Knowing how to invest in real estate with no money is the key to quick growth. Although there will be plenty of nay-sayers in your path trying to tell you that it’s impossible, I’m here to tell you that it is possible. And not only possible, but preferred.
“When you have no resources, you must become resourceful.”
I have always done my best deals when I was short on cash. I know a lot of investors that will say the same. Having a large cash stockpile is not always the best thing for you as an investor. Let me explain with a quick story.
The Tale of Two Investors
Once upon a time, in a town far away, there were two aspiring real estate investors. The first investor’s name was Lot Zamoney, and the second was Noah Credit. Lot had a fantastic job and excellent credit. He had amassed $100,000 in his retirement savings. Noah, on the other hand, was just starting out in life. He had a decent job as a carpenter's apprentice but did not have much savings and no credit at all.
Which is better, money or no money?
As Lot and Noah began investing in real estate, Lot had a much easier time. He found a real estate agent and they looked at all the listed properties. As soon as he found one that looked good, he put it under contract. When he called a mortgage broker and applied for a loan, the broker said that since it was an investment property, he should put down 20% to get the best rate. Lot agreed and put $40,000 down on the $200,000 home. It was a beautiful house, and with the 20% down payment, the payments were only $860. If you add in the insurance and taxes, Lot figured that it would just break even.
As Lot and Noah began investing in real estate, Lot had a much easier time. He found a real estate agent and they looked at all the listed properties. As soon as he found one that looked good, he put it under contract. When he called a mortgage broker and applied for a loan, the broker said that since it was an investment property, he should put down 20% to get the best rate. Lot agreed and put $40,000 down on the $200,000 home. It was a beautiful house, and with the 20% down payment, the payments were only $860. If you add in the insurance and taxes, Lot figured that it would just break even.
Lot Zamoney
After closing, Lot did some minor repairs on the house and rented it out. He started looking for another property to buy, and within a couple of weeks, he had found one. This one was only $180,000, and just as nice as the first one. He made a full price offer, the seller accepted, and he was back to the mortgage broker for another loan.
No Amount of Money is Enough
Lot called his mortgage broker and they put together an application for another loan. When the call came back from the lender, Lot was a little surprised. The lender said they could do the loan, but he barely squeaked by, because his monthly debt was too high.
They said that they would need 20% down and the interest rate would be higher this time, because the earlier mortgage had lowered his credit score. Lot asked why his monthly debt was an issue? He had leased the house at once and had a slight positive cash flow.
Income that doesn’t count.
The broker explained that even though the first rental was producing cash flow, the banks would not count it as income because it had not “seasoned.” They said their bank required the income stream to be a year old before it would count as income. Lot was at an impasse. He had spent most of his savings on down payments, and now he could not buy another house for a year. Although he was unhappy about the situation, Lot resigned himself to a slow growth plan.
Noah’s Struggle
From the onset, Noah knew that he had a challenge. He didn’t have good credit or money, so he couldn’t get pre-approved for a loan. Without a pre-approval letter, the real estate agents did not want to waste their time showing him properties. If he were to make it as an investor, he needed to find a way to start without a loan. Noah started to do research online and soon discovered a local REIA (Real Estate Investment Association) group nearby.
Within several weeks of joining the REIA, Noah discovered several ways to buy property without money and credit. He continued his research and took an inexpensive wholesaling course.
Noah Credit
One of the most important things that Noah did at the REIA meeting was to build relationships with hard money lenders, contractors, and rehabbers.
Overcoming His Obstacles
Over the coming months, Noah defined his target market and started sending letters and talking to homeowners living in the area. He studied Zillow, Realtor.com, and Craig’s List to see what prices buyers paid for properties. He attended open houses on the weekends to see what condition the retail homes were in and put out bandit signs.
When his marketing began to pay off, he was able to get a house under contract at a great price. He assigned the contract to a rehabber and received a $5,000 assignment fee. Over the next several months, Noah wholesaled several more homes, making $4,000 to $5,000 apiece.
Noah also studied hard and learned more strategies for doing deals. He soon discovered that he didn’t have any limitations because of a lack of money. Rather, his limitation had been a lack of knowledge and skill. Once he discovered the concepts of owner financing, lease options, hard money lending, and partnering with others on deals, he blew the lid off his business. Over the next 12 months Noah marketed hard and bought house after house. Wholesaling some, flipping some by partnering with a rehabber and hard money lender, and keeping the ones that he could lease-option or had owner financing.
As a result of the work and study that Noah completed, and the drive he had to succeed, he set himself up to quickly become a full-time investor. If he continues this path, he will create a recurring income machine that will make him retire a millionaire.
The question you should ask is not, “how to invest in real estate with no money?” The question that you should ask is, “how do I become more resourceful?”
How to Invest in Real Estate with No Money...In real life!
Now that you know why being short on cash is not going to stop you, let’s look at some options for investing in real estate with no money.
The most important thing that you need to learn
Before we go any further, we need to talk about the one law you must obey. Following this law will save you time, effort, frustration, and embarrassment.
Only, Only, Only Ever Work with Motivated Sellers!
Not every seller is motivated, and if you talk to unmotivated sellers you are wasting your time.
How to find and determine motivation is a topic we do not have time for here. You can learn more about finding and working with motivated sellers here. Free Weekly Training Signup
Real Estate Wholesaling
Wholesaling is usually the best place to start out. It gives you the opportunity to work with sellers and buyers and learn how to manage a deal from start to finish. You can start with as little as $500, just know that you must act quickly once you have a contract.
The money you make from wholesaling will fund the small amount you need to do other deals. Learn more about real estate wholesaling here.
Seller Financing
Although every seller you meet will not finance the house for you, it’s an offer that you need to make on every deal. Before you go meet with the sellers, look them up in county records to see what they owe on the house. If there is a mortgage, make a note of the amount and lender. The fact that there is a mortgage on the property will make it tougher, but there are ways around this. One is to buy the property “subject to” the existing financing, the other is a “wrap-around” mortgage. We will discuss both a little further down.
As part of your discussion with the seller, you need to find out what is motivating them to sell. There are many factors that can cause motivation, and not all of them are because the payments are behind.
There are many reasons why a motivated seller might like owner financing.
- The seller may have a large taxable profit on the sale.
Just because a seller may be motivated, it does not mean they do not have money. The property may have issues that transcend money, a family member may be freeloading in their rental house. They do not have the heart to evict and cause a family rift, but they want to make the property go away. The freeloader may cause trouble if they know it is on the market, so selling to an investor is the best choice. If they finance for a couple of years, they can spread out the tax burden. - Some need a steady secure income.
Some seniors would rather have $1000 per month coming in for years that having a huge pile of money. Nothing draws long-lost family bums out of the woodwork like hearing that a kindhearted aunt just got $200,000 in cash. - Others may want interest.
Some sellers would rather get 5% on a 5-year loan that put it in the bank at 1%. - They are stuck on a high price.
Sometimes people do stupid things like pay too much for a house. For some its not a problem, they take the hit and walk away. For others, the embarrassment of losing money on a bad deal can be too much to bear. Someone in their life is going to laugh and ridicule them. - For these people owner financing can work very well.
Look at these two deals;
$100,000 house with a 5% 30-year bank mortgage costs $193,256 including interest - $150,000 house with a 1.5% seller financed 30-year mortgage costs $186,356 total.
- Can you see how you could manipulate the numbers to give the seller entirely too much for the house?
- “I would gladly give you $200,000 for a $100,000 house. Just as long as I can give it to you with no interest, in $200 monthly payments.” Pete Fortunato
- Finally, they just may not care.
They just want it to go away. Sometimes the fear of the unknow, and the disruption in their life causes them to just walk away.
When trying to owner finance, the seller may want some down payment from you. This is best handle by doing a partnership with another investor if you do not have any cash.
Lease Options
Using a lease option will allow you to control the future appreciation of the property without buying it. A regular purchase option would work as well but would be a harder sell and cost money.
When you enter into a lease option agreement with a seller, there are two parts to the agreement. The lease, and the option. The lease controls the time frame and rules for the lease, and the option states the terms of the option, and the price for the property. (strike price)
If you use the proper lease option paperwork you will be able to sub-lease the property to someone else. This pays for your position in the deal, while you wait for your appreciation payday.
Hard Money Lenders
A lot of people fear hard money lenders because of the “interest rate shock.” When you read online that home interest rates are 4%, and then you hear that a hard money lender charges 12% it shocks your system. I hear it all the time, “it’s too much! they’re greedy!”
People will pay 18%+ on a credit card for useless junk but are not willing to pay 12% interest for a couple of months to do a flip with a $20,000+ profit.
Hard Money Lender
When I first started in real estate home mortgage interest was 18%. People still bought homes.
Hard money lender may also add “points” to the loan. Points are added interest. 1-point equals 1% on a hard money loan. An example would be 1 point on a $100,000 loan would be $1,000.
This causes the hard money lender to want to “turn over” his money multiple times a year. If he had a loan out at 12% interest for a year, he would only receive $12,000 in interest. If he adds two points to the loan, and loans the $100,000 two times, he would receive an added $4,000 in interest, bringing his true yield to 16%, if he has no downtime between loans. There usually is significant downtime in the lender’s money, and they struggle to obtain a 10% yield.
The hard money lender can be a huge asset for you. Here is a list of what a great hard money lender can pride for you.
The hard money lender can be a huge asset for you. Here is a list of what a great hard money lender can provide for you.
- Speed
A good hard money lender can close in just a couple of days. They have cash readily available to do your loan. - Credit score indifference
They could care less what your credit score is. They are only concerned with the deal. They will want to hear an in-depth plan of what you plan to do to the property and what your exit strategy is. If you prove that you can perform, making money on your deals and moving them quickly, you will never have to worry about bank loans again. - Just remember that hard money lenders are for short term deals. They are best used for quick flips, or for doing rentals with the BRRR method (Buy, Repair, Refinance, Repeat). Generally, deals that will be over in less than a year. Something like a rehab flip that costs $150,000 but will make a $30,000 profit in 6 months. Paying $9000 in interest does not feel so bad when you are cashing a $30,000 check.
- Experience
New hard money lenders that get in the game without experience crash and burn quickly. If they have been a lender for more than a year, they likely have a good depth of real estate experience. Always take your hard money lender with you on your property inspection and pick their brain for ideas and strategy. You will learn a lot and they will be impressed with your willingness to take advice.
Private Money Lenders
The difference between hard money and private (soft) money is primarily length of term and interest rate. The private lender may be a self-directed IRA, a retirement plan, or even a family member or friend with a home equity loan.
Frequently the length of the loan exceeds 5 years and the interest rate could be in the 6% to 9% range. If you made a good deal on the property, it is possible to have a positive cash flow rental at 9% interest.
When using both hard money and private money, you will need to buy at a significant discount. The reason is that there is no safety net for them. If the market has a downturn, they do not want to be involved in an upside-down property.
Partnerships
One avenue that you should always be working on is partnerships. You need to find financial partners and cultivate relationships before you bring them a deal. You should also think through the deal structure carefully and get an attorney involved to write up an agreement. Thing are always good until they are not, and then it is too late.
Proceed with caution, I have seen a lot of these deals go bad, but I have seen just as many work out wonderfully.
In the words of John Schaub, “The greatest asset you can have is a financial friend or family, who understands what you’re trying to accomplish.”
Subject To
It is possible to transfer the title to property “subject to” the existing mortgage. It is a method that many people refer to, but not that many have done in recent history. It seems very straight-forward in theory, all you do is keep making the mortgage payments until the mortgage in paid off. In practice it can be complex, requiring a certain degree of secrecy to avoid the lenders “due on sale” clause.
Wrap Around
Another concept is the “wrap” mortgage. The idea in to leave a lower balance first mortgage in place and “wrap” another mortgage around it to finance the entire purchase price. The buyer sends a monthly mortgage payment to the seller for the “wrap” amount, and the seller continues to pay the original first mortgage. In some instances, the investor will physically pay the original first to protect themselves. They only send the wrap amount to the seller. This is another method that works well in theory, and not so much in real life.
So now you know how to invest in real estate with no money. By using the basic principles of real estate investing, and only working with motivated sellers, you can make your fortune without ever borrowing from a bank.
For those of you with a little money and the desire to take a slower, lazier approach, I have compiled a list of government mortgage programs that will help you buy with a smaller down payment.
FHA Loan
https://www.hud.gov/program_offices/housing/sfh/fharesourcectr
FHA Section 203(k)
https://www.hud.gov/program_offices/housing/sfh/203k/203k--df
USDA Loan
https://www.rd.usda.gov/programs-services/single-family-housing-guaranteed-loan-program
VA Loan
https://www.benefits.va.gov/homeloans/
HUD Section 8 loans
https://www.hud.gov/sites/documents/SECTION8HOMEOWNERSHIP.PDF
HUD Good Neighbor Next Door Program
https://www.hud.gov/program_offices/housing/sfh/reo/goodn/gnndabot
Local Grants & Programs
Check with your local agents
Disclaimer: I am not a licensed attorney, nor a licensed CPA. All statements made above are to be considered opinion only.
