Getting into real estate investment has its many challenges. It can be hard to acquire and save up the money needed for a down payment. Is it even possible to finance a property without any money down?
Yes, it is possible with seller financing. There are various ways to buy your first rental property with no money down. Here’s how:
How to Buy Your First Rental Property with No Money Down: Summary
- You can obtain a private loan, otherwise known as a hard money loan. These are quick and simple, but are expensive and have a quick repayment term.
- Use credit cards to buy real estate. To learn more about this financing method, check out How to Use Credit Cards to Buy Real Estate
- Seller financing is a creative way to get into real estate. You can get 100% personal financing without a lot of the red tape, but the interest rates will be higher.
Seller Financing Definition
The seller plays the role of the bank, and instead of writing you a check as a loan, write out a payment arrangement for the buyer to purchase the property.
Be wary that, in one way or the other, the seller will come out better by doing seller financing. You may not get traditional financing through a conventional lender, but through seller financing, you will get the money at 100% LTV (Loan-To-Value.)
For a more in-depth look at seller financing, Investopedia gave a detailed explanation of seller financing.
Why You Should Choose Seller Financing
You weren’t able to get traditional financing. If for some reason, you’re unable to get a conventional loan due to low credit or a high debt-to-income (DTI) ratio, seller financing is a creative way to get your first rental property with no money down.
The closing process is cheaper and faster. By cutting out the middlemen, and working directly with the seller, you can jump right into the closing without waiting for things like appraisal and inspections.
You could get a seller financing deal completed in one to two weeks. It’s similar to hard money loans to traditional financing.
Your down payment could be $0. You and the seller have the ability to negotiate anything, including the down payment. It is possible that you could acquire 100% financing, and put no money down.
During negotiations, if you can create an incentive for the seller, you could obtain 100% financing through the seller, and put down no money for the down payment.
Why You Should Avoid Seller Financing
You will pay higher interest rates. This is a definitive con of choosing seller financing. Because you’re cutting through so much red tape, you will pay for it through higher rates. 100% personal financing isn’t cheap.
You most likely will have to pay a balloon payment. Be prepared to make one large payment.
For example, if you purchase a $200,000 home and the seller financing term was for 1 year, at the end of that year, you will owe the rest of the balance. Whatever the balance is, you will owe that at the very end.
If you do not pay that balloon payment, you will default, and the seller can foreclose on your property.
You can avoid foreclosure by developing an exit strategy. This means you should create a plan for what to do at the end of the loan term. This could mean refinancing to a conventional loan or extending the term of the loan.
You can still get turned down from seller financing. Seller financing is not guaranteed. The seller can run your credit to see your credit risk and potentially turn you down.
They most likely won’t go into the detail a bank would, but if your credit is low, this is something to be aware of. You can check your credit with Experian at any time.
You Can Get Your First Rental Property With No Money Down
Creative financing can be a useful tool to acquire funds quickly and effectively. With both private loans and seller financing, you avoid the hassles of conventional loans. However, there are costs for the convenience of alternative financing options.
There are typically higher interest rates, shorter loan terms, and large balloon payments. However, these cons could be worth it for the right kind of investment. Make sure to never borrow more than you can pay off, always have an exit strategy, and understand all the terms of the loan you’re getting into.
Understanding Seller Financing From the Seller’s Perspective
The seller may have issues selling the property. If the seller is having issues selling their property, whether it’s the price being too high, or the neighborhood, seller financing may be a way to get the property off of their hands.
If it’s been on the market for 100 days, the seller may view it as easier to sell the property through seller financing, than not at all.
You are getting the property as-is. Even if you have an inspection done and find issues with the property, you have to know that you’re getting the property as-is. The seller won’t be fixing anything for you, so make sure the problems you find aren’t too material.
The seller gets away with not having to spend money to make any repairs or fixes.
The seller is getting higher interest rates. The seller is giving you the property at a higher than market value. You may or may not get a deal, but they’re getting rid of property taxes and insurance, but making about the same amount of money on the rental process without the insurance or taxes.
They can sell the promissory note to another investor/get their house back if you stop payments. This is the reason why you need to understand why the seller is offering seller financing. They can transfer the promissory note. Additionally, the house you purchased will be taken back if you miss any payments.
This is how you can get into your first property with no money down! Seller financing is a really great option if you follow the tips mentioned above. Knowing what you’re getting into is really important in real estate, and hopefully, you can use the information above to start investing in real estate!
If you want a useful resource to start building your portfolio with tangible private market assets, check out Diversyfund, where it’s easy to build a portfolio of fully vetted, multifamily real estate.
Investing in real estate will allow you the opportunity to have the financial freedom you deserve, but there are many barriers and challenges to real estate investment. The Orlando Academy created a “Real Estate for Beginners” course, based and designed around Orlando Miner’s 10+ years of real estate investing experience. With over $500,000,000 in transactions closed, the program has been proven to work over the last 15 years.