“The Book on Investing In Real Estate with No (and Low) Money Down: Real Life Strategies for Investing in Real Estate Using Other People’s Money” by Brandon Turner is a helpful “greatest hits” style overview of tools to have in a real estate investor’s toolbox, especially for those new to investing. Some of the presented methods can also be a good reminder for more experienced real estate investors about real estate investing’s potential creative financial options.
Turner starts out with broader advice for investors regarding what type of investor they are, what is their appetite for risk, how hard are they willing to work to find great deals, and what are the best scenarios for low money down options. He also warns of the risks, including reduced equity for a sale exit strategy, sometimes higher interest rates, and being knowledgeable about the non-standard tools. From there, he launches into specific strategies.
Owner occupied properties are a classic way to get started in real estate investing, either as a live-in flip or as a landlord in a 1 to 4 unit building (5+ units are considered commercial and they don’t have the same low down payment options as with home owner loans). Some of the best known and most dependable low or no money down owner-occupied conventional loan options include:
- FHA (Federal Housing Administration), where the buyer pays for mortgage insurance in return for getting a loan with a low down payment)
- 203k, where rehab costs are included in the initial loan instead of the buyer needing to pay for the rehab out of pocket after closing
- VA (Veterans Administration), where zero down loans can be obtained, but this is only for military veterans
- USDA (United States Department of Agriculture), available for specified rural locations and income levels
Partnerships are explored next. This includes partnering with people who can provide other value to a real estate transaction (funding, contractor, wholesaler, etc.). The costs, risks, and rewards can be distributed across the various partners based on the value they provide and who brings the deal.
Home equity loans and lines of credit can be a good source of funding “on demand”, if you have a good amount of equity in your personal residence and can find one of these funding sources through a lending institution. These options have become much less available than in the market run-up prior to 2008, but they still exist for owners with both equity and strong credit history. The idea is to use those funds as down payments on other properties, and ideally to pay down the home equity loan or line of credit through cash flow and/or refinancing the other property to get all the money back. Then repeat with another investment property.
Hard money is a high cost, but flexible, alternative. Funding can be obtained quickly, and the transaction is mostly based on the underlying property and not on the buyer’s credit history or assets. However, interest rates and upfront points are a lot higher than conventional loans, and the term of the loan is generally 1 year or less. Also, there either needs to be a lot of equity built into the deal at the initial purchase or else the buyer needs to put money down so that the initial hard money loan is usually around the 65-80% LTV (Loan To Value) points. Getting the hard money lender to also lend on rehab costs can be infrequent, too. However, there are exceptions available for both higher LTV and rolling in rehab costs. So, investors should keep asking around until they find the right match for their needs. More flexible terms generally require really solid purchase deals.
Private money can be a great source of funding, especially for larger transactions involving multi-units and higher value properties. This involves a lot of upfront work for finding and educating the private money partners, setting up SEC compliant legal documentation and processes, and managing everything through all stages of pre-purchase, closing, and post-purchase financial and communications management.
Lease options allow the “buyer” to control a property through a lease (not actual purchase) arrangement. The investor can then rent out the property to others and make income from the difference between their underlying lease with the actual owner and what the investor is able to obtain at a higher rate through their own efforts separately. This can be used for a single family residence up to a large multi-family community or even other commercial asset classes. The target property owner for this scenario is someone who does not want the problems and time investment of property ownership/landlording yet also does not want or need to sell a property immediately. The lease option also gives the investor the option to purchase the property at a pre-agreed price in the future, therefore providing the investor time to both understand the property’s potential and to line up funding sources for a future purchase. Lease options can also be used by an owner/investor as a