How to Buy an Investment Property With Little Money Down

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In my market it can take from $25,000 to $35,000 for me to purchase and repair a rental property that costs about $100,000.  Depending on where you live and the type of property you buy it can cost a lot more or a lot less to invest in a rental property.  There are ways to purchase a rental property without spending that much money, including buying as an owner occupant and turning a home into an investment property.  Using a line of credit, refinancing your home or even credit cards can also provide ways to purchase properties for less money as well.  Seller financing is a great way to put less money down on a home, if you can find willing sellers.  A hard-money loan refinanced into a conventional loan is another great way to put less than 20% down on an investment property purchase.

The figure I use for the cash needed to purchase an investment property, is based on properties in my market priced from $80,000 to $120,000.  This amount can vary greatly depending on how much a particular property costs, but let’s assume prices are similar in your market as well.

I am willing to spend this much money on a rental property, because I make at least 24% cash on cash return on all of my rental properties.  I give more details on my strategies, financing options and figures in my complete guide to investing in long-term rental properties. 

Starting out with less upfront cash as an owner occupant

$25,000 to $35,000 is a lot of money, but there are some ways to get started with less. The easiest way is to buy a property to live in that you can later rent out and keep as an investment. You can put as little as $100 down on a house, if you plan to occupy it for at least a year.  HUD and VA, have great low money down programs that allow owner occupants to buy a house for little money down. The process for turning a house you are occupying into a rental is fairly easy.

1. Buy a house as an owner occupant, that will cash flow if you were to rent it out.

2. Move into the house and live there for at least a year.

3. After the year is up, find another house that will cash flow well and purchase that home as an owner occupant.

4. Move out of the first house and keep it as a rental. Move into the new house and keep repeating the process every year!

Eventually you will be building up equity and extra cash flow that will enable you to buy properties with 20% down. If you could repeat this process 10 times, that would be an excellent way to get started, but no one wants to move ten times in ten years.  If you have a family, it can also be tough convincing them to live in a home that would also be a great rental.

No money down options

There are many books and programs out there on how to buy houses with no money down. I have not used these techniques and I am not an expert in this field. Many of these no cash down deals, involve high interest rate notes or simply delaying the cash influx for a few months. These strategies do not work well for me since my goal is long-term cash flow, but if you have no other options it may be worth looking into.

Refinance a Hard-Money Loan

This option can be more expensive than simply paying 20% down in the long run, but it can save you a ton of cash in the short term.  The idea is based on Fannie Mae lending guidelines, that will let you refinance a home with no seasoning period.  No seasoning period means you do not have to wait 6 months or a year after your bought the home to refinance.  Fannie guidelines base the refinance on a new appraisal of the home and they will allow a 75% loan to value refinance.  No cash can be taken out, but many hard-money lenders, will allow a buyer to borrow up to 100% of the purchase price of a home, plus repairs.  Since Fannie Mae guidelines allow a 75% loan to value refinance, theoretically an investor could buy a home for $100k, get a loan with a hard-money lender for $100k plus 30k in repairs for a total of 130k.  The investor can then refinance based on a new appraisal.  If the appraisal came in at $180k, then 75% loan to value would allow a refinance of $135k.  Fannie will not allow a cash out refinance, but the investor could refinance the full 130k loan amount.  This strategy can be costly due to hard-money fees, but it allows the investor to finance the entire purchase price and repairs!

This strategy can be very risky, because you are depending on a high appraisal to get your money out.  Refinance appraisals are not always as high as we would like them to be.  Make sure you have an exit strategy, if the appraisal comes in lower than you expect.

Saving money by becoming a Real Estate Agent

There are many advantages to having your Real Estate license, but the biggest is you can keep your commission on almost every house you buy. On a 100k house that could be as much as $3k dollars! Check out this article for more advantages of getting your license.  Being a Real Estate agent, also gives me an advantage when finding and purchasing great deals.

Line of Credit

I was able to obtain a line of credit on my personal residence earlier this year.  That line of credit was for $60,000 and required no appraisal and only cost me $26!  If you have equity in your home, a line of credit is a great way to get some extra cash to invest in rental properties.  You can pull money out of your line of credit for any reason and the money is available almost immediately.  With my lender they were able to tell me how much they line of credit could be instantly and for no charge.

Seller finance

Some sellers may be willing to finance a 2nd loan on a home they are selling to allow a buyer to put less than 20% down.  If your bank is wiling to offer 80% loan to value, the seller may offer to loan the other 20%,which would equal no money down for the buyer.  The seller may also offer a number of other loan to value percentages that will help a buyer get into to a home for less than 20% down.

Finding seller financed properties is the tricky part.  Most sellers are not looking to finance a loan when they sell.  Look for homes that have no loans against them and terms in the listing description that say seller financing available.  The sellers terms can vary greatly depending on how desperate they are to sell and what exactly they are looking to get out of the deal.  Don’t expect to pay 4% interest on a seller finance loan, they will want a premium on any money they lend.

Refinance

If you already have a home, you may or may not have equity after the recent market downturn. In most areas around the country, prices are going up and rates are at record lows. You may be able to refinance and get enough money to buy an investment property. Once you are able to buy an investment property, you can refinance it in a year. You should be able to take out as much as you put into the house and still cash flow with rates as low as they are.  I use the refinance technique all the time and provide more details here.

Buy a turn-key property
A turn-key property means all the repairs are completed and it is ready to rent as soon as you purchase the home.  There can be many advantages to buying a turn-key property, the biggest being you don’t have to pay anything for repairs.  You also don’t have to spend time waiting for repairs to be made, which saves money on mortgage payments, utilities and other carrying costs.  The downside on a turn-key property, is they are usually more expensive and provide less cash flow than a home that needs work.
Credit Cards
There are a few other ways to get quick cash that can be very expensive and they are usually reserved for people looking to do a quick flip.  If you have a killer deal you can’t pass up, you may consider these options, but I don’t recommend it unless absolutely necessary.  The easiest way to get quick cash is through credit cards.  You can get a cash advance or pay for repairs using your credit card.  If you do use a credit card to finance your down payment or repairs and can’t pay it off right away, don’t get stuck with 17% interest.  Do your best to get another card that will allow a balance transfer.  Many times you can transfer all of your balance and pay little to no interest for up to a year.  Hopefully that will give you enough time to pay off the card and you won’t get stuck with a 17% interest rate eating all your profits.
Conclusion
Rental properties can be expensive to buy, but there are ways to get into them with less than 20% down.  If you are short on cash, buying properties with less money out-of-pocket can accelerate the purchasing schedule and increase your returns.

Related Articles

My plan to purchase 100 rental properties by January 2023

My rental properties

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20 responses to “How to Buy an Investment Property With Little Money Down

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  10. You didn’t address IRA’s and 401’ks
    Lease for Rental to yourself, re-invest all monies back into Ira’s upon sale of house deposit any & all gains to Ira Then there is NO! Taxes on your Capital Gain’s, then repeat process over and over!

    • Thank you for the comment Miki,
      I think the IRA and 401k route deserve their own article. I’m not a huge fan of retirement plans because you have to wait so long to touch the money. But, I think that is a great strategy for those who already have a lot of money in retirement accounts.

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