A study of asset returns over 145 years in 16 developed countries found that rental properties outperformed stocks. But how is it possible for rental properties to perform better than stocks, with lower volatility and risk? The answer lies in the higher barrier to entry for investing in rental properties.
Buying Rental Properties Requires Money & Skill
While anyone can throw $100 into an index fund with no minimum cash requirements or education necessary, rental properties pose two significant challenges to new investors. First, they require more money to purchase, and second, they require more skill than index fund investing.
At SparkRental, we provide the knowledge and skills needed for rental property investing. We offer free rental investing courses, webinars, a weekly real estate investing podcast, and a wealth of free articles. But what about cash? Does it take tens of thousands of dollars to buy a rental property?
The answer is yes, but that doesn't mean you can't use tricks and hacks to get around the down payment requirements for real estate investment.
Buying a Rental Property with No Money Down
If you've ever wondered, "Can I buy a rental property with no money down?" you're not alone. Many real estate investors have asked the same question. Here are ten ideas for how to buy a rental property with no money down, or at least less money down.
1. Consider House Hacking First
House hacking is the easiest way to buy your first rental property while scoring free housing. The traditional house hacking concept is simple: buy a small multifamily property (2-4 units), move into one of the units, and rent out the others. The rent from the neighboring tenants covers your mortgage and other housing costs, effectively providing you with free housing.
Buying an owner-occupied property requires a lower down payment compared to an investment property. For example, FHA loans allow a 3.5% down payment if your credit score is over 580. Conventional mortgage programs may also require less money down or even no money down at all. It's crucial to compare prequalified interest rates and loans from different lenders before making a decision.
2. The BRRRR Method
The BRRRR method involves buying a fixer-upper with a purchase-rehab loan, renovating the property, renting it out, refinancing it, and repeating the process. While this method requires cash upfront, you can get your initial investment back through refinancing. The new landlord loan is based on the property's after-repair value (ARV), allowing you to pull out some cash to cover the initial down payment.
3. Seller Financing
Instead of going through a loan program, you can explore the possibility of seller financing. Some property owners may be willing to finance the property, allowing you to negotiate loan terms, including the option of buying a rental property with no money down. This option works well with property owners who have no mortgage or sellers who inherited the property and need to make repairs.
4. Assume the Seller's Mortgage
Even if the seller isn't willing to directly finance the property, you may still be able to work out a deal to buy a rental property with no money down. You can offer to assume the seller's mortgage and make payments on their behalf. By stepping into the seller's low-interest loan, you're only responsible for the remaining difference. Just be cautious about triggering any "due on sale" clauses in the existing mortgage.
Remember, when you obtain conventional financing, lenders often require a down payment to ensure your commitment. However, assuming the existing mortgage allows you to avoid borrowing a purchase mortgage. You can explore various options to come up with the difference, including borrowing from friends and family or arranging a loan with the seller themselves.
With these strategies, you can overcome the down payment requirements and make your dream of buying a rental property with no money down a reality. Remember to do your due diligence, seek expert advice, and carefully evaluate each option to determine the best approach for your situation.
