There are plenty of ways to buy a rental property without having to dip into your bank account. These can include a cash-out refinance, personal loan, private funding, and more.
How to Start Investing With No Money
Many believe that investing in real estate is a strategy reserved to help wealthy people increase their wealth. However, that doesn’t have to be the case. While it is easier to get started with a nest egg, it’s still possible to get it done with 0% down.
Investing in real estate with no money down usually requires more risk and some more upfront elbow grease. In many cases, you can also combine multiple strategies in order to get enough cash for a down payment.
You need $100k for a real estate investment, and a cash-out refinance provides you with $60k. Then, you talk to your brother about financing your deal, and he provides the other $40k in exchange for a percentage of the monthly rental revenue.
10 Ways to Buy a Rental Property with No Money
Here are some of the most popular ways to buy rental properties without spending your money:
- HELOC
- Home Equity Loan
- Cash-Out Refinance
- Hard Money Loans (BRRR)
- Rent Out Your Home
- Personal Loan
- Co-Borrower or Partner
- Private Funding
- Seller Financing
- Multifamily House Hacking
1. HELOC
A home equity line of credit allows you to tap into the existing equity on your house. With a line of credit, you get access to a certain amount of money, but you can choose how much to take out. You then have to begin making payments (including interest) on the amount you borrow.
Most lenders will lend up to 80% of the equity on your house. So, if you owe $300k on your house and it’s worth $400k, you have $100k in equity. Most lenders would lend you up to $80k.
One reason investors like HELOCs is that you can draw down more of your line of credit to make payments. If you’re doing a short-term fix & flip, you could, in theory, make payments without using any of your own money and then pay off the entire balance once the flip happens.
2. Home Equity Loan
Similar to a HELOC, a home equity loan allows you to borrow against your equity in the house.
The biggest difference is that because it’s a loan, all of the money is given to you at once with a set repayment plan. The interest rates are locked in, whereas HELOCs are generally variable.
You can generally borrow up to 80% of the equity you have on the property.
3. Cash-Out Refinance
With a cash-out refinance, you can convert your existing equity into cash in your pocket rather than borrowing it.
A cash-out refinance can be an excellent choice, but only if all the factors work in your favor. For example, you’ll have to consider the following:
- You’re getting a brand new mortgage, so your 30-year clock will restart.
- Your new monthly payment. If you need to finance a larger chunk, even the same interest rate could mean a bigger payment. If interest rates have increased, it could mean a much larger monthly payment.
- How much you’ll be able to take out. If your mortgage payment increases by $200 per month, but you get $100k in cash, it’s probably worth it. An increase of $500 per month for $15k in cash almost certainly won’t be.
4. Hard Money Loans (BRRR)
Hard money loans are short-term, high-interest loans designed for real estate investors. Generally, they’re used for fix & flips, as the length of the deal only needs to be for 6-12 months.
Because of the short-term nature of the loans, they’re not ideal for rental properties. However, there is a way to do this, and it’s called BRRR.
- Buy – After locating a suitable property, you take out a hard money loan to fund the purchase of your deal. Some hard money lenders require $0 down, but you can use some of the strategies on this list if you need a down payment.
- Rehab – Now, you’ll get the property rental ready. Usually, investors spend less money and time to get a property ready to rent than they would when trying to maximize a sales price.
- Rent – Find a tenant!
- Refinance – It’s time to refinance your hard money loan into a 30-year conventional loan. Many lenders won’t refinance a hard money loan, so do your research beforehand so you don’t get stuck.
5. Rent Out Your Home
One of the most common ways to get started in rentals is to rent out the home that you live in! You could just rent out a room or your basement, but most people will actually move to a new home.
Here’s how this works:
- Buy your primary home with an FHA loan, requiring a 3.5% down payment.
- Live the mandated 1 year in your home.
- Refinance your home into a conventional loan. It often takes a few years for you to pay down enough and for the the property to rise in value to make this strategy make sense.
- Buy the home you plan to move into with an FHA loan.
- Move and then rent out your previous home.
Of course, this isn’t a no-money strategy, but it’s much cheaper than the usual 20% or more that lenders require to purchase an investment property.
6. Personal Loan
While a personal loan isn’t the cheapest option (regarding interest rates and payment schedules), it can still help make the deal happen.
A personal loan will likely work better in conjunction with another strategy on this list, as you may not want to (or can’t) borrow enough for an entire down payment. A personal loan might be perfect if you’re looking for $5k or $10k.
7. Co-Borrower or Partner
In this case, your co-borrower would generally be the financial partner while you’re the one actively in charge of the investment.
This wouldn’t be a situation where you borrow money and pay it back on a schedule. Here, you’re working with a true partner, someone with whom you make plans and share profits.
8. Private Funding
Private funders are people with money who are looking for business deals. Generally, they lend money with a set interest rate and repayment schedule.
Most of these people lend on any type of business deal that looks good, not just real estate. In this case, you’re not bringing on a partner, just someone you’ve convinced will lend you money.
9. Seller Financing
Rather than getting a loan through the bank, the seller of the property provides you with the funding. In other words, you make payments to the owner.
This situation can be rare, as the seller has to be in a good financial position not to need the cash for the house. Those who agree to this arrangement usually have the property paid off and are interested in the long-term benefit of your willingness to pay them extra over time.
This deal works well for you because you can set more flexible terms than you could with a bank. Perhaps there’s no down payment, or you can also arrange for them to receive a percentage of the profit rather than a set interest rate.
10. Multifamily House Hacking
Multifamily house hacking means purchasing a property with at least two units. You would live on one while renting out the others.
For example, if you live in a duplex, you would live in one unit, and your tenant would live in the other. In some cases, the rent payment could cover the mortgage for the entire property. If not, it should at least offset a decent chunk.
This strategy has lost some popularity lately as duplexes and triplexes aren’t as widespread as they used to be. Many of the ones still around are run-down and often being removed to build townhomes, apartments, or single-family homes.
Pros of Buying Rental Property with No Money
There are some excellent reasons that you should purchase a property with no money:
- Low Barrier to Entry – If you have little cash to your name, you can still get involved in real estate deals.
- Keep Your Powder Dry – Even if you have money sitting around, you may not want to tie it all up in a single deal. What if someone brings you an excellent business deal but you’re not liquid?
- Cash-on-Cash Return – If your most important metric of success is how much profit you earn in relation to how much money you’ve spent, then that will look great in this situation.
Cons of Buying Rental Property with No Money
Of course, there are some downsides to using other sources of money:
- More Legwork – Like the common saying, many things cost money or time. In this case, the extra time might be in the form of finding a partner or juggling a more complicated deal.
- More Interest – Most of the options require you to borrow money in one form or another. This means that you’ll have to pay back your regular mortgage and the money you borrowed for the down payment.
- More Risk – The more money you borrow, the higher your risk. Plus, putting 20% cash down on a property provides you with some instant equity, giving you more flexibility and options in the future.
