Real estate is hands down the best investment for building wealth. They’re not making any more land, and if you look at the line graph of property values over the last few decades, that curve is only going up. And it’s getting steeper.
Yet many people don’t invest in real estate, because they believe they don’t have enough money. After all, conventional wisdom is that you have to put 20% down. On a $1 million home (which doesn’t even count as expensive in many US markets), that means you have to come up with $200,000 just to get in the door. That’s not easy.
But the fact is, it’s very possible to buy investment properties without putting money down. There’s a whole spectrum of no-money-down loans, some of which are even accessible to people with checkered credit history.
That’s right, you could invest in real estate if you have no money and suboptimal credit.
This proposition may sound too good to be true, but it can be done. Of course, there are some downsides, depending on which method you choose. As the saying goes, there’s no such thing as a free lunch. Let’s look at some of the options.
The United States Department of Agriculture (USDA) offers a loan program that enables low-to-moderate income families to purchase property in a rural area with no money down. You might be thinking that property out in the middle of nowhere couldn’t be a good investment, but the USDA’s definition of rural is actually quite generous. Over 75% of the nation qualifies as rural under their definition, so this could be a viable option if you’re looking to buy outside a high-density urban area.
Hard money is the term for a private loan that circumvents the usual process of examining a borrower’s credit history and income, and instead weighs most heavily the quality of the potential investment.
If the property you’re looking to buy is in a great location in a hot market, you’ll likely receive the loan even if you have a checkered financial history. However, since these are private loans, they can come with unconventional terms. Many hard money loans require repayment within a year (although some run longer than that), and come with high-interest rates.
A Home Equity Line of Credit (HELOC)
If the investment property you’re looking to purchase is a second (or third) home, you may very well be able to use your primary home as a source of cash.
A HELOC basically converts your home equity into cash. If you take the current value of your primary home and subtract the amount of the mortgage, what’s left is the equity. It’s quite easy to open a line of credit with this equity, and if your primary residence is valuable enough, you might even be able to purchase your investment property outright with your HELOC.
FHA Owner-Occupancy Loans
Though this loan from the Federal Housing Agency (FHA) is not technically a no-money-down loan, the down payment required can be as low as 3%, so it could be a workable option if you have limited cash on hand.
When you apply for an FHA Owner-Occupancy loan, they’ll be looking primarily at your credit score, so if your financial history is pristine, you could qualify for rock-bottom interest loans alongside that minuscule down payment. There is, however, a small catch.
As you might have guessed from the name of the loan, you must live in the property you purchase with this loan, which can complicate things if your plan was to rent this new property. However, the government only requires you to live in this new property for one year. Once that year elapses, you’re free to move out and convert the place to a rental. With a little flexibility, this loan could be a great investment tool.
If you’re serving in the military, a veteran of the military, or the spouse of one, you likely qualify for a Veterans Administration loan. These loans come with exceptionally low-interest rates, and require no money down. Many of them don’t even require a high credit score, making this one of the easiest loans to qualify for, if you meet the military service requirement.
This is also known as the “ask your parents for money” option. A private loan is exactly what it sounds like: money from a private individual. With a private loan, the two parties agree to any terms they like, which could mean generous (or zero) interest and a term of however long you can negotiate.
Navigating all of these options isn’t easy, especially if you’re still early in your investing career. Partnering with an experienced real estate agent can help you learn the ins and outs of the industry, find the best properties, and really get some momentum going on your portfolio.
Clever Partner Agents are all elite performers in their home markets and come from top brokerages. They offer a full-service agent experience for a flat fee and can help you with every aspect of your property acquisitions, from financing to everything else. Contact us today and we’ll help make sure every last detail is in place!