We recognize that property ownership is one of the most enticing methods to guarantee your financial future – but the most common reason people put their property investment ambitions on hold is a lack of funds.
Over time, most property experts are discovering new ways to assist others in entering the field of property investment. For those young people who don’t have a lot of money but want to build wealth through property investment, here are some options for owning a property with little or no money down.
1. Invest With a Partner
Buying an investment property with other people’s money (OPM) is one of the most common ways to purchase property with no money down. You can find a private lender or financial partner ready to join the venture and supply you with the funds you need to purchase the property. This could be just the down payment or the entire purchase price in cash in exchange for a return on their investment.
Partners can be family members, friends, or coworkers, and there are several methods to organize their return, such as these.
- A joint venture (JV) is a partnership in which ownership of a property or company is divided into percentages. Rental income, equity, and appreciation are frequently split between the partners.
- A loan deal in which the investor gets a preferential return on their initial investment.
- A private loan in which the partner is returned with a monthly payment could be interest-only with a balloon payment or a principal and interest.
- A combination of the above.
2. Make Use of Additional Assets
Another option for buying a property with no money is to leverage your other property with a Home Equity Line of Credit (HELOC). HELOC loans will enable buyers to use the equity in their other property as collateral for purchasing a new property. Depending on the assessment, you can borrow up to 75% or 80% of the value of your home with this loan. Buyers will receive a lump sum payment and repay the loan with a fixed-rate interest over a specified period.
Buyers do not have to take money out of their pockets to purchase a new property by tapping into their home equity. For instance, if you own a $200,000 property and owe only $100,000, you could cash out $75,000 to $80,000 of your property’s equity. You could then put that money toward the purchase of another property.
3. Rent Out Your Principal Residence
Depending on your current primary residence, you might not even need to purchase a property. House hacking is a popular investing strategy that involves converting a single-family home into a multi-family home by renting out a portion of the property to tenants.
This area could serve as a basement, guest house, or garage apartment. House hacking has become a popular approach for new investors searching for a way to make money without putting money down on a property.
4. Apply for a Hard Money Loan
Hard money loans are a type of alternative financing commonly used to finance properties that will not be approved for traditional financings, such as a fix and flip. Investors can get funding for a property up to a certain percentage of the property’s current or future value (after repair value), and the cost of renovating or repairing the property will be factored into the loan.
This means that if you negotiate a great deal with a super low purchase price and meet the loan-to-value requirements of the hard money lender, you may purchase the property with no or minimal money down.
Hard money loans are typically for a short period, ranging from 6 to 18 months, with high-interest rates 5 to 10% higher than a traditional mortgage. So, if you have good credit and intend to do a cash-out refinance after the property is repaired and rented, this method of buying a rental property with no money down is typically best.
5. Assume That the Seller Has a Mortgage
Another way to buy an investment property with little money is to assume the seller’s current mortgage, also known as buying “subject to.” In a subject-to transaction, you purchase a property subject to the owner’s existing mortgage terms. This option usually causes a small down payment. However, depending on the seller’s needs, it may be possible to assume a loan with no money down.
Buying “subject to” is unique to gaining distressed properties, but it isn’t always an option. The loan may not be assumable, depending on the lender. Some lenders include a “due on sale” condition, which states that if the property is transferred or sold, the entire loan obligation is due.
6. Take Advantage of Seller Financing
Seller financing, also called owner financing, is an unconventional type of financing in which the seller or owner of a property holds the financing for the buyer. Rather than going to a bank for standard financing, the seller or owner of the property serves as the buyer’s lender. The buyer repays the loan over time under the terms outlined in a formal agreement, such as a note or mortgage.
Some sellers will know exactly what terms they will accept or hold for the financing, such as an interest rate, down payment, or loan period, whereas others will be negotiable. Suppose you are a strong negotiator and can determine the seller’s needs. In that case, it is possible to negotiate financing with no money down or have the seller carry a second mortgage while getting a first mortgage from a bank. Typically, this works only when the owner’s desire for a down payment outweighs the need to sell or reach the desired sales price.
What Should You Consider While Buying a Property With No Money Down?
If you don’t have a lot of cash on hand, using one of the above methods can make purchasing a property more affordable, but it has some drawbacks, which we’ll discuss below.
- Depending on the mortgage type you select, you may be required to pay mortgage insurance, which can influence the amount of your monthly mortgage payment.
- When you put less of your own money down, you have less ownership interest,’ and you may face a high-interest rate or monthly payment because lenders are taking a bigger risk.
- A low down payment also means it will take you longer to build equity in your home, and you may have to live there for longer than the standard five years to sell for a profit – though this is only a concern if you expect to move in a few years.
Before purchasing a property with little to no money down, there are some things to think about. However, if you’d have to empty your savings account to put a full 20% down payment on a home, it’s probably best to go with a lower down payment option and save some cash for unexpected expenses. Before deciding, consult with a mortgage lender to discuss your home loan options and get all of your questions answered.