Nothing is free, or so the saying goes. When it comes to real estate, some things can be free, or cost-neutral. Strategies such as small-town vacant land, house hacking, using other people's money, and seller financing are all ways real estate investors can essentially obtain a free property to add to their portfolios.
Here's an overview of what free property is, the pros and cons of each type of cost-neutral acquisition, and whether real estate investors should try to get in on the action.
Free vacant land
In hopes of raising the populations in small towns where economic activity has been limited, many states and municipalities offer land free of charge. These policies aim to attract newcomers to an area to help stimulate local economies. Conduct research on your state's homesteading or free land policies, and you may uncover some unique opportunities to acquire new assets.
Here are some current examples of state- and municipal-level free-land policies.
The City of Mankato is offering 26 free lots for the construction of new homes.
The town of Lincoln is offering over 20 new lots free of charge to newcomers to the town. Further, all of these lots qualify for a 10-year property tax rebate program.
According to the town's website, newcomers can "construct a single-family home in Curtis (meeting certain specifications) within a specified time period and receive the lot for free."
The township has identified 12 building lots it's willing to provide free of charge to applicants who wish to move to the area. The program website notes: "Lots are available for free or for purchase, depending on an applicants' income qualification. Independent of this program, the purchase price for a housing lot is $28,637."
The free land program in this town also includes businesses willing to set up shop in the town. The town website notes, "The amount of land offered will be determined by the number of jobs the business will employ."
The Buying Into Baltimore program offers forgivable loans for eligible applicants looking to move to that city. This will cost you $1,000, so not technically free, but still fairly low cost to obtain housing.
A state statute commission authorized a one-year pilot project titled the Dollar House Program to sell single-family residential properties owned by the city of St. Louis for $1.
And the list goes on. Check with local municipalities in your vicinity and your state's website for any housing initiatives involving free property or buyer incentives.
Another great way to live for free and get a free property is house hacking. The idea behind this is to purchase a small multifamily property, such as a duplex, triplex, or fourplex, to live in and rent out the vacant units. Although you will need a down payment, you can then live in one of the units and rent out the remaining ones to tenants.
This allows you to create rental income from your primary residence, and in most scenarios of housing hacking, you can live essentially expense-free. Consider a triplex that you buy as a primary residence with a 5% down payment:
- Assume a $200,000 purchase price, with a 4% mortgage interest rate.
- Down payment: $10,000.
- Expenses: Taxes, utilities, and insurance add up to $500 monthly.
- The mortgage payment is roughly $900.
- The total cost to you: $1,400 a month.
That said, if you were to rent out the other two units, you would only need to get $700 a month per unit to cover your ongoing costs. If you were to get more, then that's just gravy!
One of the best ways to obtain property assets for free is to use other people's money (OPM). Often referred to as real estate syndication, this is the process of packaging together an investment deal and getting private investors to give you money to make that purchase.
Consider the following example:
- You find a small, 8-unit apartment building that needs a substantial rehab job.
- The apartment building is priced below market because of all the delayed maintenance.
- You estimate about $100,000 in renovation costs, and the seller is willing to sell the property for $500,000.
- You need a 25% down payment, the $100,000 for rehabs, and a 5% buffer for cost overruns, totaling a cash requirement of $250,000.
- You find two investors, each willing to put in $125,000.
- They'll be passive investors, and you'll oversee everything from acquisition to renovations to ongoing property management.
- You and the two investors each take a 33% interest in the project.
Assuming you have the right property and access to private capital, these scenarios can be a win-win for both the active and passive investors.
This involves sourcing a deal, conducting robust financial analysis, and packaging it all together in a marketing prospectus for investors to review. Based on your presentation of the deal, investors will provide funds to you to make that purchase in exchange for an interest in that property or the debt associated with it.
Keep in mind that all the property management expectations are on you, the active investor and partner. This includes but isn't limited to finding a tenant and tenant screening, actioning any maintenance request, overseeing any eviction, leasing, rent collection, paying property taxes, and so on.
Seller financing is a great way to minimize or eliminate an investor's upfront costs of obtaining a property. This typically occurs in two different scenarios. The first is where a seller is desperate to liquidate a property and is willing to take on some of the debt so the buyer can obtain a higher loan-to-value (LTV) ratio and therefore pay less money upfront. This scenario makes it more attractive for investors as they have to put little or no money into purchasing a property.
The second scenario is where the owner of a property is interested in selling but also wants some longer-term recurring income in the form of loan repayment. For example, an investor obtains a loan for 75% LTV, and the seller finances the other 25% as a second mortgage. In this scenario, it's critical that the investor is certain the income on the property will carry both loans.
With seller financing, it's important to know that there are two loans to be repaid. Although there is still debt associated with this method, it essentially allows investors to obtain a real estate asset with no money out of their own pockets.
The bottom line
What is a free property? Free property can take the form of vacant lots given by municipalities to encourage inward migration, or cities looking to gentrify certain neighborhoods by offering free or deeply discounted properties.
Investors can also dramatically reduce or eliminate the costs of acquiring and carrying a property by house hacking, using OPM, or exploring seller financing. The bottom line is that there are highly creative strategies out there that can be deployed to obtain free property, or at the least, assets that are deeply discounted.
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