How to Invest in Real Estate Investing with No Money Down

How to Invest in Real Estate with No Money Down

The idea of real estate investing with no money out of your own pocket is enough to pique anyone’s interest.

The mere potential of making a good return without having to front the money yourself is too exciting to pass up. Meanwhile, investing in real estate with no money down is made possible by several unconventional alternatives. Therefore, if you are interested in investing in real estate but would instead use other people’s money, try networking with some of the following sources:

Hard money lenders

Private money lenders
Homeowners are willing to entertain a rent-to-own strategy.
Homeowners are willing to finance the impending purchase with seller financing.
A Home Equity Line of Credit (HELOC)
A partner

HARD MONEY LENDERS

Hard money lenders are organized, semi-institutional lenders typically licensed to lend capital to real estate investors. More importantly, they represent the most profitable relationship an investor may establish in their respective field. Hard money lenders enable investors to secure deals they might otherwise have had to pass on. By offering short-term, high-rate loans, Arizona hard money lenders are perhaps the best option for today’s investors seeking to fund a deal quickly and efficiently.

Unlike their traditional counterparts, hard money loans offer short-term solutions for borrowers who need funds to cover acquisition and construction costs. In return for their loan, however, investors will need to pay upwards of 11 to 15 percent in interest and perhaps even an additional three to five points (a subsequent upfront percentage fee based on the original loan amount).

Hard money lenders will ask to be named on the insurance policy to secure their investment. Likewise, hard money lenders will require borrowers to provide a promissory note and a mortgage or trust deed on the property. These safety measures are implemented to mitigate risk and allow them to lend money to otherwise unproven investors.

Hard money lenders in Arizona are asset-based lenders, which means they base their loan decisions almost entirely on the subject property’s potential. While they indeed consider borrowers’ track records, the property’s potential is their highest priority. That said, the better the property, the more likely an investor will receive a loan.

In return for meeting all the criteria by Phoenix hard money lenders, borrowers will be given quick access to funds that will most likely cover acquisition and construction costs. While their capital comes at a high price, investors can often receive it within as little as a few hours. The speed of implementation awarded to investors from hard money is one of the primary reasons they can acquire deals and exercise an advantage over the rest of the field.

PRIVATE LENDERS

Private money lenders are like hard money lenders in that they too are often willing to offer high-interest, short-term loans to any investor who can bring them a good deal. As their name suggests, private money lenders are not institutionalized or licensed to lend money to real estate investors. Instead, private money lenders can be anyone with enough money and a penchant for investing. Private money lenders can be anyone from a friend or family member to a business acquaintance or an investor’s latest attempt at networking.

While private money lenders aren’t institutionalized, they still offer investors a great way to get into real estate investing with no money out of their own pockets. However, their lack of a professional structure coincides with some notable differences from their hard-money counterparts. Like hard money lenders, private money lenders will request to be named on the subject property’s insurance to mitigate the risk of their investment. Private money lenders in Arizona will also want borrowers to provide a promissory note and a mortgage or trust deed on the property. That way, the faith they are placing in a borrower is secured by collateral.

The primary differences between hard money and private money are apparent in the interest rates and speed of implementation. Private money lenders in Phoenix are inclined to ask for anywhere between six and 12 percent interest. At that rate, private money lenders are usually cheaper to go through, but their capital comes at the expense of a less professional lending environment. Again, private money lenders aren’t licensed to lend money and are traditionally less experienced.

RENT TO OWN

The “rent-to-own” financing strategy is yet another alternative to traditional financing. More importantly, it proposes another way to take up real estate investing with no money (at least in the traditional sense) out of your pocket. When buyers enter into a rent-to-own agreement, they effectively agree to rent a subject property for a predetermined amount of time until they can exercise an option to purchase the house from the original owner. This is also known as a lease agreement. As a result, buyers will be expected to pay “rent,” but it won’t coincide with the significant down payment that has prevented many people from buying a home.

Rent-to-own agreements allow prospective buyers to pay rent for a predetermined period (up to 3 years), after which they can purchase the home. That’s an important distinction, as not all contracts require the renter to follow through with a purchase. As Investopedia so eloquently puts it, “some contracts (lease-option contracts) give the potential buyer the right but not the obligation to purchase when the lease expires. If he or she decides not to purchase the property at the end of the lease, the offer expires.”

SELLER FINANCING

Seller financing, also known as owner financing, is precisely what its name suggests: the buyer will finance the purchase through the current owner. The current owner will act as the lender, effectively removing the need for any third-party lenders. As a result, borrowers (the buyers) will proceed to make payments to the seller for the duration of the loan. To that end, seller financing isn’t all that different from a traditional bank loan. The owner will determine the cost, down payment, amortization, loan amount, interest, and everything else that has become synonymous with traditional underwriting.

The lack of a third party benefits both buyers and sellers. Selling financing is one of the easiest and most cost-effective ways to finance a deal. However, the benefits of seller financing can’t be realized unless the seller owns the property “free and clear.” For the seller to exercise the “seller financing” option, they must be able to carry a first mortgage, which would require them to have already paid off the property. Only once the owner has paid off their mortgage and remains in a 100 percent equity position can they act as the bank for a subsequent transaction.

Seller financing can benefit everyone involved in a deal. The owner, for example, can simultaneously sell the house, profit from interest, and limit their tax liability by taking the proceeds from the sale in incremental installments. On the other hand, buyers may negotiate more favorable terms, such as zero down payment.

HELOC

In addition to everything above, real estate investing with no money down is made even more possible for those who have already built up equity in an existing home. Thanks to the home equity line of credit (HELOC), those who have already been paying down a mortgage may be able to use existing equity to facilitate an additional purchase. In its simplest form, a HELOC allows homeowners to take the first position on a loan and put their equity to work. It should be noted, however, that most banks won’t let homeowners use 100 percent of their equity. To mitigate risk, banks typically lend 70 to 75 percent of a home’s equity. While technically borrowing against the equity in your home, a HELOC will promote real estate investing with no money out of your pocket.

FIND A PARTNER

“No money down real estate investing” takes on a new meaning when a partner is introduced into the equation. Investors can practice real estate investing without money if they align their services with the right partner. If for nothing else, there’s no reason one partner can’t fund an entire deal. That said, investors who don’t bring any money to the table must compensate for their financial shortcomings. If a partner can’t help fund the deal, they should be able to bring something of equal value to the table. Perhaps they are great networkers or expert marketers. After all, money isn’t the only thing with value in the real estate investing industry.

Summary

The concept of real estate investing with no money is lost on many people. Purchasing an asset as large as a piece of real estate without any of your own money seems downright impossible. However, several alternative forms of financing, not the least of which rely on other people’s money to complete a deal. The more options an investor has to fund a deal, the more likely they are to acquire it.

Matt Prosory RI/MLO/Broker
NCO Enterprises LLC
Private Hard Money
DBA Setabay/SetabayLoan/Level 4 Funding
26731 N 90th Drive
Peoria AZ 85383
Matt@Level4Funding.com
Telephone: 623-582-4444
NMLS 2062278 NMLS 1118493

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property at just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters and 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

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