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 hard money and gift money. 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.
- You can use gift money to finance your real estate investment.
- 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. Read our article on Seller Financing.
What Is a Hard Money Loan?
A hard money loan is a type of loan that is secured by real property. It’s often considered a short-term bridge loan, with the lender being a private individual. It’s a quick way to get capital, but at a lower LTV and a higher interest rate.
Why Should I Choose a Hard Money Loan?
You will get 100% financing. When you’re able to get 100% financing, that means no money out of your own pocket. The entire cost is financed, thanks to private money.
Sometimes you need to get the deal done fast. If the seller is motivated and wants the deal done as soon as possible, a hard money loan can cut down the time to 2-3 weeks, or even one week if you have a good relationship with the seller.
There’s a lot less paperwork. The hard money lender will take a look at the property and give you the loan based on the property’s value, allowing you to not get bogged down with PNLs, credit, and other paperwork.
This is a short-term investment. This kind of financing is excellent for shorter-term projects like fix and flips, and you can refinance the loan in a few months. If you know the property value is there, and you got the property for under-value, a hard money loan could be the right choice.
Why Should I Avoid a Hard Money Loan?
You will pay higher interest rates. This is a definitive con of choosing hard money loans. You won’t be able to capitalize on the lower interest rates, and realistically will be facing 10-15% interest rates.
Because you’re cutting through so much red tape, you will pay for it through higher rates. 100% personal financing isn’t cheap. Remember that this is an interest-only loan, meaning that, at the end of the term, you will have to pay a balloon payment.
- Balloon payment: a large payment due at the end of a loan
If you got a $100,000 loan, your end-of-term balloon payment will be $100,000. The periodic payments you’re making are only your interest payments.
The loan term is short. Typically, hard money loan terms are 6 months to 12 months. It’s a very short time, but know that hard money lenders do not want to be part of long-term loans.
They’re not like a conventional lender that wants to hold your property as a mortgage for 30 years. Also keep in mind that, if you want to extend your term, you will most likely have to pay a fee.
Most hard money lenders are not nationwide. Hard money lenders tend to stick to their regions. It’s safer for them to lend in their own backyard, so this can prove to be a difficulty if you’re looking for lenders. They typically don’t advertise, and often go by word-of-mouth.
What is Gift Money?
Gift money is money that you receive as gifts from friends and family. You can use it to finance your down payment on your first rental property, so you can invest in real estate with no money down.
Things to Know About Gift Money
You have to confirm your relationship. You have to prove that this money is coming from a family member or friend and establish that the person giving you the money isn’t someone trying to profit off you.
You will have to fill out a gift letter. It basically says “I know this person; they’re going to give me the money and it is not a loan.”
How much can you be gifted? $30,000 is the greatest amount that can be used as gift money before the gift taxes are implemented. Typically, this is more than enough for the down payment.
Make sure that you can get a signed statement from the gift giver, and that the gift giver has a paper trail of where the funds came from.
The money has to be seasoned. It’s important to ask how long the money has been sitting in the gifter’s account. The bank will ask you for at least 2 months of bank statements to prove that the money is “seasoned.”
Not all loan types will allow gift money. Make sure that your lender will allow gift money for down payments.
This is how you can get into your first property with no money down! Hard money and gift money are really great options 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!
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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.