Do you want to buy rental property? Let’s discuss how to buy your first rental property with no money down even if you’ve got bad credit.
So, you’ve got no money, bad credit, nothing to trade, and you can’t get a bank to loan you money. Can you still buy your first rental property with no money down? Yes. It’s called seller-financing, and here’s how it works.
Buy rental property using Seller-Financing?
Seller-financing (also commonly known as owner-financing or contract for deed) is a real estate transaction where the seller essentially acts as the bank.
Similar to bank-financing, when you use seller-financing to buy rental property, the buyer pays a monthly principal/interest payment to the seller which would likely also include property taxes and insurance.
Seek the help of a real estate agent
A licensed real estate agent is able to look up listings for you where the seller is willing to consider a seller-financed arrangement.
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These opportunities are tougher to find, however, because why would a seller do seller-financing when they could sell to someone who can pay cash or get bank financing? Usually, you’ll see these opportunities pop up when the market is slow, and a seller is motivated to get rid of a property.
Important Factors to keep in mind
Should you find a seller who will owner finance, and you decide to go this route to buy rental properties, you’ll want to close at a title company just like you normally would if you were financing with a bank.
Additionally, you’ll want to get an appraisal completed to verify the value, and you may want to consider hiring a property inspector.
Here are some other truths about seller-financing worth taking into consideration:
Large Down Payment
Most sellers who will consider seller-financing will want a sizable down payment which is understandable since they are selling their property but not getting the full amount at the point of sale.
“But I don’t have any money for a down payment!”, you say. I understand. So, you might see if you can work with the seller to either increase the sales price, the interest rate, or the monthly payment as an alternative to providing a down payment.
More Costly Than A Bank Loan
Again, since the seller has to wait to get all his money, you’ll pay more for the house, and can expect a much higher interest rate and monthly payment compared to a bank loan. Also, similar to a bank loan, if you get behind on your payments, the seller can foreclose on you.
Typically, in seller-financed transactions, the seller isn’t going to want to wait 20 or 30 years for you to pay him off, so it’s common for a balloon payment to be part of the deal.
A balloon payment is essentially a time when the seller wants to be paid off. So, for instance, you could have an arrangement where you have a payment amount based on a 30-year period, but a balloon payment after 5 years.
In other words, your payments are based on a 30-year loan, but at the end of 5 years, the seller wants that balance at that time paid in full. So, in this example, you’d have 5 years to either come up with cash to pay the balance in full or be in a position to get a loan from a bank.