It can seem impossible to get into real estate investing with banks requiring 20% down payments and a 6 months reserve of cash to cover the mortgage to account for vacancies etc. If you can manage to secure enough cash to purchase a few properties it is certainly limited and makes it near impossible to reach that goal of making real estate investing a full time career. But wait! There are other ways to get in the real estate business, it’s not easy and you have to be creative and really have the desire to want to make it happen. I’ve listed a few of the ways that I know of that can get you on your way to a real estate investing career with no money down. This is not to say that you can be totally broke and appropriately manage rental properties because there costs associated with home ownership involved, taxes, home repairs, vacancies, etc.
Lease Options Lease options are a great and fairly simple way to get started investing in real estate without having to use your own money. Not only do you not need your own money you don’t have to have good credit either. The contracts are pretty simple and can be written to allow you to opt out of purchasing the property. With a lease option you lease the property with an option to buy it at some point in the future. The contract specifies a specific purchase price and the lease can be for any time that you and the seller can agree on. A longer lease period can allow the buyer (you) some advantages and flexibility to exercise your option to buy when the market is favorable and home values are high. Until the time you opt to purchase the property you would sublease/rent it to cover the payment to the seller, and hopefully make a little extra monthly cash in the process. When/if you decide to exercise your option you can either keep the property, or you can flip it and take your profits right away. This is a great strategy and has some flexibility and advantages over some of the other ways to purchase real estate with no money down.
“Hard money” Lenders This strategy works really well in a low housing market where housing has not fully recovered from the market collapse. There are definitely deals out there that would work very well with this strategy if you keep your eyes open. The basic premise of using a hard money lender is to find a deal where you can purchase the property and repair it with a 30% profit margin. There are companies that will loan 70% of the value, post repairs including closing costs which equals no money out of your pocket. Once the renovation is done a conventional, low interest loan can be sought or you may choose to flip the house.
Owner Carry An owner carry can be structured in a lot of different ways but is most often written up as a “subject to” agreement. One of the great things about an owner carry is that you can start claiming the tax benefits right away because you get the title and in fact own the property. These deals are a little more scarce to find because the owner is essentially on the hook for the property if you decided to not fulfill your end of the deal and stopped paying the loan. However, even though your name is not on the loan the bank or lending institution can and will still foreclose on the property and take it back if payments ceased. An owner carry basically is you agreeing to take over the payments on the property and the owner is deeding the house to you. These deals are in violation with the mortgage lending agreement but banks generally don’t make a stink about it as long as they continue to get their payments.
As with any business deals, proceed with caution and make sure that you are protected with well written legal documents. Are there any other scenarios that could allow purchase of real estate with no money down? I would love to hear your ideas!
Dulcey is a member of Rentec Direct who provides Property Management Software, tenant ach payment processing, tenant credit check, and criminal reports for property managers and landlords. The information in this post is just that, informational and should not be used as a substitute for legal advice.