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When it comes to building wealth, one asset that has helped many people to realize their full financial potential is real estate. It's been said over the last two centuries that roughly 90 percent of the world’s millionaires were created by investing in real estate. Whether buying a property to use as their home or to rent out to others, investors need to be conscious of the benefits that owning real estate can provide.
However, there's one big challenge keeping most people out of the game: capital. Conventional loans require the buyer to put down at least 20 percent before agreeing to finance the loan. Depending on the size of the property, that could mean the investor would need to upfront tens of thousands of dollars.
Where is the average person supposed to be able to buy real estate? One answer could be that they explore alternative options that involve virtually no down payment.
There are many ways to get started investing in real estate with little to no money. This can generally be done through lenders that support down payment assistance, programs such as VA or USDA loans, or seller-financed arrangements. In addition, investors can also profit from real estate indirectly by adding financial products to their portfolios such as shares of REITs and crowdfunded real estate.
In this post, we'll explore each of these options more closely and explain how investors can use them to their advantage to finally fulfill their dream of owning real estate.
Getting Started Investing In Real Estate With No Money
The first thing to know about buying real estate with virtually no money down is that there are already several programs and special types of mortgages designed to help people in this position. The following are some of the most commonly used ones.
Down Payment Assistance
Down payment assistance (DPA) is a term applied to an umbrella of programs designed to help homebuyers afford to buy real estate. Most of them are intended for first-time homebuyers and cannot be used for rental or investment properties. Applicants must also meet specific and strict eligibility requirements.
There are several types of down payment assistance programs available which result in the homebuyer putting virtually no money down upfront:
- Grants – Money that is gifted to the homebuyer through the government or a charitable organization. These funds are considered a gift and do not have to be repaid.
- Forgivable Loans – A loan in addition to their primary mortgage (also called a “second mortgage”) that the home buyer can use to cover their down payment. These loans are typically interest-free and don’t have to be paid back as long as the owner lives in the home for a certain number of years.
- Deferred-Payment Loans – A second mortgage that the home buyer can use as their down payment. These loans are typically interest-free and don’t have to be repaid until the owner decides to move, sell, or refinance their mortgage.
- Low-Interest Loans – A second mortgage that the home buyer can use as their down payment. These loans do have to be paid back, but the interest rate is relatively low compared to the primary mortgage.
When seeking out potential lenders, it would be a good idea for the homebuyer to check if down payment assistance is available. A good way to do this is to use a tool like Credible to apply for multiple offers at once. From there, applicants can check with the lending companies to see if DPA is offered.
For those people who’ve served their country, they can apply for a mortgage that’s backed by the U.S. Department of Veteran’s Affairs. This is essentially a private mortgage where a portion is backed by the VA department. In other words, they guarantee 25 to 50 percent recovery to the lender if the buyer happens to default or go into foreclosure.
The main benefit of a VA loan is that there’s no down payment required. This is only as long as the sale price of the property does not exceed its market or appraised value.
In addition, VA loan applicants also enjoy the following:
- No PMI (private mortgage insurance) – Whereas a conventional home buyer would have to pay PMI on a mortgage with less than a 20 percent down payment, VA loan applicants don’t. That’s easily another $50 to $100 per month saved.
- Better terms and rates – Because of the VA backing, these types of loans often carry better terms and interest rates than those from private lenders.
VA-backed loans are intended to help homebuyers afford a primary residence. Buyers cannot directly buy a property with a VA loan for the purpose of using it as an investment property. However, there is a small loophole.
There’s nothing against the rules that says you can’t rent out a portion of the house. For instance, a buyer could buy a duplex and lease out of the bottom portion to a tenant. As long as the owner continues to make the house their primary residence, up to three other units within the property can be rented to others.
Another popular type of loan that doesn’t require a down payment is a USDA loan. These are mortgages given by the U.S. Department of Agriculture's Rural Development office to help assist people living in select rural communities (10,000 people or less).
To be eligible, an applicant must:
- Meet income-eligibility – They cannot exceed 115 percent of the median household income
- Agree to personally occupy the dwelling as their primary residence
- Be a U.S. Citizen, U.S. non-citizen national, or Qualified Alien
Because these loans are designed to help people afford housing who otherwise couldn’t, they cannot be used for investment properties. Unlike VA-backed loans, owners are also not allowed to rent out any portion of their home to tenants.
Other Ways Investors Can Buy Real Estate with No Money
Down payment assistance and VA/USDA loans aren’t the only way to buy a property with no money upfront. There are several other strategies interested homebuyers can use to minimize the cost.
Seller Financed Loans
Most people use mortgage lenders because they need them to provide the seller with a check for the full asking price of the property. However, what if the seller doesn’t need the full payment upfront?
In some cases, buyers and sellers have effectively cut out the middleman (i.e., the lender) and agreed to a private loan contract among themselves. This type of arrangement is called seller financing.
From the buyers perspective, there are several advantages:
- It could be used for a primary residence or investment property.
- The terms are at the discretion of the buyer and seller. This means they are free to set their own interest rate, payment schedule, and clauses (or lack thereof) for things like appraisals, inspections, etc.
- The seller can also agree to finance 100 percent of the loan, meaning that the buyer doesn’t have to put forth a down payment.
What’s in it for the seller? Just like a bank collects tens of thousands of dollars in interest, this money would now go to the seller.
Of course, the downside to this arrangement is that the seller then bears the complete responsibility of managing and enforcing the loan. If the buyer were to default, then it would be up to the seller to take them to court and seek legal recovery.
Using a Lease-to-Own Option
Suppose someone is leasing a property that they’d like to buy in the future. If the landlord agrees, they could enter into a lease-to-own agreement where the tenant intends to buy the property at a later date.
Under this agreement, the tenant will usually pay the property owner a premium on top of their normal rental payments. In return, a percentage of the total payment would be applied towards the purchase price of the house at a later date.
For instance, a tenant with a monthly rent of $1,000 might agree to pay a higher rate of $1,200 per month with 25 percent going towards the house principal. If they decide in five years to buy the property, then they’d already have $1,200 x 0.25 x 60 months = $18,000 of credit to apply towards the principal.
People interested in finding lease-to-own property opportunities in their area can try a tool like Foreclosure.com.
In business, it's very common for entrepreneurs to find financial backers so that they don’t have to put forth all of the necessary upfront capital themselves.
Real estate is no different. Someone hoping to buy a property (or several properties) that are outside of their financial limits may want to consider finding partners to share in their venture. Depending on the structure of the business arrangement and how much these investors are willing to put forth, this could mean little to no capital is needed from the entrepreneur personally.
Several people could be potential real estate partners:
- Business partners already established from other ventures
- Family and friends
- Other small businesses or organizations
- Angel investors
Real estate entrepreneurs might also find the funding they need from:
- Peer-to-peer lending
- Crowdfunding sites
Remember that anyone who involves other parties has an ethical obligation to act in their best interest financially. This means not taking unnecessary risks and making sound financial decisions that will benefit the group as a whole.
Alternative Ways To Invest In Real Estate With Little Money
There’s one more way for someone to invest in real estate with a lot less money than what they’d need to purchase a piece of property. Plus, it’s an option that will save them the hassle of having to actually manage the property themselves.
This can be accomplished by investing in property indirectly through financial products that specialize in real estate holdings: REITs and crowdfunded real estate.
REIT stands for “real estate investment trust”. This is a company that owns and operates income-producing properties, finances mortgages to other companies for similar purposes, or is a hybrid of both.
REITs typically specialize in commercial real estate that would be inaccessible to the common investor. Such properties might include:
- Office buildings
- Shopping centers
- Medical parks
In return, shareholders are rewarded with handsome dividend payments from the profits that the REIT has earned.
Investors can buy shares of REITs in the open market just like stocks. This can be done through their regular brokerage account or through a retirement account (which would give them special tax advantages). If the broker allows the purchase of fractional shares, then the investor can put forth as small of an amount as allowed by the platform they’re using.
Crowdfunded Real Estate
Similar to REITs, crowdfunded real estate allows investors to buy shares of large real estate ventures and share in the profits through lucrative dividend payments. However, the main difference is that the investor funds the project directly (as opposed to funding a company) and so there’s more transparency about what takes place.
Some crowdfunded real estate platforms allow users to get started with as little as $10. A popular option to try is Fundrise.
Investing In Real Estate With No Money Is Possible
Real estate can be a lucrative path to financial freedom. Those who want to get started don't need to let a lack of capital hold them back. There are many ways to invest in real estate that require little to no money.
Down payment assistance programs, VA-backed loans, and USDA loans are all good ways to avoid needing a down payment. Finding opportunities for seller-financed loans, lease-to-own options, and recruiting partners can be other ways to minimize your upfront costs.
Of course, investors can also profit from real estate without actually physically owning it. Financial products like REITs and crowdfunded real estate make it possible to benefit indirectly from commercial ventures for as little as $10.
Whether the goal is to get a primary residence or an investment property, buyers don't have to let a down payment stop them from pursuing their dreams. By utilizing one of these options, investing in real estate may be closer in hand than they realize.