Summary: What can you do if you don’t have much money for a rental property down payment? In this post, we share some creative options that can help you buy your first (or tenth!) property in the next year, even if you don’t have access to much money right now.
When we speak to coaching clients, colleagues, and friends, we frequently have people tell us that they don’t have enough money to make a down payment on an investment property.
Sometimes the issue is that they think that they need to buy some $500,000 property as a first purchase. In those cases, we can quickly help rearrange their thinking by talking through some of our best purchases, which have been $150,000 duplexes.
Other times, people are missing out on some of the resources that they do have. Whether it’s taking out a Heloc on their primary residence or selling a property that is bleeding them money or even doing a cash-out-refinance, most people have a lot of ways to access capital. They just don’t see it.
Sometimes, though, the real fact is that the people we’re talking with don’t have that much money to put down on a property. Maybe they just graduated from medical school or residency. Or maybe they just put all their money into a different investment property, but they want to keep growing and acquiring more now.
So what options do these people have to help them purchase an investment property on their own in the near future? And by near future, we mean the next 6-12 months.
There are actually lots of ways that people who have little in savings can still obtain properties besides the most obvious one: pick up more moonlighting shifts! These solutions are all about working smarter, not harder.
When you read through these options, know that not all of them will appeal to you and to your situation. The key is that you don’t need to do all of these. Just pick the one that matches your personality and life situation.
BRRRR
The most obvious option is to BRRRR. For those of you not familiar with this term, BRRRR stands for “Buy, Rehab, Rent, Refinance, Repeat.” What this looks like in practice is that you buy a property (most often a single family home, though BRRRRs can be done on any size property) for below market price. Usually the property is in bad shape, so that’s why you get it at such a steep discount. Because it is in bad shape, you usually need to get a hard money loan to buy it, since banks won’t lend to you. I’ll cover what a hard money loan is below.
After you buy the property for a discounted price, you quickly put in some of the extra money you borrowed from the hard money lender to fix it up (Renovate). Ideally, you get this done within a month so you minimize your hard money costs.
Then you proceed to rent it (Rent). Banks want to see a renter in place before the next step.
Your final step is going to a traditional (investor-friendly!) lender to get the property refinanced (Refinance). At that point, your traditional bank is going to do an assessment to determine the value of the property. Most banks will offer you at least a 70% loan to value. So, if you’ve bought a house for 60K, put 10K into fixing it up and then get it appraised for 100K, you’ll end up upping your full 70K out of the deal. This is how you buy a property for no money down.
What we’d do now is BRRRRH. The H is for hold. So keep the property and continue to rent it, bringing in cashflow. Then, move on and do another!
To learn more about and see an actual example of a BRRRR, check out our post on BRRRRing your way to financial freedom OKC style.
House Hacking
House hacking takes a bit more personal sacrifice than a BRRRR. That being said, it is an amazing option if you want to both buy something with little money down and live close to rent free, so you can save up money for your next deal.
When you house hack, you basically buy a property that you live in with renters, who pay your mortgage for you. One way it can be done is by buying a single family home and having people rent out other rooms. Another way is by buying something like a four plex, renting out three of the units, and living in the fourth one.
Because you are living in the property, you have access to loan programs that aren’t available to investors. As an investor, you have to put down 25%. If you live in the property, you could potentially have access to an FHA loan, which only requires 3.5% down. For a $400,000 property, that’s only $14,000 compared to $100,000 if you didn’t live in the property.
Kenji and I house hacked not so many years ago. (Read all about that here!) As attending physicians with a one-year-old, we actually moved into a duplex that we fixed up on the outskirts of Seattle. I’m certain many of our friends thought we were crazy. My parents definitely did not understand.
The driving force behind our move was to achieve financial freedom faster. Because we had this goal, the sacrifice was the clear right decision. And, actually, the investment turned out to be much better than we could have imagined, since we sold it for a $200,000 profit two years later.
Go Into a Partnership
I include the partnership section in here with a little bit of mixed feelings. Partnerships are great, until they aren’t. By that I mean that there can be awesome benefits to being part of a partnership. But things can go bad if both parties don’t have a shared vision or if unexpected things happen.
Those warnings aside, partnerships are an option for those with little cash but a lot of knowledge and experience. Partnering with someone who has a lot of cash but doesn’t know how to find a property, or doesn’t have the time to devote to managing a rental, can have upsides for both sides. You bring your skills, knowledge and time; your partner brings the money. Not surprisingly, partnerships are a frequently-utilized vehicle for cash-free investing.
Just make sure you have contracts to lay out roles, expectations, and contingency plans ahead of time.
Use the Equity in Another Property
You may own a personal residence or an investment property that has a considerable amount of equity that can be tapped in one of two ways.
One is a line of credit. This entails getting a credit line that you can borrow against when you need it (Heloc). You don’t pay any interest on the money borrowed until you actually borrow the money. And usually the interest rate on Helocs are quite low.
The other way is a cash-out refi. Unlike the line of credit, a cash-out refi is a loan that you start making interest payments on immediately, whether you use the money or not.
Seller Financing
Sometimes the seller may be willing to finance the entire purchase price. These types of arrangements aren’t common but not impossible. You just have to ask and find a willing participant.
Why would a seller consider financing your purchase?
One reason is taxes. If the seller can spread out the sale in installments, they can spread out the tax payments over years instead of paying it all at once. This method especially appeals to older owners, who want to ensure they have ongoing monthly payments over the years, like social security, while keeping their tax burden low.
Another big reason is that sellers can often get a higher price and sell their properties faster using seller financing. Imagine how many buyers you’d have lining up to buy your place if you solved their down payment problem for them. Many buyers are in the same boat as you–looking for ways to buy properties with little or no money down!
So What Are You Waiting For?
Do not let a lack of a large down payment be your rate-limiting step.
When you don’t have access to money, it’s time to get creative, to push yourself to learn new skills, to leverage what money you do have, and to put in some sweat equity.
Real estate empires aren’t built (and financial freedom at a young age isn’t achieved) by sitting back and doing nothing. You must act and think differently than you do now and force yourself to grow.
Need some help? Reach out to us and other readers on our Facebook groups to get ideas and connections that will help you get there faster!
