Many investors dream of buying an investment property but wince at the size of the necessary down payment. Because of their cash flow potential, multi-family properties typically cost more than a single family.
While you can reduce the amount of cash you need to get into investment real estate by working with a low-commission agent like one of Clever’s Partner Agents, the biggest stumbling block for many is the down payment. If you’ve been searching for how to buy an investment property, here is how to buy one with little to no money down.
Rent-to-Own an Investment Property
Many investors like duplexes and four-family properties because you can live rent-free. The tenants’ rent essentially pays your mortgage. Often, you can negotiate a rent-to-own deal with the current owner and then the property’s rents buy it for you.
These deals can be structured in many ways. Some require that you put money down, such as $10,000, which is still far less than the 20% down payment that a bank would require. Or some, of all, your monthly “rent” to the owner is credited towards the purchase price.
Other deals allow you to purchase the property at a predetermined price at some point during the lease. These deals can be quite complicated, and you should always bring in a lawyer and real estate agent knowledgeable in investment real estate to help draft them and ensure it’s a safe investment.
Assume an Existing Mortgage
Some landlords don’t like rent-to-own deals because their name is still on the mortgage. If their current mortgage doesn’t contain a “due on sale” clause you might be able to assume their existing mortgage.
A “due on sale” clause would mean that the owner has to pay off the mortgage when it’s sold, but without one they can sign a “subject to” contract and transfer it to you. You can use the existing seller’s financing for part of the purchase price if you don’t have full down payment. In exchange for paying on the mortgage, you get the property’s title.
Borrow or Negotiate the Down Payment
Do you already own a home? Look into taking out a line of credit on your existing single-family residence to fund the down payment on an investment property. Or, refinance and get money out. As a bonus, the interest paid on that loan will be tax deductible. Or you can write a deal for an investment property with the down payment in the form of a home equity loan or line of credit.
Seller-financing is common in the investment real estate industry. Talk to the seller and see if they’d be willing to negotiate the down payment by giving you credit at closing, or with a private mortgage allowing you to pay it in a balloon payment after you’ve collected enough rents to build the down payment.
Short-Term Private Loan
Individuals with cash to invest are often looking for better returns on their money than they can get in the stock market. Private lending platforms have sprung up all over the Internet to connect them with borrowers. Consider reaching out to private lenders on one of these platforms to take out a short-term private loan for the down payment.
You will pay a higher interest rate than on a bank loan, but you can structure the deal for maximum flexibility. Make monthly payments, or arrange for a lump sum repayment after a year. Save up your rental income to cover that lump sum payment.
Get creative, but make sure that you’re investing in a good market with strong fundamentals. You want to make sure that your rental income will allow you to fulfill the deal’s terms.
Find a Partner
Combining resources lets you and a friend, family member, or a business partner invest in property that none of you can afford on your own. With a partner, you can also share the responsibilities of managing investment properties.
Trade Skills or Assets
Are you an experienced carpenter or electrician? If the investment property that interests you needs work, talk to the owner about trading your skills. You could work off the down payment by fixing it up or work out a deal by combining cash down payment with work.
Alternately, the seller might be willing to consider swapping assets. If you own a house, or a boat, or other investment, talk to the owner and see if they’d like to swap.
After the subprime crash in 2008, many states passed laws to prevent what legislators view as risky deals. Not all of these options could be available to you in your state, which is why it’s crucial to work with an experienced, Clever Partner Agent.