I was sitting in a meeting full of extremely successful real estate investors and the topic of what beginning investors want to know came up. Several topics got thrown around like LLCs, financing, locating deals, and management. The room did have a few newer investors, so we asked them. Without hesitation the answer was how to invest in real estate with no down payments. Here are eight ways investors do just that.
Wholesaling is probably the most common solution to the no money down mystery. The reason for this is the concept and execution are easy. The basic idea of a wholesale transaction is when a real estate investor locates an opportunity, but instead of buying the property, they “give” that opportunity to another investor for a fee. Let’s say you find a deal for $100,000 and after some repairs it is worth $190,000. Depending on how the numbers shake out, a fix and flipper may be willing to buy that house for $105,000 or maybe even more. In that example, the wholesaler can sell their interest in that house for $5,000.
There are many ways to execute this strategy, but the easiest is to make the contract assignable, which is as easy as putting in the contract that it is assignable, and then assigning the contract to the end buyer for the $5,000. Assuming you do it this way or something like this, you will never close on the house, so there is no down payment.
2. Subject To
Subject to investing is when you as the buyer purchases the home subject to any financing that is already in place. That means that you take title and own the home, but the seller’s loan remains. If you do not make the payments on that loan, the lender could foreclose and take the property from you, so it is essential to keep the payments current. This strategy is very powerful and as you can see, if you are not getting a new loan, there is no loan requirements which includes a down payment.
3. Lease Option
The lease option is a great strategy, especially for newer investors. I say that because it is simple to understand and easy for a seller to understand, which helps with negotiation and helps get the seller on board with the idea. In this strategy, you the investor will lease the property from the sellers for a period of time with the right to purchase the home at a set price. The idea is that the home will increase in value over time, giving you plenty of equity by the time you need to purchase. Before your option period expires, you can wholesale it to another investor for a profit or buy it and sell it to your tenant for a bigger profit. I go into great detail about this strategy in The 45 Day Investor to include how to find them, negotiate them, and do the paperwork.
4. Owner Carry
Owner carry can mean many different things, but the basic concept is having the owner accept payments instead of the money they are due upfront. If the home is free and clear, they may be willing to carry the entire amount, making it no money down for you, or they may be willing to carry enough for a down payment in a junior position. This will be heavily dependent on your lender if you are bringing in new financing, but typically private lenders and banks are more concerned with their equity position and less concerned with who put the money up.
I have several clients that mentor or help other investors for fees or equity. If they consult on a deal, especially if they help locate it, they can normally negotiate a small piece of ownership without them personally buying the property, contributing any cash, or sign on debt.
Syndication is a hot topic right now for sure. Several “experts” are out there teaching this strategy. Most of them are trying to raise money for their own deals. Syndication is extremely common in the commercial space. The concept is, a sponsor, the person who puts the deal together, raises money from private investors in exchange for a piece of the pie. The most common structure that I see is the sponsor raising all the money needed for the deal for a piece of the pie, let’s say 50% of the ownership, and then they retain the other 50% for their effort. In this example, the sponsor puts in all the work but none of the money. Although uncommon, you can easily do this with smaller real estate deals as well. Giving up a piece of the deal is a great way to raise the down payment needs from other investors.
A syndication falls into the partnership category, but I wanted to break this out into its own section because partnerships are not limited to syndications. A partnership can mean almost anything when there is more than one investor involved. If you are lacking a down payment, but have great income and credit, you can go 50/50 in a house with someone with the down payment. In that case, you are trading your credit for the down payment. Your option with partners is virtually infinite and is limited only by your imagination.
8. Hard Money
Of course, I have to mention hard money. Pine Financial Group has no down payment requirement. In fact, we will loan 100% of the purchase, all the repair money, and the closing costs if the deal supports it. We do cap our loan at 70% of the after repaired value (ARV), so the deal needs to work. In its simplest example, if you are buying a home worth $100,000 after some repairs and improvements, we can loan up to $70,000. If you are purchasing the home for $50,000 and have a construction budget of $15,000, we would be able to loan all the money needed for the deal.
No Money Down Does Not Mean No Money
Obviously, no money down investing can be very attractive, but that does not mean you should go out there and invest in real estate if you have no money. Cash reserves is the number one thing that will get you through a problem, should one arise. With no cash reserves, one problem can take you down and you can lose everything. Ask me how I know. Many investors choose to invest in no down payment deals so they can keep reserves in the bank instead of putting them into projects.