So you’ve been looking for a rental, and you’d like to get started as soon as possible. Maybe you heard that rental investments can be a great way to establish multiple streams of passive income or long-term wealth creation, and you’re anxious to start?
But maybe you’re also short on funds. If this sounds like you, you’re not alone. A full 25% of survey respondents to a recent CNBC survey stated that they had no savings at all.
When it comes to investing, it’s commonly thought that you need a big chunk of cash to get you started. But what if you don’t have any money saved up? Does that mean you can’t invest? Well, that depends! The truth is, while investing in rental property usually does require some money up front, there are many, many creative ways that you can go about raising those funds. This includes taking out an FHA loan with very low down payment requirements, tapping into your home’s equity, finding creative ways to raise a down payment, and more.
Here are some different options you might consider if you don’t have a lot of extra cash –but would like to start investing in rentals.
FHA Loans
First up, let’s look at FHA loans. Sure, you’ll need some money for these, but they can be a good alternative nonetheless if you have a bit of savings, but not loads of capital just sitting around waiting to be spent. The great thing about an FHA loan is that it can give you a good chance to get on the housing ladder for a relatively low down payment. Currently, that amount is 3.75% for a 15-year fixed-rate mortgage if you have a decent credit score (usually, at least 580). For a $100,000 property, that’s $3,750. A lot better than the 20% that most banks want for investment property. One caveat with this loan, though. You’ll need to live in the home for one year first before you can list it as a rental. Alternatively, you could take out a mortgage for a multifamily unit like a duplex or triplex, reside in one unit, and rent out the rest. That’s also allowed under the FHA rules, as they allow you to purchase multifamily complexes with up to four units.
Looking for alternatives for a down payment? Be sure to check out: Creative Ideas for Down Payments
House Hacking
Purchasing a multifamily unit, residing in one unit while renting out the rest is also known as house hacking, and it’s a strategy that some first-time investors use to get started. With this strategy, you’ll be able to live rent-free, as the other occupants will (ideally) pay down your mortgage through their rental payments. While you will still need to be able to take out a mortgage, or obtain financing for this method, it’s a great way to get help with ongoing mortgage payments. And if you’re able to secure good financing, such as an FHA loan, it’s a good way to get started with rental properties, with minimal money down.
Look for a Rent-to-Own Property
While not all sellers are interested in this option, it is a great way to get started with your first investment property. Rent to own is essentially the seller carrying the mortgage while you make rent payments to them. The rent payments go towards the purchase price of the property. Once you have the property paid off, you can turn the house into a rental. Still, this type of option might be a bit tricky to find in today’s housing market, where housing inventory is tight, and homes just aren’t staying on the market that long. Still, it might be an option in some locations. Where can you find these homes? You could identify listings that have been lingering on the market for a long time; the sellers might be more willing to negotiate or consider a portal like foreclosure.com. See more places to find rent to own property.
Assume the Seller’s Existing Mortgage
Another option is to assume a seller’s existing mortgage. In some cases, a seller might be willing for you to assume their current mortgage. This means, instead of paying the full price of the home up front, you would just take over making payments on their mortgage for them. Keep in mind that you will want to see the mortgage terms before agreeing to this. You should also consider that not all loans are transferable and this won’t work in every situation.
Consider a Partnership
If you don’t have the money to put towards an investment property, you might be able to join forces with someone who does. A real estate partnership is essentially an agreement between you and another party. In situations like this, you could find someone who has the money and wants to invest but doesn’t have the time to find deals or oversee projects. You could structure the deal so that they put the money forward, and you put in the legwork, that is, all of the groundwork, research, property management, or renovations. Be sure to get an agreement in writing between you and the other party, outlining the details clearly so everything is clear. This agreement can be between friends, family members, or even colleagues.
Private Lenders
You might also consider going to a private lender for a loan rather than a bank. Private lenders could be hard-money lenders, or they could be willing family or friends who have the money but don’t want to get involved in real estate investing or don’t have time. As with a partnership, it’s important to have the terms written up in a contract. Keep in mind that while their interest rates may be higher than what you might be able to get from the bank, their terms will probably be more flexible and could work to suit your situation better.
Consider a Hard Money Loan
A hard money loan is a short-term loan that you can obtain from a professional private lender. Keep in mind, though, that interest rates are normally much higher on hard money loans, so make sure you have a clear plan for repayment.
Home Equity Line of Credit (HELOC)/Home Equity Loan
A home equity loan or a home equity line of credit could be another way to buy a property with “no money down.” Of course, you’ll need to have a home for this to be an option. A home equity loan works as a fixed-term loan, while a HELOC is a line of credit, much like a credit card. Both loans are taken out based on the amount of equity that’s in your home. They’re usually available to homebuyers who have already been able to accrue equity in their homes. For some investors, tapping into equity that’s in their home and using it to fund their first rental can be a good way to get started with investing.
Learn more about using a Home Equity Loan to buy a rental.
Bonus Tip: The BRRRR Method
While the BRRRR method is another method that requires a little bit of money upfront, if done correctly, you will make that money back fairly quickly, and you’ll be set for your next investment. In short, it’s a great way to continue investing if you’d like to expand your portfolio.
BRRRR stands for Buy, Repair, Rent, Refinance, and Repeat. It is a great way to get started in investing if you have a little bit of money to put down. In short, you’ll look to purchase a bargain property that’s in need of some repairs or renovations. You fix the property up and then rent it out. Once you have the repairs finished (and after six months have passed) you’ll then be able to go back to the bank to see about refinancing the property. The amount you’ll be able to pull back out will depend on how much equity you’ll have built up in the home, but since it’ll be valued using the ARV, or, after repairs value –which should be higher than the original valuation, you should be able to obtain some equity.
While this method is a little more involved and requires a little bit more work and some money down initially, it is a great way to get started in investing. Keep in mind too, that ideally, this is a good option for experienced investors as there are some risks involved.
Looking for more information on the BRRRR method? Read: The BRRRR Strategy Explained
If you’d like to buy a rental, but aren’t sure where to start and funds are a bit tight –don’t worry. There are things that you can do to get yourself into a position where you’re ready to buy. Your best option is to work to improve your credit score, as having a higher credit score will help you to qualify for the best loan terms, with lower down payment requirements and the best interest rates as well. Even with an FHA loan, a higher credit score means you’ll qualify for the best loan terms. Next, you’ll want to start learning all that you can about rental property investments –so that you will know how to spot a good deal when you see one. Learn about emerging markets, as the location where you invest is a significant part of generating good returns. Finally, start saving. As you can see, some of these options don’t require much down, but most do require something. Even having $5,000 to $10,000 saved up can help to give you options, making it easier to buy.
Then make sure you take that first step. You should do your research, but don’t feel that you have to learn everything that there is to know about each and every step of the process before you start. Instead, as real estate investor and expert Ken McElroy says, find the right team to surround yourself with and learn from them. Let them help you. With rental investing, you’ll want to assemble your team of experts –a property manager, an attorney, an accountant –and have them help you with your investment. Don’t feel like you have to go it alone.
Are you looking for rental property? Be sure to take a look at our available inventory. Find rental properties, many of them ready to go, complete with tenants. Coupled with our property management services, you’ll be able to start generating passive income right away.
Want to learn more about getting started with rental investments? Take a look at: Tips for Spotting a Good Investment Property.
Finally, you’ll also want to check out 30 Tips for Financing Your First Investment Property to see a complete list of ways that you can go about obtaining financing for your first investment –even if money is tight.
Note: This information in this article is intended to inform and guide. It is not meant to serve in place of advice from a professional lending agency. Loan terms vary considerably from lender to lender. Be sure to consult with your lender first to learn more about financing and to see what loan terms you qualify for.
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