Interested in investing in real estate but you’re afraid you have no money? There are creative ways to acquire investment properties without necessarily having the cash in your bank account.
When I closed on my first property, I was waiting to hear back from the bank on how much I need to bring. My banker works with numerous investors so I trusted she knew what she was doing. When I showed up at the bank, I just signed papers and never had to write a check.
I was able to make this “no money” purchase through the power leverage! Specifically, I was able to leverage the equity in my primary residence to acquire my first rental property.
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4 Ways To Invest In Real Estate With “No Money”
The biggest barrier that prevents people from investing in real estate is the lack of capital. People think you need a lot of cash to acquire an investment property.
Though that may be true, it doesn’t necessarily have to be your money. Seasoned investors leverage other people’s money and pay it back (interest included) through the profits generated by the investment property.
Here are 4 ways investors invest with “no money”:
- Hard Money
- Private Money
- Business Line Of Credit
Hard money is a type of loan provided by an individual or a company. However, they operate a little differently than a bank.
A bank normally checks a person’s credit and employment to see if they qualify for a loan. On the other hand, a hard money lender does not check for those things. Instead, a hard money lender values the quality of the deal more than the borrower’s employment history.
Hard money loans last for a shorter term compared to a traditional loan, such as 6-12 months, and also have higher interest ranging from 12%-15%! These types of loans work best for house flippers planning to rehab a property and quickly put it up for sale.
For example, a house flipper found a distressed property being sold for $50,000 that needs about $25,000 to fully renovate. The after-repair-value (ARV) is estimated to be $150,000.
The house flipper can borrow $75,000 from a hard money lender and pay back the loan through the sale. With “no money”, the house flipper was able to make a profit!
Another benefit of hard money is that it can allow a property to be closed in a matter of days rather than weeks. For example, traditional lenders usually hire an appraisal to justify financing. The timing of the loan now depends on the availability of the appraiser.
Hard money lenders understand real estate and will confidently support great deals!
They can be found by networking with other investors. A good place to start is attending a local real estate meet up group.
Private money is another “no money” strategy very similar to hard money. However, hard money lenders usually lend from their business. Whereas, private money lenders are nonprofessionals who are usually friends or family. They usually can tap into their 401k or other retirement accounts to lend money.
Also, hard money lenders usually charge high-interest rates. Private money loans have much lower rates and are even negotiable. The term also has the flexibility to be longer compared to a term on a hard money loan.
In this stage of my investing career, I don’t finance my deals using hard money or private money. However, if I wanted to scale my real estate portfolio quickly, financing through these options seems like a necessity.
I am open to the idea but I am hesitant because I’m not comfortable yet mixing money with friends and family. Therefore, I recommend if anyone who wants to use private money that they create a legal document clearly stating all the terms between all individuals.
Home Equity Line Of Credit
A Home Equity Line of Credit (HELOC) doesn’t disperse an entire amount like a loan. Instead, it’s a readily available amount that can be borrowed and paid back.
A HELOC is similar to a credit card where a borrower pays monthly interest payments on the amount borrowed.
For example, an investor has a HELOC with a balance of $50,000. That amount can be used towards a down payment on a house including rehab expenses. The investor can then pay back the balance through a sale of a property or the cash flow generated from a rental property.
The amount of the HELOC is based on a percentage of a person’s home equity. A house’s equity is the market value of the house minus the balance of the mortgage.
For example, the market value of a house is $175,000 and the mortgage loan balance of the house is $100,00. Therefore, the equity a person has in the house is $75,000! The greater the difference between the market value and the mortgage loan, the greater the equity a person owns.
The percentage used to determine how much can be borrowed is called the loan-to-value (LTV). Usually, LTV ranges from 75% to 80%. For example, an LTV of 80% with a home equity of $100,000 with yield a balance of $80,000 ($100,000 x 80%).
The interest rate on a HELOC is variable, which means it can change from month to month. Also, the time frame on when the balance is to be paid back varies between lenders.
If you’re looking for alternative ways to tap into your home equity, check out this Hometap Review.
Business Line of Credit
A Business Line Of Credit (LOC) is very similar to a HELOC because the available balance can be based upon someone’s home equity. This is the primary way I make down payments on my investment properties!
However, a Business LOC can also use other assets, such as stocks and cash. For example, an investor has $100,000 equity in their primary residence. With a 75% LTV, the investor can get LOC with a balance of $75,000 ($100,000 x 75%).
Furthermore, the investor also has $50,000 in stocks. The lender would then use the stocks as collateral and increase the LOC balance by an additional $50,000. Therefore, the investor now has a LOC amount of $125,000.
Some lenders will even increase the LOC by how much cash an investor has in their bank account
It’s important to note that different stock brokerages operate differently. You need to verify first if your account can be pledged as additional collateral. The broker will typically have their own Collateral Pledge Agreement for use.
Ultimately, reach out to a local bank and build a relationship with a banker. A great banker can come up with creative solutions to help finance your deals!
Creative “Low Money” Ways To Invest In Real Estate
There are other creative strategies investors use to acquire their investment properties that may not be “no money” strategies. Here are some “low money” ways to invest in real estate:
- Seller Financing
- House Hacking
Seller financing is when the seller acts like a bank.
An investor will still take legal ownership of the house. However, instead of making mortgage payments to a traditional bank, the investor will make payments to the previous owner.
For example, a seller fully owns their property and wants to sell it for $200,000. With seller financing, an investor can request to make a 5% down payment with a 10% interest rate.
Traditional banks usually require a 20%-25% down payment for investment properties. So, a 5% down payment is a relatively low out-of-pocket expense.
As for the seller, they also benefit. They will receive monthly payments with a 10% interest rate and avoid being taxed on a large lump sum of a sale.
This can be a “win-win” situation for both the buyer and seller. The terms between the two are negotiable that technically a person can buy a house with no money down!
Seller financing can still be accomplished if there is a mortgage on the property. This is what is commonly known as “subject-to”. The legal ownership of the house will transfer to the investor. However, the seller is still “subject-to” the loan and still responsible for making monthly mortgage payments.
Unfortunately, the risk with “subject-to” is that the previous owner could default on their loan and the lender could take possession of the property. Also, some lenders may have a “due-on-sale” clause, which requires the loan to be fully paid back once sold.
Therefore, the seller financing strategy is ideal for sellers that fully own their property!
House hacking is when an investor purchases a multi-unit property, lives in one of the units, and rents out the other unit(s). The tenants pay down the debt service while the investor lives rent-free!
This is a great strategy for those wanting to get started in real estate. Check out my article “House Hacking: Live Rent Free” for more details.
Wholesaling is when a person (wholesaler) finds a deal on a property and finds an investor interested in purchasing the property. The wholesaler then charges a fee to the investor. The better the deal, the more a wholesaler can charge!
Investors are always looking for deals, especially good ones! Unfortunately, searching for these deals can be very time-consuming especially if an investor has another full-time job.
Investors are willing to pay a relatively small fee to acquire a great deal. This is where a wholesaler can be beneficial.
For example, a wholesaler finds an absentee owner willing to sell their property and has them sign a contract. The wholesaler reaches out to an investor informing them of the deal. The investor pays for the purchase of the property while the wholesaler collects a fee.
With the power of leverage, there are multiple ways for a person to invest in real estate with “no money.” However, it’s important for investors, especially beginners, not to over-leverage themselves.
Real estate is cylindrical. The market will have high moments and low moments. Therefore, it’s important to always be prepared for those low moments.
Seasoned investors are financially wise when it comes to their money. They use conservative numbers when calculating a deal and have enough money in reserves to anticipate unforeseeable issues.
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