surplus of $200,000 that can be used to pay down mortgage debt or even invest in more properties.
Cash-out refinance
A cash-out refinance is when you “cash out” of your existing loan and trade it in for a completely new one. An example of how this works can be seen below:
| Exising Propety Value | $500,000 | New Property Price | $400,000 |
|---|---|---|---|
| Exisiting Mortgage | $150,000 | ||
| Downpayment Needed | $80,000 | ||
| 80% Cash Out Refinance | $400,000 | ||
| Existing Mortgage Loan | $150,000 | ||
| Total Available | $250,000 | Surplus | $170,000 |
In this scenario, we take the same $500,000 property, but this time trade the existing $150,000 loan in for a completely new mortgage. After accounting for the down payment on the new property, we are left with a surplus of $170,000. This can be used to pay off existing mortgage debt or buy further properties. The cash-out refinance is part of the BRRRR method, which we have covered in depth here.
Pro Tip
We spoke to real estate professional Nicole Beauchamp about doing a cash-out refinance vs. a home equity loan, comparing the interest rates offered for both options. “A cash-out refinance may have lower interest rates than a home equity loan, as it replaces your existing mortgage with a new one,” she says. “Consider how this impacts your current mortgage terms, such as the remaining balance, interest rate, and any penalties for early repayment. Evaluate the loan terms for both options. Consider the repayment period, monthly payments, and any associated fees or closing costs and what the overall costs are for each option. Determine the amount of equity you need to access. Depending on your home’s value and the loan-to-value (LTV) ratios offered by lenders, you may be able to borrow a larger amount through a cash-out refinance compared to a home equity loan.”
HELOC
A HELOC works a bit like a credit card in that you have a credit line tied to the equity value of your home. With a HELOC, you can take out however much you want, when you want. As long as you are within the credit limit, you can borrow as you please. You can see this in the model below:
| Existing Property Value | $500,000 | New Property Price | $400,000 |
|---|---|---|---|
| Exisiting Mortgage | $150,000 | ||
| Downpayment Needed | $80,000 | ||
| Existing Equity | $350,000 | ||
| HELOC Withdrawl | $80,000 | Surplus | $0 |
In this scenario, you only take on the $80,000 that you need for the down payment on the new property. The big advantage here is that a HELOC is much more flexible than a cash-out refinance or a home equity loan, which is a set percentage of equity in the form of an LTV ratio (70% LTV, 80% LTV). With a HELOC, you can take out what you want and will only be responsible for paying the interest.
Home equity investments
Another promising approach for obtaining a rental property with no money down is through Home Equity Investments (HEI). Unlike traditional home equity loans or HELOCs, Home Equity Investments allow you to access a portion of your home’s equity without taking on additional debt. Here’s how it works:
Home Equity Investment Model
Home Equity Investments involve partnering with an investment company that provides a lump sum payment in exchange for a percentage of the future appreciation or depreciation in the value of your home. Essentially, they invest in your property, sharing both the potential gains and risks with you.
Why Consider Home Equity Investments?
- No Monthly Payments: Unlike traditional loans, there are no monthly payments with Home Equity Investments. The investment company gets paid when you sell the property, refinance, or at the end of the term.
- No Interest Rates: Since it’s an investment rather than a loan, there’s no interest rate attached to it.
- Flexibility: You can use the funds for a down payment on a rental property or any other purpose, providing a flexible way to leverage your existing property’s value.
- Shared Risk: The investment company shares in the risk of property value changes, meaning that if the property value decreases, the amount you owe could decrease as well.
Other options to consider
House hacking
House hacking is taking an existing property and renting out part of it while still living in another part. The great part about house-hacking is that if you have a low fixed-rate mortgage, you don’t have to take on any more debt that might have a high-interest rate attached, either fixed or ARM. There are two methods to house hacking: traditional and house hacking conversion.
Traditional house hacking/multifamily
Traditional house hacking refers to buying a multifamily property and living in one unit while renting the adjacent units in the multifamily complex to other tenants. One thing to note, however, is that unless you have access to a special VA loan or alternative financing, you’ll need to put some money down with a multifamily investment. A traditional multifamily house hack is detailed below.
| 4 Unit Multifamily Development | $1,000,000 |
|---|---|
| Mortgage at 70% | $700,000 |
| Mortgage Annual Payments (5% fixed) | $45,096 |
| HOA/Property Tax | $12,000 |
| Toatl Needed Annually | $57,096 |
| Annual Net Rental Per Unit | $24,000 |
| Annual Rental for 3 Units | $72,000 |
| Surplus + Live for Free | $14,904 |
You can see how the math works if you buy a four-unit multifamily property for yourself and rent out the other three units. If you were to buy the whole multifamily unit using a 70% mortgage, assuming you rent out the other units for $24,000 a year net, you can live for free and are left with a small surplus.
Alex Capozzolo, a real estate professional based in San Diego, prefers this method. “House hacking can pave the way for prospective homeowners a house buying company to acquire property with little to no initial capital. Instead of investing personal funds, you can borrow money for the down payment of a multi-unit property. The key is to purchase a property that needs to be renovated. You can add value to the property by fixing it up and then refinance the property, extracting the original down payment or more. This cash-out refinance can then be used to repay the original loan for the down payment, effectively allowing the individual to have acquired the property with no money down in the first place.”
This strategic approach to real estate investing can open doors to homeownership that would be otherwise unattainable for many. - Alex CapozzoloClick to Tweet
House hacking home conversion
The easiest way to house hack with no money down is to convert your existing primary residence into multiple units that you can rent out. This is one of the easiest forms of real estate investing. However, it’s important to note that although you don’t need any money for a further down payment, you might need capital to inject into the renovation to make the other apartments rentable.
Some lenders will provide hard money loans for renovation-related items. This could be for building separate kitchen and bathroom spaces, sectioning or apportioning part of the home, and putting in different entryways/pathways. Below is an example of how an existing conversion might work, with the assumption it won’t cost anything.
| Exisitng Home | $500,000 |
|---|---|
| Existing Mortgage | $150,000 |
| Existing Mortgage Payemtns @ 5% | $9660 |
| Rental 2 Rooms at 750 a Month NET | $1500 |
| Annua Net Rental | $18000 |
| Surplus | $8340 |
You can see that converting a couple of rooms in your house can help pay off your existing mortgage and even give you a surplus of more than $8,000.
Alternative buying/finance structures
There are other ways to buy a property with no money down, but those require obtaining financing through nontraditional means. Here are some options you might want to be aware of.
Seller financing
Seller financing means the seller agrees to finance a portion of the property or the property in its entirety. Seller financing, in many cases, is completely unregulated, so it won’t have the same laws and protections as traditional financing routes. It allows the buyer to pay in installments or through some other method.
In the United States, seller financing is actually quite rare. Seller financing is most commonly seen in resort-style properties outside of the U.S., like the Caribbean or Thailand. It’s important to note that an investor must consider why the seller is offering financing in the first place.
Assume the seller’s mortgage
Another option is to assume the seller’s mortgage and have the property transferred to you along with the mortgage. This is rare, though, as it’s difficult to find sellers who are looking for mortgage relief who would be willing to trade in a loan with no money down.
Personal loans
If your credit is decent, you should be able to get a personal loan, which might be enough money to afford a down payment. Be wary, however, as personal loans (which are unsecured loans) come with higher interest rates.
Use other people’s money
This technically isn’t no-money-down, but it’s none of your own money down. Finding investors is a great way to be able to purchase rental properties if you personally don’t have any money in the bank. Maureen McDermut, a real estate professional based in Montecito, CA, has had clients who used a variety of methods to obtain funds. “Many investors I have worked with will crowdsource their funding and take on partners for that specific property,” she says. Some will take out a mortgage, but especially more recently, if they can find co-investors, that is more desirable.”
FAQ
What are the ways to purchase a rental property without any financial involvement?
There will always be some kind of financial involvement either in a mortgage, the down payment, or the general purchasing of a property. But if you don’t have cash on hand, you can take out a second mortgage or a HELOC, or try a house hacking situation.
How can I achieve the purchase of a rental property without any initial funds?
Some additional ways to achieve the purchase of a rental property without any initial funds are by finding investors, taking out a personal loan, or using seller financing.
Key takeaways
- There are several ways to buy a property with no money down, such as “house hacking,” tapping the equity in an existing property, or organizing alternate financing routes.
- For a real estate investor looking to build a portfolio and buy rental properties, consistently tapping into your equity is a great way to finance the next down payment.
- A property owner can convert an existing property with no money into a rental property by house hacking. If money is needed for renovation, they can get it via hard money lenders and a hard money loan.
- There are alternative ways to buy a rental property with no money down, such as seller financing or taking out a personal loan if your credit score permits.
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