Yes, you can invest in real estate with little or no money down. Here’s how

Craig Berry
The Mortgage Reports contributor

How to invest in real estate with almost nothing out of pocket

Maybe you’ve always pictured future-you as a real estate investor.

But, you think, you don’t have the know-how or the cash you need to get started.

Believe it or not, that might not matter.

You don’t need to be an expert homebuyer or investment guru to buy real estate.

And you don’t have to be a current homeowner to get started, either.

Renters and homeowners alike can become real estate investors and start building wealth through home equity — even with little or no money for a down payment.

Want to see how that’s possible? Start here.

Verify your investment property eligibility here (Oct 27th, 2021)

In this article:

Investing for current homeowners

Invest in a new home and rent out your current one

If you already own a home, you’re ahead of the game.

One of the cheapest, fastest and easiest ways to becoming a real estate investor is by turning your current primary residence into a rental property.

There are significant advantages to “backing into a rental property” this way.

  • Traditional investment property loans require a larger down payment and come with higher interest rates. Often times, you can expect a 20% down payment requirement
  • The interest rate on an investment property is generally higher than the rate on your “primary” home by a half percent or more

>> Related: Investment property mortgage rates — How much more will you pay?

So the strategy is: Rent out your current home, and finance the next home you buy as a primary residence (meaning, you’ll be living there full time).

That way, you pay a lower interest rate on both properties. And if you’re still making mortgage payments on that first home, you can use the income you make from rent to cover part or all of the mortgage.

Find second-home buying options here (Oct 27th, 2021)

Use a HELOC or cash-out refinance

Using a HELOC or cash-out refinance to buy property is another great option for existing homeowners.

If you own a home, you may be able to use the equity in that home for a down payment on your next place.

One way to do that is by borrowing cash secured against your home equity. Homeowners may be able to obtain a standard home equity loan, or a home equity line of credit (HELOC).

>> Related: Using a HELOC to make a down payment

Using a HELOC, you secure a line of credit against your home, and then draw on it as you need it. And you can begin paying the loan back with rental income.

The other way to tap into home equity is with a cash-out refinance.

>> Related: How to use a cash-out refinance to buy another home

A cash-out refinance lets you refinance your mortgage for a higher amount than you actually owe. Then, you take that extra loan amount out as cash.

In this scenario, the money advanced to you by a cash-out refinance can be used to make the down payment on an investment property.

In other words: If you have enough equity in your current home, you may be able to start investing with nothing out of pocket.

Verify your eligibility for a cash-out refinance or HELOC here (Oct 27th, 2021)

Investing for renters

Be a resident and the landlord: Buy a multi-unit home

Multi-family homes can be a great way for novice real estate investors to get started buying properties that generate income.

First, with the help of a real estate professional, find a good deal on a 2-4 unit property. These homes are typically known as “multi-unit” properties.

While living in one unit, you’ll rent out the others. You can then use the rent payments to help offset your mortgage payment.

The key here is that you can buy a multi-unit property using affordable financing — like an FHA loan — as long as you live in it, too.

>> Related: FHA mortgages for investment properties

Mortgage programs like FHA loans don’t just have good rates and terms. They also give you options for covering the down payment.

You may be able to obtain gift funds, or perhaps even down payment assistance. And you can use these to buy the home with nothing out of your own pocket.

If not, thanks to FHA’s low down payment requirement, you’d only need 3.5% of the purchase price for the down payment.

Verify your eligibility for a multi-unit FHA loan (Oct 27th, 2021)

Lack credit or funding? Partner up with a co-borrower

Imagine this scenario.

You don’t have money for a down payment, but you want to start investing in rental properties. What’s more, you’re willing to do the research it’ll take to buy and manage these investments responsibly.

Your friend, on the other hand, has money for a down payment. But they don’t have time to learn the ropes of buying rental properties.

This scenario could be a win-win for both you and your friend.

You can go in on the investment together by acting as co-borrowers.

You share responsibility for mortgage payments on the house, and you can also share profits that come from rent payments or equity buildup.

A co-borrower doesn’t have to be a friend, either. It could be a family member, or even a stranger that would purely act as a business partner.

Look for a lease purchase option

Another proven way to invest in real estate with no money is through what’s known as a lease option or a “rent-to-own” home.

Under lease option, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments. The excess rental fee will then be channeled towards the purchase price.

With this type of agreement, you may be able to invest in real estate via a slightly higher rental fee.

>> Related: Pros and cons of “rent-to-own” homes

Investing with the seller’s help

Assume an existing mortgage

An assumable mortgage is one where the buyer can take over the seller’s mortgage, typically with little to no change in terms or interest rate.

Basically, the buyer receives the title to a property in return for making payments on the seller’s mortgage.

Using the seller’s existing financing can be especially effective if the current loan has a low interest rate.

But keep in mind, this scenario requires a bit more research.

In particular, you will want to make sure there is no due-on-sale clause. This type of clause prohibits the new buyer from assuming the mortgage.

And more often than not, assuming a mortgage will require lender approval. So you’ll still have to prove your credit-worthiness and fill out some paperwork.

Look for seller financing

Another easy way to acquire property with no money down is with help from the seller.

Known as “owner financing” or “seller financing,” this is an agreement where the seller handles the mortgage process instead of a financial institution.

This works especially well with sellers who have no mortgage.

For example, this can happen when someone inherits a property and does not want to keep it.

For sellers that are willing to take on the role of financier, owner financing can help sellers move a home faster with sizable returns on their investment.

Should you invest in real estate or the stock market?

According to the S&P 500 Index, the average return on investment (ROI) in the US real estate market is 10.6%.

By contrast, the average annual return for the S&P Index over the past 20 years is only 8.6%.

  • Average return on real estate: 10.6%
  • Average return in the stock market: 8.6%

By these numbers, the real estate sector has easily outperformed the overall market. This is in spite of the collapse in housing prices during the 2008 financial crisis.

With these returns, why wouldn’t everyone invest in real estate?

In large part, it’s because real estate investing seems unattainable to many people.

When it comes to stocks, anyone can throw a hundred bucks into the market. There’s no minimum cash requirement, nor any formal education necessary. 

But purchasing real estate is different.

Unlike the stock market, there’s a barrier of entry to invest in real estate. For most, that barrier involves a proper understanding along with the funds required for a down payment.

But home buying is becoming more and more accessible for novices and repeat buyers alike.

With plenty of low- and no-down-payment mortgages, and rates predicted to stay low through 2020, now might be the time to take a more serious look at real estate investing.

Start investing in real estate now

Fortunately, you don’t need to be a seasoned real estate entrepreneur to get started in real estate investing.

And it only gets easier to invest in real estate with no money after you gain experience owning a home.

With interest rates at historic lows, as well as homes continuing to appreciate, now’s a great time to start investing in real estate.

You have exciting options. Stop paying rent, living with your parents, or living with a roommate and get out on your own.

Verify your new rate (Oct 27th, 2021)