The ability to understand, recognize, and take advantage of other people’s money is the hallmark of successful real estate investors. Why? Because they’ve mastered the art of how to invest in real estate with no money of their own. This is an attractive way for newer and financially strapped investors to get a foot in the real estate door without having the financial resources and credit to do so. On the other hand, veteran investors have found that using other people’s money liquidates their available funds and frees up their cash to invest more and ultimately make more.
If you want to learn how to invest in real estate with no money of your own, you are in luck. If for nothing else, it’s entirely possible to get started without investing your cash. That said, if you don’t intend to invest your own money, there is something else you need: a trustworthy network. The trick is in knowing who can help you and how to work with them.
There is no doubt about it: real estate investing with no money out of your own pocket is possible. You don’t need endless cash reserves of your own to acquire a deal. You need to know how to invest in properties with the right people at your side. If you want to invest in real estate with no money of your own, may I refer you to the following?
How To Invest In Real Estate With No Money: 11 Ways
There are many investment deals that transpire throughout the real estate market every year. Most of them are achieved through traditional lenders and institutions like banks, but some are accomplished through less traditional means. In most cases, it’s because the investor couldn’t raise the capital or didn’t have the credit score to do so. Here are 11 ways to invest in real estate with no money:
- Hard Money Lenders
- Private Money Lenders
- Wholesaling
- Equity Partnerships
- Home Equity
- Option To Buy
- Seller Financing
- House Hacking
- Government Loans
- Microloans
- REITs
It’s important to note that while investing in real estate with no money down offers numerous benefits, not all cashless deals are worthwhile. Investors equipped with a superb credit score will not only receive a wider array of options for working capital, but they’ll have more control over their financial obligations. As a real estate investor, it’s in your best interest to ensure that score remains top-notch, as it will provide the best money-saving outlet.
There are, however, situations where utilizing these options makes more sense. Consider the fact that cash buyers are viewed as more direct than conventional loan purchases when compared to traditional loans, which are slow to fulfill. With cash in hand, this strategy can provide an unprecedented upper hand at the negotiation table.
For investors with neither the credit score nor the financial capability to purchase a property through traditional means, it’s important to remember you still have options available. The following provides an understanding of the many ways you can invest in real estate with no money of your own:
1. Hard Money Lenders
Unlike private money, hard money lenders set forth fees in the form of points. Ranging from three to five, these points represent an added, upfront percentage fee based on the borrowed amount; this is on top of the interest rates hard money lenders charge, which range between 10 and 18 percent. Fees and interest rates are not universal with hard/private money lenders, so investors need to do their due diligence.
2. Private Money Lenders
Private money loans, which bring speed and efficiency to every transaction, will typically cost investors somewhere in the neighborhood of 6 and 12 percent interest on the money borrowed. The most popular course of action when financing real estate deals with no money down is through the use of hard or private money lenders. These loans are not given from banks but rather individuals and businesses aimed at financing investments for a return. Also, these loans are generally comprised of their own set of criteria, including more fees and higher interest rates to deal with. When using these types of lenders, a good rule of thumb is to find homes that can be purchased for 50 cents on the dollar.
3. Wholesaling
As the introductory course to real estate investment, wholesaling requires neither a high credit score nor large sums of money down. Instead, it simply comes down to having the right numbers in place. Real estate wholesaling, at its core, consists of finding discounted properties, assigning the contract to a potential buyer, and getting paid to do so.
4. Equity Partnerships
A very common path in real estate investment is through partnerships. Edward Shaw, Co-Founder of Leeline Sourcing, says, “A typical path in real estate investments is by using alliances. If you lack something as an investor, another person can make up for it.” Many partnerships will entail one partner finding a distressed property at a discounted price, while the other uses their credit score and working capital to finance it. Just make sure everyone is bringing something to the table. For more experienced investors, goals, risk, roles, and returns should always be discussed before creating any partnership type.
5. Home Equity
An alternative option for investors with no upfront money is home equity. This can be a viable option since property values have gone up in recent months, meaning there could be more capital available than you think. For investors looking to capitalize on this route, there are generally two options: rewrite the first mortgage and do a cash-out refinance, or keep the first loan in place and add a home equity line of credit.
6. Option To Buy
Sometimes referred to as a “lease-option,” this method allows investors to acquire properties without initially taking legal ownership. However, the investor will sign a legal “option to buy” from the homeowner at a specific price in the future. In return, the investor rents the property out on a long-term basis with an agreement in place to purchase the property at a later date for a previously set amount.
7. Seller Financing
Unlike traditional loans, seller financing works like this: the investor purchases the property from the homeowner/seller, rather than a bank, and the two sides sign an agreement that states an interest rate, repayment reschedule, and consequences of default that both parties have agreed upon.
8. House Hacking
House hacking, as its name suggests, is a real estate strategy that awards savvy investors the ability to take advantage of a unique situation. However, this particular exit strategy will witness investors earn rental income by renting out their primary residence. Those with multi-unit homes, for example, may choose to rent out the units they are not living in. That way, the rent generated may help pay for the mortgage, allowing the owner to potentially live mortgage-free. Those in single-family homes, on the other hand, may elect to rent bedrooms when they can. Either way, house hacking allows investors to mitigate the risk of vacancies while building cash flow simultaneously.
9. Government Loans
Government loans are perhaps the most well known of all the sources of funding made available to today’s investors. Here’s a list of the government loans you may already be familiar with:
- FHA Loan
- USDA Loan
- VA Loan
- Good Neighbor Next Door Program
- Fannie Mae Or Freddie Mac
- Energy-Efficient Mortgage (EEM)
- FHA Section 203(k)
- Native American Direct Loan
- Local Grants & Programs
However, it is worth noting that there are aspects of government loans that are not perfectly suited for rehabbing homes for a quick profit. VA Loans, for example, may only be applied to one home at a time. On the other hand, FHA loans tend to coincide with loan durations that are considerably longer than private and hard money lenders. What’s more, nearly all government loans can take months to receive approval, making them less attractive than just about every other option on this list.
Using USDA or VA loans can open you to more flexible options, especially if you first purchase your future rentals as a primary residence. This is largely useful when you are trying to invest in real estate with little or no money. You can purchase a home as your primary residence with zero cash down, stay in the home for a one-year minimum, then turn the home into a rental property upon moving out. Building equity also includes your primary residence, not just your rental properties. Credit score and down payment requirements are also more flexible when purchasing a primary residence. Living in properties you hope to turn into rental properties is common practice to avoid harsher lender rules.
You can finance a duplex with only a 3.5% down payment using FHA loans as long as you live in one unit. In turn, you can rent out the second portion of your duplex and gain extra profits. This strategy can help those who are just starting to invest in real estate with little of their own money. With a low down payment along with an influx of rent, you can cover a substantial portion of your mortgage payments.
10. Microloans
As the peer-to-peer economy continues to shape how real estate investors do business, microloans will remain a viable option. Issued by individuals, as opposed to banks and credit unions, microloans are yet another branch of peer-to-peer lending, making it possible for people to invest in real estate. Microloans can be issued by a single lender or aggregated across several investors, each of whom is expected to contribute a portion of the borrower’s needs.
11. Investing In REITs
Real estate investment trusts, called REITs, are a great way to start investing in real estate. Instead of purchasing physical properties, investors buy shares in a company that develops or manages properties. In this way, REIT investing is similar to stocks; however, REITS still allow investors to enjoy all of the benefits real estate offers. REITs are an excellent opportunity for generating passive income by real estate investing without having to purchase properties themselves.
Can You Invest In Real Estate With Bad Credit?
No cash or credit? No problem. For beginners seeking how to invest in real estate with no money down and bad credit, the first step is understanding your credit score. This number, which is essentially a statistical method for lenders to determine the probability of you paying back the money borrowed, is critical when acquiring financing for real estate. Quality scores equal better mortgage rates, resulting in long-term savings and ultimately benefiting you — the investor.
Credit scores are almost always based on a scoring model, with the most popular model being FICO. These scores range from 300 to 850, and ultimately determine a person’s creditworthiness. It looks somewhat like this:
- Bad Credit: 300 – 600
- Poor Credit: 600 – 649
- Fair Credit: 650 – 699
- Good Credit: 700 – 749
- Excellent Credit: 750 – 850
Although each credit agency will have its own evaluation systems, which are based on different factors, the most common credit score calculations are based on five major factors:
- Payment History = 35 percent
- Outstanding Balances = 30 percent
- Length of Credit History = 15 percent
- Types of Accounts = 10 percent
- Credit Inquiries = 10 percent
The first step is knowing your credit score and understanding how it impacts your investment strategy moving forward. Depending on your score, you may qualify for a traditional loan and be eligible to secure down payment assistance. Comprehending where you stand in the financial realm of credit will only enhance your real estate investment strategies, as well as your financing options. Learning to invest in real estate with no money down is important as an investor, but it’s not always your only option.
Avoid Becoming House-Poor
There is a phrase in real estate and finance called “house-poor.” The term describes people who stretch themselves too thin when buying a home and are left without any emergency money. When unexpected events happen, such as a job loss or broken appliance, these homeowners are in such a tight spot financially that it is difficult to recover. Unfortunately, this is all too common when attempting to invest in real estate with no money.
There are a few ways to avoid being backed into a corner financially when purchasing real estate. It is always a good idea to keep your emergency fund separate from other money and not include it in your estimates when buying a house. That way, if anything were to happen, you have funds you can rely on. In some cases reserving your emergency money may force you to make a smaller down payment than you want. Remember that even if you are required to get mortgage insurance initially, you can always refinance down the road when you have more equity in the home.
