A study of 145-year asset returns in 16 developed countries found that rental properties outperformed equities.
But how can? rental properties outperform equities, with lower volatility and risk? Doesn’t a higher return mean a higher risk?
The answer is simple: there is a higher barrier to entry for investing in rental properties.
Buying rental properties requires money and skill
Anyone can throw $100 into an index fund. No minimum cash requirements, no education required. It is one of the great advantages of investing in stocks, despite their volatility.
But rental properties pose two huge challenges for new investors: they need more money to buy and they require more skills than investing in index funds.
At SparkRental, we can help you with the “skill” part of that equation. We offer free rental investment courses, free webinars, a free weekly real estate investing podcast and, of course, hundreds of free articles. But what about cash? Doesn’t it cost tens of thousands of dollars to buy a rental home?
Yes, but that doesn’t mean you can’t use tricks and hacks to get around the down payment requirements for real estate investments.
Buying a rental property without saving money
If you’ve ever wondered, “Can I buy a rental home with no money?” you are far from alone. Every real estate investor has asked the same question at one time or another.
Here are ten ideas for buying a rental property with no money. Or at least spend less money – there is no free lunch in life, but you have several options to reduce or even eliminate the down payment you need to buy your first rental home.
1. Consider Home Hacking First
Home hacking is the easiest way to buy your first rental home. And on top of that you score free living space!
The traditional house hack concept is simple: you buy a small multi-family home (2-4 units), occupy one of the units and rent out the other(s). The rent from your neighbors covers your mortgage and other housing costs, for effectively free housing.
And when you move, you keep it as a traditional rental home and the cash flow only gets better.
How does this help your down payment? Traditional lenders require much lower down payments on owner-occupied homes than investment properties. It’s a simple risk calculation for them: borrowers are much less likely to default on their home mortgage than a loan for a rental home.
A popular low down payment loan program is FHA, which allows a 3.5% down payment as long as your credit score is above 580. (And let’s face it, if your credit score is below 580, you probably need to work on paying off debts before buying a rental property.)
But FHA isn’t the only option — there are conventional mortgage programs that require even less money, sometimes no money at all.
Aside from down payments, conventional loan options also have lower interest rates, for lower monthly mortgage payments. Compare interest rates and loans on Credible and LendingTree, and talk to at least three traditional mortgage lenders or brokers before choosing a lender and loan program.
Finally, keep in mind that multi-unit properties are not your only option for home hacking. Also try these other home hacking ideas to score free housing!
2. The BRRRR method
A traditional model — which still requires cash, but you get it back — is the BRRRR method. The BRRRR strategy acronym stands for Buy, Renovate, Rent, Refinance, Repeat.
It works like this: you buy a fixer-upper with a downsizing loan, which does include a down payment. You then renovate the distressed property and finance the upgrades with the Purchase Rehabilitation Loan (try Kiavi or Lend for the initial renovation loan).
When the renovation is finished, you refinance the house with a long-term landlord loan (try vision) and withdraw your original money. It works because the new landlord loan is based on the new value after repair (ARV) of the property, not what you initially paid for it. So if you’ve created enough equity, you can withdraw some money when you refinance to cover your first down payment.
And if you’re struggling to come up with that first deposit, try some of the strategies below to borrow the deposit elsewhere. Keep in mind that while beginners love the idea of 100% funding, the BRRRR method is actually better suited to more experienced investors given the higher risk associated with higher leverage. Start with lower-risk strategies if you have a real estate investing beginner.
3. Seller Financing
Of course, no one is saying that you have to go through a loan program all the way.
Sometimes sellers will finance the property for you so you can negotiate whatever loan terms you want. Including the possibility to buy a rental property without depositing money.
This works especially well with property owners who don’t have a mortgage, or sellers who have inherited the property and don’t know what to do with it. Maybe the property needs repairs and the seller doesn’t have the money to make them.
Often they are happy to accept regular monthly payments for the property, taking the income along with a quick settlement and not having to deal with brokers and commissions.
Not every seller is open to owner financing, but many are. It’s worth exploring with them and can be an effective way to buy your first rental without paying any money.
4. Assume the seller’s mortgage
Even if the seller is not willing to finance the property directly, you may still be able to discuss with them how to buy a rental property without having to pay any money.
You can offer to take over the seller’s mortgage and make payments on their behalf. You step into their (presumably low interest) loan, so you only have to think of the remaining difference. Be careful about activating the “due on sale” clause in the existing mortgage.
Remember that when you buy a home with conventional financing, lenders often won’t allow you the down payment. They want your skin in the game.
But in this case, you are not borrowing a purchase mortgage, you are just taking the existing one and paying the seller separately for each difference.
That means you can pay them however you want!
You could borrow money from friends and family. Borrow from your credit card, or a personal loan. Or work out a loan yourself with the seller!