Can you buy a rental property with less than 20% down?

investment property down payment

Can you buy a rental property with less than 20% down?  Yes, you can.  There are two main reasons why real estate investors want to acquire rental properties without the standard 20% down payment: they don’t have 20% to put down, or, they do have the 20% down payment, but they don’t want to tie up their cash.

Well, fret not.  I’m going to show you how to avoid a 20% down payment on a rental property, and, show you how to arrange a no-money down situation when buying rental properties.

Identify Your Strategy

When it comes to acquiring rental property, there are many things to figure out.  One thing to decide on, before you go shopping, is whether you want a fixer-upper or a rental property that is 100% move-in ready.

If your aim is to purchase rental properties that don’t need any work, then its going to be harder to NOT tie up your cash because you’ll have little to no opportunity to do work on the property and build up equity.  More on that later.  Ok, once you’ve decided on a move-in ready or fixer-upper, it’s time to choose your lender for the purchase mortgage, so you can acquire the property.

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Use Private Money to Purchase Rental Properties

I’ll talk more about when to use traditional lenders (banks) in a minute, but I strongly recommend using private or hard money to purchase your rentals.  This type of funding can come from a friend, family member…whoever you know that has the cash to lend you.

However, most people don’t know people who have this kind of cash.  No worries.  There are financial institutions that operate as private money lenders.  Lending Home and Lima One Capital are a few I’ve used and recommend.

While private money is a bit more expensive than getting a bank loan to purchase property, it’s recommended for several reasons:

  • No income verification
  • Low FICOs ok
  • Fast Closings

Now, these lenders aren’t going to loan you 100% of the purchase; 75% will likely be their max.  So, what do you do to get the remaining 25% for the purchase?  If you’ve got decent credit, you can apply for a small business line of credit.  There are many companies that offer these.  Two that I recommend are Kabbage and Fundbox.  If you can get approved, you’ve potentially just landed 100% financing on your rental property.

If you’re buying fixer-uppers, Lima One or Lending Home will extend you a separate loan to cover up to 100% of your rehab costs.

Now, these private money options and lines of credit are short-term loans.  You’ll want to arrange for a long-term (20 or 30 year) mortgage for your rental property to hold it long-term as soon as possible.

Choosing a Bank for Long-Term Financing

Once you’ve acquired your rental property without having to use ANY of your cash for the down payment, and you’ve made necessary repairs (if applicable), it’s time to choose a lender that will secure a long-term mortgage on your rental property, so you can pay off the short-term debt and be ready to move in a renter.

For long-term loans, some private lenders such as Lima One Capital and Onyx Funding do offer long-term loans for rental properties, but they will be more expensive than getting a long-term note through a local bank.  So, use the banks for this, if you can.

Now, with that being said, when it comes to banks, don’t use the big banks.  You’ll want to use portfolio lenders.  These are your smaller regional banks.  They are called “portfolio lenders” because they don’t sell their loans on the secondary mortgage market, but, rather, keep them “in-house” in their portfolio.  Check out this post for more on portfolio lenders.

Anyhow, you’ll want to find a portfolio lender that will offer a loan based on 80% of the appraised value.  This is where having some sweat equity in the property is going to pay off and help you get all your cash back and leave none of it tied up in the rental property.

Let’s say, for instance, you bought a property for $50,000, and put $15,000 worth of repairs into the property, and now its worth $82,000.  You used a private money lender for the purchase, and a line of credit for the down payment and needed repairs.

Then, you work with a local bank to get a long-term loan on the property.  The bank agrees and orders an appraisal.  The appraisal comes in at $82,000, and the bank loans you 80% of that, or $65,600 which pays off your private money loan and line of credit.  Pretty cool, huh.  This strategy will be especially necessary if you want to scale and build a large rental property portfolio.

Hopefully this post has helped provide you with a game plan for how to buy rental properties with less than 20% down…or no money down.

About the author

Brandon Jones

Desiring to escape the clutches of corporate America, I started investing in real estate in 2015 and left my job in 2020 to become a full-time real estate investor. I now teach other how they can experience freedom through real estate investing.

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