Can You Buy a Rental Property With No Down Payment?

Key Takeaways

• It’s possible to invest in rental property with no money down by using alternative financing methods.
• Alternative options include hard money loans, rent-to-buy programs, home equity loans, and cash-out refinancing.
• A home equity agreement is a way to tap your home equity to purchase a rental property with no money down and no monthly debt payments.

If you want to invest in real estate but don’t have the funds for a 20% down payment, you may have other options. There are alternative financing methods that let you invest in rental properties without a lot of upfront cash. You might use assets you already own, like home equity, to secure a loan, or you can explore funding outside of traditional banks and mortgage lenders.

Below, we’ll go over a variety of methods you can use to invest in property beyond your primary residence, so you can build or expand your real estate portfolio sooner rather than later.

Exploring Financing Alternatives

In addition to conventional mortgages, there are other strategies you can use to borrow the money you need for a rental property. Below are four financing alternatives to traditional investment property financing.

Hard money loans for investment property

“Hard money loans” are short-term loans for buying investment property, and they’re offered by hard money lenders, not banks. These lenders are more concerned with the value of the property than with your credit score, making this form of funding more accessible if you struggle to qualify for a conventional loan.

Hard money loans usually close quickly, helping you speed up the timeline for a property purchase. The tradeoff is that they can be much more expensive than conventional mortgages, with higher interest rates and shorter terms.

Private money lenders

A private money lender is someone who lends money directly to you, at their discretion. They’re not an institution, so they don’t offer conventional loans, and they can use different loan criteria when deciding whether to lend to you. A private lender could be a friend, family member, or simply someone with cash who is interested in investing in your project.

You can negotiate the loan terms directly with them, and these kinds of loans tend to move more quickly than conventional loans. However, you still risk losing the property if you can’t repay. To find a private lender, reach out to real estate professionals in your network — people like real estate agents, title officers, or attorneys specializing in real estate. They may be able to connect you with private lenders offering funding for rental properties.

Real estate crowdfunding

If you want to invest in real estate without the hassle of managing property, you might take a look at real estate crowdfunding. These platforms offer a way for multiple investors to pool their funds to purchase real estate and receive returns on their investment. While there’s often a low barrier to entry with this method, some crowdfunding platforms require a certain level of assets before you’re allowed to invest. You also give up the level of control you’d have if you purchased the property by yourself.

Another form of pooled real estate investing is Real Estate Investment Trusts, or REITs. REITs are companies that invest in real estate development. You can often buy shares of publicly-traded REITs on a stock exchange and receive dividends for each share.

Lease options

Popularly known as rent-to-buy, lease options let you rent (lease) a home with the option to purchase it later. Often, you can arrange to have a portion of your rent payment set aside to build a down payment.

Lease options typically let you move into a home right away while you work on arranging financing down the line. Many people use lease options to give themselves more time to build credit while working toward real estate ownership.

Using Home Equity to Buy Rental Property

If you already own a home, you have a major asset at your disposal: your home equity. Home equity is the portion of the property you own outright. To calculate it, find your home’s current market value and subtract the amount remaining on your mortgage.

There are several options for releasing some of your equity to use toward the purchase of a rental property: a home equity loan or line of credit, cash-out refinancing, and a home equity agreement.

HELOC/HEL

A home equity line of credit (HELOC) or a home equity loan (HEL) is a form of financing that uses your home equity as collateral. You can get a lump sum upfront, use it as a down payment on a rental property, and then repay the loan over time.

HELOCs and HELs often have lower interest rates than other types of loans, which can make them a more affordable option. However, you’ll need to have an acceptable credit profile and sufficient equity in your home to qualify.

Cash-out refinancing

Cash-out refinancing is a common way to finance improvements to your primary residence, but it can also be used as a funding source for a new property.

Cash-out refinancing replaces your current mortgage with an all-new mortgage for a higher amount. You receive the difference in cash, which you can then apply to your real estate investment purchase. Just keep in mind that the application and underwriting process is the same as for a mortgage, so you’ll need strong credit to qualify. If you default on the refinance, you risk losing the home.

HEA/HEI

Another way to use your home equity to buy a rental property is through a home equity agreement (HEA) or home equity investment (HEI). These are contracts that provide an upfront sum of cash in exchange for a portion of your home’s future equity. Unlike with HELs and HELOCs, there are no monthly payments and qualifying criteria tend to be more flexible. And unlike a cash-out refi, there’s no need to replace your current mortgage. Unlock’s HEA could be an ideal option for homeowners with equity who need cash to purchase rental property. There are no monthly payments with an Unlock HEA and you have ten years to settle the agreement, which can be a benefit for those just getting started in real estate investing. Later, when you have rental income coming in, you can buy back your equity and focus on your investments.

Creative Financing

Besides loans and tapping your home equity, you can also explore more creative financing solutions.

Seller financing

With seller financing, the seller acts as your lender. You close on the rental property purchase but make payments to the seller instead of a mortgage lender. You’ll still pay interest and sign a promissory note that details the rate and terms of the loan. But the seller can offer more flexibility and easier qualifying than a conventional lender.

Partnership arrangements

Another option is to purchase the rental property with a partner. Buying investment property through a partnership lets you combine forces with another investor, allowing you to pool your finances for greater purchasing power. You’ll want to carefully vet your partner, making sure that they’re a reliable person with a strong financial history. You’ll also need a detailed partnership agreement that spells out each partner’s rights and responsibilities.

Risks and Benefits

Before you move forward with a rental property purchase, take the time to weigh the pros and cons of using an alternative financing method.

Advantages of no money down

• Start sooner: Buying investment property with no money down means you can get started without waiting around to save up tens or hundreds of thousands of dollars.
• Fund improvements: Instead of spending your savings on the purchase, you can use it to improve, remodel, or upgrade the property. It’s useful if you need funds to flip a fixer-upper, for example.
• Reserve cash: It also means you can set aside funds for future needs as a property owner, such as home repairs or covering a tenant vacancy.

Considerations and risks

All investment carries risk. No-money-down strategies reduce the upfront capital required, but you still need to do your due diligence on every investment. Consider the impact that higher interest rates or a shorter repayment period could have on your cash flow, for example. It’s also wise to have an emergency fund to manage unexpected costs or vacancies that may arise.

Conclusion

Investing in rental properties can provide an alternative income stream and potentially offset your current mortgage payments. If you don’t have the cash on hand to put down 20%, explore whether another financing method can you help you reach your financial goals with an appropriate amount of risk. Unlock’s HEA offers cash up front with no monthly payments, helping you fund a real estate purchase and expand your investment portfolio.