How to buy investment property with little money down

How to buy investment property with little money down


Hi, it’s Mark Ferguson with Invest Four
More again. Welcome to another video on real estate investing. Today I want to talk about
how to buy an investment property with little money down. Now there’s all types of people out there
advertising lots of ways to buy with no money. Get started in real estate, make it rich,
get all this money without spending any of your own. The truth is, it is possible to
do that, but it’s highly unlikely to get rich fast without spending any of your own
money buying real estate. The less money you spend, the riskier it is, the less returns
you will get, and the harder it is to buy really great properties. But I will go through
some techniques, some ways to use less of your own money, and to get started in real estate
without the typical 20 percent, 25 percent down that most banks will require. All right. To start off with, what do banks
want? Banks want to see a down payment when they’re lending to investors. The reason is,
they feel investors are riskier than homeowners because they’re not living in the property.
If they lose the house, it’s not as big of a deal to them. And the government gives incentives
to people who are owner-occupants, who live in houses, so they typically get a smaller
down payment to be able to buy a home. Now because the banks require 20 percent, sometimes
25 percent down to buy a rental property, to buy a fix and flip, doesn’t mean that’s
the only way to do it. There are ways to get started with less money, but it will take
some work, some creativity and you may not make as much money as if you’re putting more
of your own money into it. So the first technique I talk to about is
buying as an owner-occupant. Now I am not talking about pretending to be an owner-occupant
when you’re really an investor. I mean actually being an owner-occupant. And it is fraud to
pretend to be an owner-occupant when you are an investor. Please do not do that. It gives
the rest of us investors a bad name and creates more laws, regulations, restrictions on the
rest of us. But most banks will require an owner-occupant to live in a house for one
year. That means, when you’ve satisfied that requirement, when you’ve lived there
for one year, you can move out and you can begin renting the home. Now always pay attention
to the paperwork you sign. There are some instances where it’s more than that or less
than that that you have to live in the home as an owner-occupant. So one strategy that many investors have used
is to buy a house that would be a good rental property; live there for one year. After that
year is up, they rent the house out and then they proceed to buy another house as an owner-occupant,
use the low down payment again, and repeat the process over and over again. Now obviously,
there are some drawbacks to this scenario. The first one is you have to move a lot. So
you’ve got to live there for a year, move out, move out again in another year. Sometimes
you may have to move even more than that because it’s not always easy to qualify for a house
right after you’ve rented a house. So if you live in a house for a year, you
move out, you rent it, and you want to buy a new house, most banks won’t count that
rental income until it shows up on your taxes. So that means you have to qualify for two
houses at once if you want to use this strategy right away. If you buy a cheap enough house
to begin with, then you can definitely do that. Move out, move right back into a new
house and repeat the process over and over. The trick is, though, you’ve got to buy
as an owner-occupant and live there as an owner-occupant. You can buy with as little
as 3 percent down with many conventional FHA mortgages. If you can qualify for a BA, you
can do it for zero dollars down payment. Great program, no mortgage insurance, awesome way
to get started if you’re a veteran and can quality for BA. So, one way: owner-occupant. There’s many
other ways if you don’t want to sacrifice moving, the hassle, all of that that comes
with buying as an owner-occupant and turning it into a rental property. Hard money is another way to buy a rental
property with little money down. Hard money lenders are not like typical banks. They are
companies that take money from investors and lend that money out to other investors at
a higher rate. So they can give you, 100 percent of a deal in some cases. Now normally, you’ve
got to be a seasoned investor and have done a lot of deals with them to borrow 100 percent
from them. But even beginners might be able to borrow more than 80 percent, 90 percent
to get into an investment property. Typically hard money lenders are lending to
fix and flippers because it’s a short-term loan. Usually the maximum term is one year
on a hard money loan. Hard money lenders will charge a lot. So you will be looking at probably
2 to 5 points on the loan amount. That means you’re paying 2 to 5 percent of the loan
amount in fees to that hard money lender. And the interest rates can range from 10 percent
all the way up to 18 percent for the loan amount that you get from them. Big money. I myself, I have 13 rental properties. I also
do fix and flips. I have a local portfolio lender, I do put 20 percent down. My rates
are about four and a half percent on my rental properties. On my fix and flips I put 25 percent
down; it’s five and a quarter percent. So three times the cost, usually, with a hard
money lender if you go that route. But it is one option to buy with little money down.
And that’s why I said in the beginning, the less of your own money you put into a
deal, the less returns you will get. Because the last money you’re borrowing on those investment
properties gets very expensive. The first 80 percent and the first 75 percent, you can
usually get a pretty good rate. You know, 5 percent, maybe 6 percent, but that last
20 percent, the last 10 percent, you’re probably going to be paying a lot higher rate.
You might be paying mortgage insurance on top of it, greatly reduce your returns and
increase your costs. All right. Another way to invest with little
money down is private money. Private money is simply money you borrow from somebody else,
a family member, friend, rich uncle, business associate—to invest in rental properties.
So maybe you get a loan for the first 75 percent of the purchase price, and for the down payment
and the repairs, you use private money to pay for those. Great way to buy with little
money down if you have that source for the money. That’s the tricky part, finding a
person who will lend you that money. Rates vary widely based on your relationship, the
risk, your experience. I borrow private money at 7 percent. But I’m
very experienced, I have an awesome track record with that person who lends me that
money. They trust me; they know their money is very safe with me. Other private lenders
might want 12 percent. Others, maybe 8. It’s all going to be different. All right. Private money, hard money, buying
as an owner-occupant. You can also use your current house to try and tap money out to
buy investment properties. So you could use a line of credit. A line of credit can be
obtained from most banks, mortgage companies, if you have equity in your house. For your
personal house, many banks will lend up to 95 percent of the value. So if you’ve owned
your house for a while, it’s appreciated or you’ve paid down your mortgage a little
bit, you might have equity in your home to get a line of credit. Pull out cash to invest
in a rental property. Refinance would be another route to go. A
refinance is different from a lot of credit because you are refinancing the entire loan
plus you’re trying to refinance more than what your loan is, so you’re taking cash
out. A line of credit is just added on to your current loan you have on your home. You
can take money out of a line of credit, you can pay back your line of credit. It’s called
revolving because you can put money in and out the same route. A refinance is a strict
mortgage. So you’re refinancing it, you’re getting a big chunk of money in the beginning.
If you pay back that loan, you can’t take money back out. You’ve paid it back. But I used a refinance to buy my first rental
property. So my personal house, I’d got a great deal on it. Bought it at a foreclosure,
we fixed it up a little. A year after I bought it, it appraised for much more than I bought
it for. I was able to refinance it, take 50,000 dollars out and use some of that money to
buy my first rental property. All right. More options: seller financing.
Now again, this is kind of like private money where you’ve got to find the right people
who will do seller financing. It’s pretty rare, nowadays, to find someone who will do
the seller financing. Basically, whoever is selling your house, they would sell the house
to you, deed it to you, but they would carry the note, they would carry the loan, and they
would decide on the terms. They might accept less than 20 percent down; they might want
more than 20 percent down. It’s all up to them. It has gotten tricky lately with Dodd-Frank,
that’s the new mortgage regulation act, on how seller financing works, how it has
to be structured. So be very careful with that. Another option is partnering. So if you don’t
have any money to flip, you don’t have any money to buy a rental property, but you’re
willing to find the deals, to work on the deals, help sell the deals, get them rented,
maybe you’d find a partner who has the cash and the money to lend you while you’re doing
a deal. You do the work, they provide the money. A typical split is usually 50-50 in
those cases. Some more, some less, depending on how the work is divided up. Again, the
trick is finding that partner, finding the person with the money, and making sure they
trust you. A few other ways, maybe not the best way,
is you can use credit cards. It better be a really good deal if you’re using your
credit cards to buy a rental property or a fix and flip. Really high interest rates,
really high payments. Please be careful if you decide to do that. Your IRA or 401K: Many people do not realize
you can use a self-directed IRA or 401K to buy rental properties. Now, you can fix and
flip with those, but all the money has to go through the IRA or 401K—all the expenses,
all the income, all the cash into it. And you can’t take that money out until you
reach retirement age without severe penalties. Again, talk to an accountant about the details
on those, how exactly to do it. On the 401K, you also might be able to borrow
money from your 401K. If you have a substantial amount in there. Again, please talk with your
accountants, retirement experts on those. So I hope those give you an idea of how to
buy with little money down. Again, the less money you put into it, the more costs you’ll
have, the more interest you’ll be paying, and the less money you’re going to make.
But if it’s a good enough deal, an awesome deal, it may be worth it to go that route
to get started. Thanks for watching. Again, Mark Ferguson
with Invest Four More, I have a ton more articles on investing at investfourmore.com. Thanks
a lot. Have a great day.

Comments

  1. Post
    Author
    swagcity

    Hey mark gotta question…what would you do if you were 22 years old with no direction other than wanting to work towards being able to separate TIME from the money equation? I come from slowlane family and while I'm grateful for them, I'd like a diablo in my garage one day. Any advice?

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    kdhartman44

    I am toying with the idea of buying a 4 unit condo, 4 levels, 1 with a kitchen the other 3 without kitchen. They all have separate entrance. Its at a resort near here and is already maintain by the resort there. The realtor add said it made $55k last year in rentals. Is this possible, and a good investment? Thanks

  5. Post
    Author
    newidentity316

    I appreciate your honesty. A lot of these other people are leaving out a bunch of details trying to sell you something. Making it lot all nice and shiny but leaving out a lot of the reality.

  6. Post
    Author
    Bruce Crosby

    I qualify for a VA loan, if I purchase my first home with a VA loan, do you think that I should purchase a home that is cheaper or what price range would you suggest? FYI, I'm going to do the live in it for 1 year method.

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