It’s a rule of real estate financing so old and revered that it might as well be carved into the side of a mountain: If you want to buy a house, you need to put down 20 percent of the purchase price.
But while that number is considered ideal for a getting a loan, there are a number of programs that allow you to buy an investment property with no money down, depending on the circumstances.
This is especially true for real estate investors, who have likely already bought their own home through conventional financing and are looking for other options for their short-term holdings or rental properties. Let’s take a closer look at how to buy an investment property with no money down.
1. Home equity loans
If you have equity in your home or another property it can serve as a down payment when buying a new investment property. Often referred to as a “second mortgage,” a home equity loan lets you borrow money by leveraging the value of your property.
For consumers, it offers an easy source of cash, although at a higher interest rate than what you pay on your initial mortgage. If you’ll be using the loan to purchase a rental property you’ll just need to keep your monthly balance sheet in mind.
2. Alternative financing
Alternative real estate financing – that is, financing that doesn’t come from traditional sources, like a bank – can take on a few different forms.
You can work with a private money lender, which is usually someone close to you. Friends, family or co-workers can all loan you the money at a specified interest rate. Private loans allow investors to close within two weeks, where traditional bank loans can take six weeks to go through.
Another possibility is a type of real estate financing known as “hard money.” Hard money lenders are either individuals or small companies that make loans based on the value of your property. Again, they are quicker to secure than traditional loans, but often charge much higher interest rates.
3. Owner financing
Also known as “seller financing,” this is a type of real estate financing in which the seller of a property finances the purchase with the person who wants to buy the home. It eliminates the cost of working through a bank but presents some significant risks for the owner, as it requires the owner to take on the default risk for the buyer.
To protect their interest, the owner/seller can require a larger down payment than the buyer would have to pay through a traditional mortgage lender. It’s a good arrangement for buyers with a higher level of cash liquidity.
4. Self-directed IRA
A self-directed IRA (or SDIRA) is a type of individual retirement account that allows account holders to make a wide variety of investments, including real estate investments.
Doing this can be complicated because SDIRAs are complex. It may help to work with an IRA custodian, as there are tax implications to your investing. But there are tax benefits to this type of real estate investing as well. As with any IRA investment, you benefit from tax-deferred income until the point you take your withdrawal.
How to Buy an Investment Property with No Money Down
If you’re still wondering how to buy a house with no money down, the experts at DIG, the Diversified Real Estate Investor Group, can help.
We are the premier real estate investor association in the Delaware Valley area, and provide members with the education they need on questions about financing their projects.
Our members include full and part-time investors, real estate brokers, bankers and property managers, all of whom have experience in buying, flipping and investing in properties.
Join us today or come to one of our next meetings to see how DIG can help you on your path to success in the real estate market.