HOW TO DO 100% FINANCING ON AN INVESTMENT PROPERTY

100% financing for an investment property

I get it.  Whether you’re just starting out in real estate, or you have a few properties under your belt, you want invest with as little money out of pocket as possible, so doing 100% financing for an investment property seems very appealing.  I completely understand.

Well, the good news is there are a number of ways to do 100% financing for an investment property, and that’s exactly the topic at hand for this blog post, so let’s get started.

DO 100% FINANCING WITH UNSECURED LOANS

Unsecured personal loans and lines of credit can be an excellent way to do 100% financing for an investment property.  The Loan Exchange offers personal loans up to $100,000.

Depending on your purchase and rehab costs, you may be able to use unsecured loans to handle both the purchase and the rehab of the property.

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Once the property is rehabbed, you can then do what’s called a cash-out refinance with the bank to pay off all your unsecured debt.

This is a very viable way to buy and fix investment properties with no money out of pocket. In fact, I used this strategy to acquire nearly 40 rental properties over a two-year period.

DO 100% FINANCING WITH GOVERNMENT loans

You can also get a VA or USDA loan to purchase an investment property with no down payment, however, these programs have their restrictions.

With a VA loan you either have to be active/prior military or a spouse of someone who is active/prior military along with other qualifying criteria.

For USDA financing, a property has to be located in certain rural areas, and, for investment properties, the USDA only offers the “Multi-Family Housing Direct Loans” program.”

According the USDA’s website, this loan program is specifically designed to “…provide competitive financing for affordable multi-family rental housing for low-income, elderly, or disabled individuals and families in eligible rural areas.”

To see if a multi-family property lies within an eligible area for the Multi-Family Housing Direct Loans program, contact your state’s USDA office.

DO 100% FINANCING WITH OWNER FINANCING

Also known as “seller financing”, owner financing is another way you can acquire investment properties if you lack enough cash to purchase the property or can’t qualify for bank financing or other investment property loans.

Owner financing is essentially where the seller loans you the money to purchase the property.

Owner financing can be structured in different ways. Here are five of them:

All-inclusive mortgage
Land contract
Lease option
Lease purchase
Assumable mortgage

ALL-INCLUSIVE MORTGAGE (WRAP-AROUND MORTGAGE)

An all-inclusive mortgage (aka wrap-around mortgage) is where a seller extends a loan to a buyer while maintaining an existing mortgage on the property.

This is best explained by creating a simple example.

John wants to buy a house from Chris.  They agree to a price of $150,000. Chris has an existing $50,000 mortgage on the property.

John can’t get financing from a bank to buy the house from Chris, so Chris agrees to act as the bank for John, and John agrees to pay Chris a set amount each month based on a $150,000 loan over 20 years at 9% interest.

The loan Chris extends to John would “wrap-around” John’s existing mortgage of $50,000. At closing, Chris conveys the property’s title to John.

One major issue with wrap-around mortgages is what’s called a “due on sale” clause.  If the lender of the existing mortgage has a “due on sale” clause this means that, at the point title is conveyed to another party, the lender of the existing mortgage would demand the loan ($50,000 in this example) to be immediately paid in full.

Thus, it’s important for the seller to find out from the lender of the existing mortgage whether this clause is in place or not.

LAND CONTRACT

Under a land contract, the seller and buyer agree to a purchase price, loan duration and monthly payment amount, etc.  The seller maintains legal title, and the buyer receives equitable title to the property. Once the buyer has paid the seller in full, the buyer receives legal title to the property.

“What’s the difference between legal title & equitable title”, you ask.  Great question. The answer? Ownership. The party who holds legal title owns the property while the party who maintains equitable title has the right to use and possess, and in this case, the right to own at a future time (once the terms of the land contract have been met).

This can pose a real risk to the buyer because if the seller has an existing mortgage on the property and defaults on that mortgage, the house could go into foreclosure and the buyer is out the money paid to the seller.

LEASE OPTION

A lease option is an agreement usually between a property owner (lessor) and a tenant (lessee) whereby the lessee has the option to purchase the property after a certain period of time.  However, this agreement could be between a property owner and an investor.

In a lease option the lessee would typically enter into the lease option by signing a contract and paying the lessor an option fee usually equal to 3-5% of the purchase price.  It’s important to note that this option fee is usually non-refundable.  Again, you could use The Loan Exchange to get the cash you need for the option fee.

The lease option contract would lay out the purchase price, monthly payments, payment amount applied toward the purchase price and the lease option period.

The lease option period is usually 1-3 years.  This period gives the buyer time to arrange for permanent financing or gather the funds needed to purchase the property.

With a lease option, the lessor is obligated to sell to the lessee if the lessee is able and willing to buy, but the lessee is not obligated to exercise their option to buy.

LEASE PURCHASE

A lease purchase is very similar to a lease option with the main difference being that unlike a lease option where the seller must sell but the buyer is not obligated to buy, a lease purchase binds both parties to a purchase agreement.  The seller must sell, and the buyer must buy.

ASSUMABLE MORTGAGE

With assumable mortgages, the buyer is taking over (assuming) the seller’s existing mortgage on the property.  In essence, the lender behind the mortgage is transferring the mortgage along with its terms from the seller to the buyer.

The advantage for the buyer is its cheaper and faster to close as an appraisal will likely not be required, and you will probably save on other financing-related fees.

Additionally, the buyer could save on interest if the interest rate on the mortgage being assumed is lower than what banks are offering at that time.

With all this being said, assumable mortgages typically only apply to government-backed loans (FHA, VA, USDA) and may require sizable down payments.

DON’T FORGET ABOUT CLOSING COSTS

Even if you do 100% financing for an investment property, you’ve still got closing costs to consider.

Items like appraisals, bank fees, taxes, insurance, title fees, etc. usually range from 2%-5% of the property’s purchase price that the buyer is responsible for paying at closing.

However, there is a way to get your closing costs paid for as well.  It’s called seller concessions.

A seller concession is where a seller pays for a some or all of a buyer’s closing costs.  To get a seller to agree to this, you may have to pay a bit more for the property, but this is a great way to get out of paying closing costs.

FINAL THOUGHTS

I used to think that real estate investing was only for those who were already rich.  I was wrong. Real estate investing is for anyone. You don’t even need up front capital. In this post I’ve offered you a few ways to do 100% financing for an investment property.

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