Real estate investing is one of the oldest and most profitable ways to make money. As soon as people started owning land, they quickly learned that they could make money renting it out or selling it at a profit.
You may think real estate investing is reserved for high net worth individuals with cash to burn. You probably have visions of them buying up rental properties with their vast resources and letting the monthly rental income roll in.
The promise of passive income is enticing for anyone looking to invest in real estate. Sitting back and watching the checks come in each month sounds great, right? For most people, the biggest obstacle to enjoying passive income is the idea that they need to have some money saved up to start investing.If you are wondering how to invest in real estate when you aren't flush with cash, you’ve come to the right place. Read on to learn how some of the notions about real estate investing you might have are misconceptions.
Do I Need Money Up Front To Invest In Real Estate?
Financially strapped investors often wonder if they should even consider buying rental properties or engaging in other forms of real estate investing if they don’t have a lot of capital built up. The truth is, you don't need a lot of money to get started. In fact, there are several ways to become a real estate investor with little or no money at all.
Many successful real estate investors have grown their wealth by understanding that some of the best investments are the ones that don’t require a down payment or any other funds upfront. Through loans and other creative financing models, they profit by using other people’s money instead of their own.
So, the simple answer is no. You don't need money upfront to buy an investment property or make money off of real estate in various other ways. Below we will get into how to invest in real estate with no money by providing a variety of strategies from which to choose.
Can I Invest In Real Estate With Bad Credit?
You may be thinking, “ok, I don’t need a down payment, but I certainly need good credit, right?” Nope, you can start investing even if you have bad credit. The first step is understanding exactly how bad your credit is because it may be better than you think.
Your score will determine what type of loan you are eligible for and if you qualify for assistance with a downpayment. It will also influence the interest rate on any loan you receive. Understanding how it is calculated will help you know your current score and how you might be able to improve it.Most credit scores are based on the FICO scoring model and range between 300 and 850. Calculations to determine your score can vary by the credit agency, but here are the most common factors that determine your credit score.
Now that you know how your score is calculated, you can focus on behaviors that will improve it. You can also find out your current score by utilizing a variety of websites like FreeCreditReport.com. Once you know your score, you will need some context to understand how good or bad it is. Here is a helpful scale to help you understand where you stand in terms of creditworthiness.
The critical thing to remember is that real estate investing is not only for people with excellent or good credit. Does it help? Definitely, but you aren't out of real estate financing options if your credit is fair, poor, or even bad. Some of the strategies for real estate investors with little or no money that we will cover here will work no matter your credit score.
13 Ways To Invest In Real Estate With No Money
You probably already know that there are many ways to invest in real estate if you have some money saved up. But what if you don't? Here we will provide strategies that will teach you how to invest in real estate with no money.
Some of these approaches involve finding alternative funding sources, while others don't require any initial funding. Some you can do independently, and others need you to find a business partner.
The many differences between these real estate investment strategies mean you can choose the one that’s right for your unique situation.
1. Assume An Existing Mortgage
Traditional financial institutions often lend money to homebuyers when purchasing a house through a mortgage loan. You probably knew that already. But did you know that you can buy a house simply by taking over the current owner’s mortgage? Well, you can, and it’s called an assumable mortgage.
You take over (assume) every part of the mortgage the current homeowner has. That includes the interest rate, principal balance, and loan terms. This means the monthly payments remain the same. They are just being made by you, as the new owner of the home, instead of the previous owner.
In return for assuming the existing mortgage, you get the title to the property. The house is yours. This is only possible if the original mortgage was set up to make it assumable.
Some mortgages have a “due upon sale” clause, which means the loan’s entire balance needs to be paid off if the home is sold. Even if the mortgage is assumable, you will likely need to show the lender that you have the necessary creditworthiness to make the monthly payments on time.
Assumable mortgages can be helpful when interest rates are high. Instead of getting the current rates as you would with a traditional mortgage loan, you get the rates that the home’s previous owner locked in when they first purchased the property.
2. Seller Financing
Assumable mortgages can often require a downpayment, so you might want to consider seller financing if you don't have any funds to cover that. Sometimes referred to as owner financing, this type of loan has the seller as the lender instead of a bank, credit union, mortgage company, or other traditional lenders.
The loan contract terms are mutually agreed upon by the seller/lender and buyer, much like a traditional mortgage. The difference is the credit score and down payment requirements that a bank might have don’t apply. That means the seller can make the terms as favorable or unfavorable for the buyer as they want.
Again, the buyer and seller determine the monthly payment amounts, interest, downpayment, and all the other terms of the loan. This means if you don’t have any money for a downpayment, you might be able to use seller financing if they agree to waive a down payment in the loan terms.
3. Turn Your Home Into An Investment Property And Buy A New One
Owning multiple properties might seem like a stretch if you don't have a lot of money in the bank. However, there is a unique way to purchase your first rental property at a discount if you already own your own home.
Traditionally, rental properties are more costly to purchase than your primary residence. They usually require 20 percent or more for a downpayment, and the interest rates are higher than when you buy a primary home.
If you want to have an investment property, simply start renting your current home and buy a new primary residence. Your loan terms will be better on both mortgages, and the rental income you collect can help pay for the mortgages on both homes.
4. HELOCs And Cash-Out Refinances
A home equity line of credit (HELOC) is a great way to generate funds for real estate investing if you own your home. Depending on your original down payment, interest rate, and how long you have been in your home, the property might be worth more than you owe on it.
In fact, given the recent rise in home values, the amount your home could appraise for is likely significantly more than the balance of your mortgage loan. With a HELOC, you borrow against that value gap and essentially take out a new loan while keeping your current mortgage.
The best time to get a HELOC is when interest rates are low, and home values are high. In other words, now. Home values are historically high, and interest rates, while currently low, are expected by many to rise as we get further into 2022. If you have been thinking about getting a HELOC and spending those funds on investment properties, don't delay.
A cash-out refinance is similar to a HELOC because you borrow from the difference between what you owe on your mortgage and what your house is worth. The difference is that you don’t take a new loan out. You simply replace your current mortgage with a new one.
The new mortgage is for a much larger amount than your original loan, and you are paid the difference in cash. You also might be able to reduce your monthly mortgage payments as part of a cash-out refinance. This increased cash flow can be a great way to buy new residential or commercial real estate.
5. House Hacking
House hacking involves renting out parts of your current home. If you own a duplex or other type of multi-family home, this is easy, and you are probably already doing it. If you have a more traditional single-family home, you can still house hack.
Websites like Airbnb help property owners find people to rent out all or part of their homes. You can set up an account and start marketing your property within minutes. You can even rent out a room or two while you are still in the house, but renting the entire home is the best way to make a significant financial return.
If you live in a city with popular events that people travel for, the potential for charging a slightly higher rental fee than usual is enormous. For example, if you live in a college town with a football team that draws a crowd, you can rent your home for a weekend and pay for your entire month’s mortgage or more.
6. Find A Co-Borrower
If you can't find the money to purchase your first rental property, sometimes the best solution is finding someone who does. Equity partnerships occur when two or more people buy a rental property, with each person bringing something different to the table.
For example, if you have good credit but no cash for a downpayment, finding an equity partner with lousy credit but funds to put upfront might be a great fit. You share the profits, of course, but you also share the financial investment and risk. You will also need to decide on a clear division of labor, including determining who will collect rent payments, handle maintenance requests, and all the other responsibilities associated with owning a rental property.
Sometimes you can end up owning a property without cash upfront if a seller agrees to let you rent-to-own it. Also referred to as a lease-purchase option, the owner of the property charges the buyer an excess rental fee in the form of monthly or yearly premiums.
This excess rental fee is applied to the purchase of the home. Sometimes a large balloon payment is required at the end of the loan for the purchase to be complete.
8. Hard Money Lenders
A hard money loan won't have terms as favorable as a traditional loan with a down payment, but it might enable you to purchase a rental property with no money down. Hard money lending comes with upfront fees, called points, that are charged in addition to the interest on the loan.
Each point represents an additional percentage point of interest, and they usually range between 3 and 5 for hard money loans. The interest rates will be higher than a traditional loan as well. Hard money lenders typically charge between 10 and 18 percent interest.
9. Private Money Lenders
Private money loans don’t have the points found in a hard money loan, but their interest rates are still higher than a traditional mortgage. If you borrow money from private lenders, they will typically charge you between 6 and 12 percent interest.
The upside of using private lenders is that the approval requirements are usually much less stringent than those found with traditional financial institutions. In addition, the loan process can move much more quickly. Private money lenders don’t need to go through the underwriting, appraisal, and other steps that can slow down the approval of a traditional mortgage loan.
In addition to needing no money to start, real estate investments can be made without even purchasing a property at all. With wholesaling, you agree on a purchase price with a property owner and write up a contract for you both to sign. Then, you find a buyer willing to pay more than the agreed-upon price before the deal closes. The contract is transferred from you to the new buyer, the price is increased to what the new buyer has agreed to pay, and you keep the difference.
11. Government Loans
If a conventional mortgage loan isn't something you qualify for, several government-backed loans can help. Here are a few to consider.
The Federal Housing Administration (FHA) offers mortgage loans issued by a lender but insured by the federal government. Since the loan is backed by the government, banks are more likely to approve them for low-income or low credit score individuals and families.
If you have a low income now but expect it to increase, the FHA offers a Section 245(a) loan that features a graduated-payment mortgage (GPM). This type of loan starts with lower payments each month and then gradually increases the amount of the monthly payments as you get closer to the end of the term.
If you want to purchase a fixer-upper, consider an FHA Section 203(k) loan. This allows you to borrow more than the home is worth because it factors the cost of repairs into the loan amount.
The U.S. Department of Agriculture (USDA) offers mortgages to residents in rural areas with income too low for a conventional loan. These loans have zero down payment, so they are a great way to purchase property if you don’t have the cash to spend upfront.
Like FHA loans, USDA loans are guaranteed by the federal government, so lenders are much more likely to approve borrowers. There are no down payment or credit score requirements, but there are usually restrictions regarding debt-to-income ratio, income, location, and property type.
The U.S. Department of Veterans Affairs (VA) offers loans for military service members, veterans, and their spouses that require no down payment, no private mortgage insurance, and low-interest rates.
VA loans can be used for purchasing, building, improving, or repairing a home. They can also be used to refinance a mortgage. You can apply for a VA loan as many times as you want, but sometimes you will incur additional fees after the first time.
Good Neighbor Next Door Program
The U.S. Department of Housing and Urban Development (HUD) offers teachers, firefighters, emergency medical technicians, and law enforcement officers significant funding to purchase a home.
If you qualify, the good neighbor next door program, backed by HUD, will pay half of the listed price of the home you are buying. In return, you must commit to living in the house for at least 36 months after purchasing it.
Beyond the federal government, state and local municipalities often have grants available for people looking to purchase properties. These vary widely by region, so be sure to investigate what is available in your neck of the woods.
The U.S. Small Business Administration offers loans to small businesses guaranteed by the federal government that have several features related to real estate. These loans can be used for purchasing or enhancing property for a small business.
Qualifying businesses can apply for up to $2 million and don’t need to start repaying it for up to two years after the loan is originated. Loan funds can be used to buy equipment, pay employees, purchase real estate, and pay off various forms of debt
The federal government also backs native American direct loans through the VA. They are available to eligible Native American veterans to help them buy, build, improve or repair a home. They can also be used to refinance mortgages.
The home must be located on Native American Trust land, and the purchaser must live in the house. In addition, the tribal organization the purchaser belongs to must be participating in the Native American direct loan program.
Microloans are another form of lending that does not require a traditional financial institution. Like private loans or lease purchase options, these are loans between individuals. Microloans differ slightly, though, as they can be given by one individual or several different people. In many cases, a group of people will all pool their resources to meet the needs of an individual borrower looking to purchase property.
13. Real Estate Investment Trusts
Real estate Investment Trusts (REITs) allow you to buy a portion of a property instead of the whole thing. By pooling your resources with other investors, you can get a percentage of the profits on an investment property you wouldn't be able to afford on your own.
Investment levels vary greatly, but some REITs can be joined with as little as a couple of hundred dollars. You can even use retirement plans like 401ks to invest in REITs if you don't have the cash available to get started.
When Should I Start Investing In Real Estate?
The short answer is right now. Real estate investing often relies on the “long play,” where profits increase the longer you own properties. Property appreciation, for example, almost always grows year over year unless there is a significant market shift that makes property values drop.
If a shift like this occurs, holding on to your investment properties until the real estate market rebounds requires patience. Regardless of whether you are facing a hot or cold real estate market, time is on your side.Investing in real estate at a young age might seem daunting, but it’s actually the best time to do it. The sooner you begin, the more time you have left to watch your investments grow.
An empty bank account or poor credit doesn't mean you can't invest in real estate. There are many ways to get into real estate investing with little or no money. Whether it’s finding creative loan types, finding a partner to invest with, or using the property you already own to generate rental income, the possibilities are virtually endless.