The two extremes of buying an investment property are buying outright or buying without using your own money. Most people’s investment strategy falls somewhere in between. There are several methods people use to buy an investment property with no (or very little) money.
Buying an investment property with no down payment is a fairly common real estate investment practice. People call this practice using other people’s money (OPM for short). It may sound too good to be true, but there are some techniques that work. You just need to learn what they are.
If you already own a primary residence
1. Get a HELOC
Once you have enough equity in your home, usually between 15% and 20%, you can apply for a home equity line of credit. Depending on how much you are approved for, you can buy an investment property or you can use the HELOC money as a down payment on a property. If you use the HELOC for a down payment, you may not have any cash flow until you pay off the HELOC. You’ll need to run the numbers to decide if the deal is worth it.
2. Perform a cash-out refinance
Another method to use when you have around 20% equity in the home is to take out a new mortgage for more than you owe, called a cash refinance. You use the extra money to buy another property or as a down payment on a property.
3. Hack the house
You can also rent your house, called house hacking. You can rent to one person or a family or rent individual rooms. You would then rent an apartment or live somewhere else for less than what you charge for rent.
If you don’t already own a property: use OPM
1. Vendor Financing
Seller financing is when the owner sells their home directly to you. The owner would be the lender, not a bank or mortgage company. This works if you don’t qualify for a traditional mortgage now, but might in a few years.
Let’s say you are currently renting a single family home. You can ask your landlord if he would be interested in selling the house to you. If you’ve paid your rent faithfully, your landlord knows you can afford the deal. A real estate attorney can draft a promissory note, used in place of a mortgage, that lists the terms of the agreement. You’ll likely need to pay the landlord a down payment of around 10% of the price of the house to close the deal. The homeowner would also likely expect a payback on the house in about five years, but the payments would be amortized, usually over 30 years. You would then get a mortgage to pay off the balance.
Wholesaling involves finding and acquiring off-market properties for the purpose of selling them to real estate investors for a profit. You would be a middleman in a real estate transaction and get a piece of the action by doing so. You would then sell the home purchase agreement to a real estate investor for more than the price you negotiated with the owner, keeping the difference.
3. Find a partner
It works if you have the time and the expertise, but not the funding. You would be in charge of finding the property, finding a tenant and managing the property. Your partner provides the down payment to acquire the property. You would split the profits depending on the type of deal you and your partner negotiate.
There are barriers to buying investment property today as we head into a post-pandemic world due to limited supply and high prices. But investing in real estate usually pays off. That’s why so many people want to participate. Although difficult, buying an investment property is not impossible, and you will likely find it worth the effort.