Investing in real estate can be expensive. It often requires a large down payment too. What if you don’t have that large down payment, though? Does this prevent you from buying an investment property? Luckily, with a little ‘outside the box’ thinking, you may be able to invest in real estate with no money down on the home.
Keep reading to learn how you can do it too.
Some sellers are motivated enough to sell their home that they will provide seller financing. This method will take a little more legwork as you’ll have to find a willing seller first. You will then have to be able to convince the seller that you are a good risk, much the same as you would if you secured funding from a bank.
Because the seller creates the terms, there may be more room for negotiations, including the need for 100% financing. Right off the bat, make sure you let the seller know what you need. Be prepared to back that up with a list of qualifications that prove you are a good risk. Because you need 100% financing, you’ll want to show the lender you are:
- A good credit risk (you have a high score with a good credit history)
- You have a history with investment properties and running them properly
- You have solid income so that you can keep up with the mortgage payments
With seller financing, you may pay higher interest rates, but that’s the tradeoff for the creative financing method.
You may not find financing from a seller, but there are private investors out there that may finance your purchase. Just like with seller financing, you can usually negotiate the terms of the loan with a private investor.
Private investors are those people that have money to invest, but don’t want to risk it in the volatile stock market. Instead, they would rather provide the funds to those that can invest in something less risky, such as real estate.
Because you don’t have a down payment, you’ll have to prove to the lender that you are a good risk. This works in much the same way if you were to try to obtain seller financing. A private investor wants to know that you pay your bills on time, have a steady stream of income, and can manage rental properties.
Don’t worry, though, you don’t have to have a salaried job that produces W-2s or have tax returns with a high AGI. Private investors understand creative income streams and expense write-offs, giving you more flexibility in securing the financing you need for your investment property.
Line of Credit on Your Primary Residence
If you prefer to go the traditional route and secure funds from a bank, consider a line of credit on your primary residence. If you own the home free and clear or you have a significant amount of equity in the home, this could be a good option.
A line of credit usually has a fairly competitive interest rate and low fees. Many banks let you borrow between 80% and 85% of your home’s value in a HELOC. Of course, the amount you can borrow will depend on your qualifying factors and the amount of your outstanding balance on your first mortgage.
The HELOC provides you with funds in an account to use as you see fit. You’ll receive a checking account and/or debit card that provides access to the funds. If you want the funds in one lump sum to use as a down payment on a home, you can do that too.
The line of credit usually provides you with continual access to the funds (like a credit card) for the first 10 years. After that point, the draw period ends and you enter the repayment period. This is when you make principal and interest payments over the course of 20 years to pay the loan in full.
One final option may be a subprime loan. Subprime lenders make their own rules, some of which may allow no down payment on an investment property. Just like the other financing methods above, this will require some shopping around.
Each lender has their own requirements. Some may require exceptionally high credit scores in order to qualify. Others may require a steady stream of income and a low debt ratio. As you shop around, inquire about the guidelines to see which lenders are willing to provide you with a loan that doesn’t require a down payment and will fund a home that isn’t your primary residence.
Finding financing for an investment property with no down payment may prove to be tricky, but not impossible. Shop around and evaluate all of your options so that you choose the one that makes the financial sense for you.