Most people are intimidated by the idea of investing in real estate because they think that you need a lot of money to do it.
While having a giant down payment does makes it easier to buy rental property, you can definitely start investing even if you don’t.
We’ve got some really cool and creative ideas on how to do exactly that. Here’s a preview of the categories:
Get a Partner
Down Payment Assistance Programs
Hard Money Loan
Peer to Peer Loan
Convert Home to Rental
Buying “Subject to”
Let’s get into it!
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Table of Contents
15 Ways to Buy Rental Property for No Money Down
Get a Partner
If you want to invest in real estate but don’t have the down payment, one of the most common strategies is to find a partner who is willing to front the cash in exchange for a good return on investment.
These arrangements can be structured in many ways. It can be a simple loan, which would be repaid based on terms you and the partner mutually agree on.
Or it can be a profit-sharing arrangement where the partner gets a piece of the profits on the property (both ongoing cash flow and net profit when sold).
There are more complex variations of these, which some of the real estate crowdfunding platforms use when you invest with them (in that model, you are the “partner” and you’re giving them money to invest in properties).
Hard Money Loan
As I was researching this topic, I ran into a lot of articles suggesting the use of “hard money loans” to get around the need for a down payment. Hard money loans are private loans that a real estate investor can use to finance properties. They are often short term in nature and tend to last less than a year.
Hard money lenders are focused on the loan to value ratio (which is the amount of the loan compared to the value of the property). So if you find a deal where you are getting a property for much less than the market value, you may be able to convince a hard money lender to finance the entire purchase price because the ratio still works.
I wouldn’t count on it, though – you need to find a really good deal. Plus you would need to refinance out of it pretty quickly.
Using hard money lending as a no down payment strategy might work for a flip because you are getting out of the loan quickly, but for rental properties, I think there are better options.
Peer to Peer Loan
Peer to peer lending is a fine option. You basically use prosper, lendingclub, or any of the other peer to peer lending platforms to apply for a personal loan.
If you get accepted, you can use that money to fund your down payment. Here is a good comparison chart of various peer to peer lending platforms.
A more traditional option is a personal loan from a bank or credit union. Similar approach here – just apply and use the funds for the down payment.
You may be able to take out a loan against balances in your 401(k) to fund your down payment. This option is a bit more exotic than the ones discussed above.
But the cool aspect of this approach is that you are borrowing money from yourself, so you are paying yourself back (with interest).
Not all employers allow you to do this and there are limitations on how much you can borrow (the lesser of 50% of your assets in the 401(k) or $50,000).
If you pursue this option, one thing to note is that you will need to pay back the entire loan balance within 60 days if you leave your job.
If you don’t, the withdrawn amount will be subject to taxes and penalties if you are under 59.5 years old.
Obviously, borrowing from your 401(k) may not be ideal from a retirement planning viewpoint because that money should be dedicated for retirement.
But if you are aware of the risks and feel that investing in rental property is a better path toward securing your retirement, this is an option you may want to explore.
Update: If you have been affected by the pandemic, the CARES Act allows loans up to $100,000 and has relaxed other requirements for 401k loans (like allowing you up to 6 years to repay the loan). Source: CNBC
401(k) Hardship Withdrawal
Alternatively, you can tap funds in your 401(k) by applying for a “hardship withdrawal.” These funds may be used to buy a house that you will live in for a period of time and then rent out.
There are some rules around what can qualify as a hardship withdrawal, but home buying expenses for a principal residence are included.
If you are approved, you can withdraw those funds without paying penalties, but you still must pay taxes on the withdrawal.
There are a lot of regulations and potential financial and tax consequences associated with this type of withdrawal, so I would be careful before pulling the trigger on this (and, as with any of these strategies, you should definitely consult with your tax and financial advisors).
For this reason, I prefer the borrowing option. One good thing about the hardship withdrawal option though is that the funds do not have to be repaid, unlike the 401(k) loan.
Update: as with 401(k) loans, if you have been affected by the pandemic, the CARES Act allows you to withdraw up to $100,000 without the normal 10% penalty and allows you three years to pay the tax liability arising from the withdrawal. Source: CNBC
Did you know that if your securities brokerage account is a margin account you may be able to use that margin (which is basically a loan from the broker to you) to fund your down payment?
There are some brokers that offer really low-interest rates for margin accounts right now, so it could be an interesting option.
But there are significant risks associated with this strategy. Namely, if the securities that are backing up the margin loan decline meaningfully, you may get a “margin call.” That is really bad and it could cause you to sell your securities at a depressed price.
I wrote an article discussing in detail the pros and cons of this form of investing if you are interested in learning more.
If you have a home equity line of credit (HELOC), you can draw money from your HELOC to fund your down payment. This is a common practice among real estate investors who want to use leverage to maximize their returns.
The biggest advantage of this option is its convenience – no approvals or third party involvement needed. You just stroke a check
Of course, there are risks to this approach. The biggest being that if you default on the HELOC, you can lose your home.
HELOCs can be on rental properties too. So if you already own rentals and they have enough equity, you can extract some of that equity through a HELOC and use it to expand your real estate holdings.
CLOSING THOUGHTS ON BORROWING:
As you can see, there are many ways to fund your down payment by borrowing funds.
Bear in mind that borrowed funds deposited in your checking account may need to be “seasoned” for a period of time before you can use them as a down payment. Typically funds are considered seasoned after around 60 days, although some lenders may have different seasoning timeframes.
Word of Caution: The borrowed funds under some of these strategies may show up on your credit report and the payments on that debt may be counted toward certain ratios that need to be met to qualify for the mortgage.
Convert Your Existing House to a Rental
If you have an existing home, you can convert it into a rental property and buy a new home with an FHA loan. This can be a low down payment option because FHAs require as little as 3.5% down if you qualify. Source: hud.gov
To get this low down payment, you need a credit score of 580 or above. If you don’t know what your credit score is, you can get it through Experian or Transunion.
If your score is bit banged up and you want to give it a a quick boost, Experian offers a product that is designed for that purpose.
It is worth highlighting that FHA loans are not just for first-time homebuyers (a common misconception), so this strategy can be used even if you already own a home.
Source: the mortgagereports
Although a 3.5% down payment is not the same as a zero down payment, it is pretty small compared to the 15% down payment required for most property purchases.
And you may find it much easier to actually turn that 3.5% down payment into a “no money down” situation with some of the other methods discussed in this article.
Here’s what I mean.
Imagine you are looking to buy a $200,000 home. If you have a normal mortgage, you need 15% down or $30,000. If you get a 3.5% down FHA loan, you only need $7,000.
If you are using the partner strategy to get a no money down deal, try asking your rich uncle for $30,000. Unless he has more money than sense, you will need to do some real convincing. But $7,000 is a much easier sell.
What if you only asked him for $3,500 and tried to find a $3,500 loan through peer to peer lending or other sources? The probability of getting a “yes” from him is getting pretty good, right?
Using that same example, getting a $3,500 loan for the remaining amount is going to be much easier than a $30,000 loan, no matter who the lender is.
Want to tap your 401(k) for a loan instead?
You might not even have $30,000 in your 401(k), let alone the $60,000 you will need if you get a conventional mortgage (remember you can only take out 50% of the value of your 401(k) as a loan)
But there’s a good chance that you may have $7,000 in your 401(k), which you can use to fund the $3,500 shortfall you still need under our FHA down payment scenario.
The lower down payment really makes everything easier and gives you a higher probability that these other methods (or any combination of those methods) actually get you to your goal.
One last thing I want to mention on this strategy. After you have lived in your new place for a while, you can rinse and repeat this process (i.e., buy, live for a while, rent out, buy new property, live for a while, rent out, etc.).
I know of real estate investors who have collected a very nice portfolio of rental properties this way.
House hacking is a real estate investment strategy where the investor buys a small multi-family property (normally 2-4 units), lives in one of the units, and rents out the others. The rent from house hacking can allow the investor to live in the property for free or at a greatly reduced cost. In some cases, the investor may house hack his way to a profit each month.
Buildings with four units or less work best because you can still get an FHA loan.
As with the previous strategy, this is not a “no money down” solution, but you get to purchase a multi-unit property with only 3.5% down.
And, as I said before, you will have a much easier time finding the money for a 3.5% down payment as opposed to the standard 15% down payment.
As I mentioned above, an added bonus is that you can use the rent you are getting from the other unit(s) to cover some or even all of your mortgage payment. That’s huge.
You can really skyrocket your wealth if you recycle this strategy (similar to what I discussed in the prior strategy) because you are gaining multiple rental units each time you do so.
I wrote an in-depth article on investing in small multi-family units, which includes a great discussion of house hacking and its awesome benefits.
Bonus tip: I also compared house hacking to room renting (which is another great strategy for getting extra income through your property). We compared them head-to-head based on actual data that I pulled together. To learn the winner and get some great info on both strategies, check out my article here.
Down Payment Assistance Programs
There are programs offered by the federal government (Chenoa Fund) for first-time homebuyers who meet certain low-income requirements. These programs offer down payment assistance of up to 3.5% of the purchase (at a 0% interest rate to boot).
So here’s how it works. If you get an FHA loan that requires a 3.5% down payment, you can use the down payment assistance loan (which is exactly equal to the 3.5% down payment you need) to get a house for no money down.
If you make 36 consecutive payments on your mortgage and you meet certain eligibility requirements you do not need to pay that down payment assistance loan back. So basically the government has paid your down payment for you.
If you are interested in learning more about this program (including their eligibility requirements), check them out here.
There are individual state programs that offer similar types of assistance as well. Here’s a pretty good compilation of them courtesy of the US government (HUD).
Now for all of these programs, you need to actually move into the property and live there for a while before renting it out as an investment property. There may be minimum requirements for how long you need to live in the property, so I would consult the specific program’s terms.
Honestly, even if you have to stay there a while, there are worse things. If you qualify for this type of program that means that you may have not purchased a home before. This can be a fantastic way to enjoy the many benefits of homeownership, even if you can’t transition this into a rental for some time.
Finally, I want to mention that there are zero down payment programs offered by the federal government called USDA loans. These may be used if you are buying your primary residence in rural areas.
There are also VA loans available to active members of the military, honorably discharged members and spouses of military members killed in active duty. VA loans are also zero down.
If you have a Roth IRA, you can withdraw the “contributions” portion of your balances without penalty or taxes at any time and for any reason (because you have already paid taxes on that money).
Obviously, if you want to withdraw contributions from your Roth IRA for a down payment on a rental property that is 100% allowed.
If you have a traditional IRA, the rules are a lot more complicated. If you qualify as a first-time homebuyer, you can withdraw up to $10,000 to buy a home that you are going to live in.
You will still owe taxes on that withdrawal, although you can avoid penalties. For a fuller discussion of IRA withdrawals, check out Scwab’s article.
Obviously, the traditional IRA is a much less attractive option because not only are you limited by the $10,000 cap (which is a lifetime cap), you cannot directly invest that money into a rental property because you must use the funds for a personal residence. You have to live in the property for a while, just like with some of the other options outlined above.
Creative Real Estate Investing
This next series of ideas is a bit off the beaten path. These strategies are typically used by experienced real estate investors and they carry with them a fair amount of complexity and risk.
But to provide as complete a picture as I can, I have included them in the list.
This strategy is pretty straightforward. Instead of going to the bank to get a mortgage, you negotiate with the seller to provide you with financing so you can buy the property. You get them to agree to finance 100% of the purchase price because you do not want to put any money down.
The problem is that most properties have mortgages on them. So either the seller has to have no mortgage on the property or they need to figure out a way to address any “due on sale” clause in their loan agreement, which requires repayment of the mortgage in full if the property is sold.
Some mortgages are assumable (FHA, USDA, VA), so there may not be as much of an issue for these types of loans, but you need to look into it.
In addition, you need to find a seller that does not want any money at closing and is willing to take on the risk that you will pay them back over time.
If you can find a seller that checks all of these boxes, then seller financing may be a workable “no money down” option (assuming of course that the numbers make sense too).
In this method of investing, you buy the property “subject to” the existing mortgage. In other words, the original mortgage is not wiped out when you buy the property – you inherit it.
If you want to do this in a “no money down” way, you need to find a seller who is willing to walk away from the property and receive no profit.
This type of investing can also trigger due on sale clauses, so you need to be very careful about buying your rental with this strategy.
Lease options are another way to invest in a rental property with no (or little) money down. The typical lease option works like this.
You have found a property that you are interested in buying as a rental but you don’t have the money for a down payment. You talk to the owner to see if they are willing to offer you an option to purchase the property along with a lease to the property.
If they are living in the house and need money to buy a new place, it will be a tough ask.
For example, let’s say the property is worth $100,000 and you offer the owner $3,000 to have the right (but not the obligation) to purchase his property in five years for $100,000.
You also get a lease that allows you to rent out the property at a discounted rate of $1,000 per month for the next five years (let’s assume market rent is $1,100). Your argument would be that you should get a lower than market rent because you are taking on such a long lease term.
If the owner is having a hard time selling the property the traditional way, they may take the $3,000 now and be happy that they found a 5 year tenant.
You now have a five-year lease and control the property for $3,000 instead of the $20,000 down payment that you would have needed under the traditional buying method.
You then go out and find a tenant that will rent your place for $1,200 and you pocket the difference between your rent and the tenant’s rent each month.
In five years, maybe the property has appreciated to $110,000. In that case, you can exercise your option to buy it for $100,000 and earn additional profit through this arrangement.
There are more advanced strategies when it comes to lease options, like sandwich lease options, where you offer a “rent to own” program for tenants. In that strategy, you do exactly what I described above, but when you are looking for tenants you offer them a lease option.
So they pay you $4,000 as an option fee to buy the house for $110,000 with a rent of $1200. You pocket the difference all around.
There are a lot of real estate investors who use this strategy with success, but I would tread with caution before moving forward because there are some legal pitfalls that you must navigate when using this strategy.
Related reading: If you want to learn more about lease options, I have written a number of articles about using this niche investing strategy. You can read an article comparing them to traditional rental property investing here and an article discussing sandwich lease options here.
So there you have it – 15 ways to get a rental property with no money down (or in some cases very low money down). If you have questions or other ideas, please let me know in the comments section.