The two extremes of buying investment property are buying outright for cash or buying using none of your own money. Most people's investment strategy falls somewhere between the two. There are several methods people use to buy investment property using no (or very little) money.
Buying investment property with no money down is a fairly common real estate investing practice. People call the practice using other people's money (OPM for short). It might sound like a proposition too good to be true, but there are some techniques that work. You just need to learn what they are.
Image source. Getty Images.
If you already own a primary residence
1. Get a HELOC
Once you have enough equity in your home, typically 15% to 20%, you can apply for a home equity line of credit. Depending on the amount you're approved for, you could buy an investment property outright, or you could use the HELOC money as a down payment on a property. If you'll use the HELOC for a down payment, you might not have any cash flow until you pay back the HELOC. You'll need to run the numbers to decide if the deal is worth it.
2. Do a cash-out refinance
Another method to use when you have about 20% equity in the home is to take out a new mortgage for more than what you owe, called a cash-out refinance. You use the extra money to either buy another property outright or as a down payment on a property.
3. House hack
You also can rent out your home, called house hacking. You can rent to one person or family or rent out the individual rooms. You would then rent an apartment or live elsewhere for less than what you're charging for rent.
If you don't already own property: using OPM
1. Seller financing
Seller financing is when the owner sells you their house directly. The owner would be the lender, not a bank or mortgage company. This works if you don't qualify for a traditional mortgage now but could in a few years.
Let's say you're currently renting a single-family home. You could ask your landlord if they'd be interested in selling you the house. If you've been paying rent faithfully, your landlord knows you have the means to do the deal. A real estate attorney can write up a promissory note, used in place of a mortgage, which lists the terms of the deal. You'll probably need to give the owner a down payment of around 10% of the home's price to get the deal done. The owner will also probably expect a payoff of the home in about five years, but the payments would be amortized, usually at 30 years. You'd then get a mortgage to pay the balance.
2. Wholesale
Wholesaling consists of finding and acquiring off-market properties with the goal of selling them to real estate investors for a profit. You'd be a middleman in a real estate deal and get a cut of the action by doing so. You would then sell the contract to buy the house to a real estate investor for more than the price you negotiated with the owner, keeping the difference.
3. Get a partner
This works if you have the time and expertise but not the funding. You would do the work of finding the property, getting a tenant, and managing the property. Your partner provides the down payment to acquire the property. You would split the profits depending on the sort of deal you and your partner negotiate.
There are hurdles to buying investment property today as we head toward a post-pandemic world because of limited supply and high prices. But real estate investing usually pays off. That's why so many people want in on it. Although difficult, buying investment property isn't impossible, and you'll probably find it's worth the effort.
