HOW MUCH DO YOU HAVE TO PUT DOWN TO BUY A RENTAL PROPERTY?

How much do you have to put down to buy a rental property

Buying your first rental property is a very exciting step in becoming a real estate investor, but you might be wondering if the down payment is more than you can handle.  

Down payment requirements to buy rental property typically range from 15%-30% depending on the kind of financing.  However, there are several ways for you to acquire a rental property with no money down.  I’ll explain these different options in this post.  

Different Ways To Finance A Rental Property

The two most common ways to finance a rental property are banking financing and hard money.

Financing with a bank

Financing a rental property with a bank is a very similar process to financing a primary residence with a bank.  The bank will pull your credit, request pay stubs, tax returns, order an appraisal, etc.

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However, not all banks are created equal when it comes to financing rental properties.  You’ve really got two different types of banks: those that sell their mortgages, and those that keep their mortgages in-house.  

Banks That Sell Loans

When banks sell their mortgages on the secondary market, they are likely selling them to Fannie Mae.  Fannie Mae is a government-sponsored enterprise that buys mortgages.  

If a bank is selling its loans to Fannie Mae, it must follow Fannie Mae’s underwriting guidelines.  As a result, if you work with such a bank, you’ll likely be required to put 20% down (although some exceptions may apply).  

Portfolio Lenders Are Better

An alternative, is to get financing from a portfolio lender.  Portfolio lenders are also banks, but they keep some or all of their mortgage loans in-house instead of selling them.  This changes the game quite a bit because these banks don’t have to bow the knee to Fannie Mae.  

Consequently, you may be able to get financing with as little as 10% down.  I’ve even heard of some portfolio lenders who offer 100% financing, although this is rare, and, frankly, I don’t recommend it.  You really need to have some skin in the game.

Portfolio lenders tend to be the smaller community banks.

Getting money from hard money lenders

Hard money lenders are either individuals or companies who are investing their own money. Hard money lenders are more interested in the property and less focused on your personal credit and financial situation.  

As a result, hard money can be a great alternative if you can’t get bank financing.  The downside, however, is that the down payment is likely somewhere around 30%, and the interest rate on the loan will be much higher than what a bank would offer.   

Here’s a directory for hard money lenders all across the county.  

How To Get A Rental Property With No Money Down

Although it may sound too good to be true, there are several ways to acquire rental property without a down payment.  

Borrow money from family & friends

You might be surprised at how many family & friends may want to partner with you in your real estate pursuits.  When I bought my first rental property, I didn’t have enough for the down payment, so I partnered with my father-in-law.  It worked out well.  In fact, we co-own several properties now.

Use personal loans and lines of credit

Getting personal loans and lines of credit can be a great way to come up with a down payment or even purchase a property entirely with cash and forego the banks or hard money lenders altogether.  Here are few companies that offer personal loans and lines:

Owner financing

Owner financing is when the seller of a property acts as the bank.  Similar to bank financing, you would make principal and interest payments to the seller and be responsible for property taxes and insurance.  Check out this post I’ve written on owner financing.  A real estate agent can find properties for you where the seller will consider owner financing.

Conclusion

You don’t need to have deep pockets to start buying rental property, and real estate investing is certainly not only for those who are already rich.  With little to no money down, you can own rental property, and start your career as a real estate investor.

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