investment property loans with low down payment

If you’re like me, and I imagine most other real estate investors, you want to invest in real estate with as little money out-of-pocket as possible.  The great news is there are a number of ways (yes, realistic ones) that you can get investment property loans with low down payments or possibly even no money down.

Investment property loans no money down

The only no-money-down investment property loans that I’m aware of are VA and USDA loans.  With the VA, though, you need to be active or prior military (or a military spouse). USDA loans only apply to properties in certain rural areas.  

Furthermore, you can’t get a VA loan for an investment property unless it’s a multi-family (2-4 units), and you’re willing to live in one of the units.  The USDA has special multi-family financing to help investors provide housing for low-income individuals, but that’s about it in terms of investment property financing from the USDA.

Click here for more on VA and USDA loans for investors.

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With this being said, VA & USDA loans aren’t a viable option for most of us, so let’s move on.

Investment property loans with low down payments

When it comes to investment property loans with low down payments, FHA loans are probably your best bet.  With an FHA loan, borrowers can get financing for an investment property with down payments as low as 3.5%.

However, like VA loans, you can’t get FHA financing for a single-family investment property; it must be a multi-family structure, and you need to live in one of the units.

So, unless you want to buy a multi-family property and live in one of the units, none of these options so far will work for you, but there is something you can still do to get an investment property loan with low or no down payment: personal loans.

Use personal loans (this is what I did)

With the limitations tied to FHA, VA & USDA financing, and with conventional loans for investment properties usually requiring at least 20% down, a viable alternative is to use personal loans to either fund your down payment or just buy the property with cash.

Now, at first blush, it may seem financially irresponsible to use a personal loan in this fashion, but let me explain, and I think you’ll get excited about the idea.

First of all, the personal loan is only going to be used for the short-term because you’re going to do a cash-out refinance and pay it off in about 4-6 months (I’ll explain).

Here are the steps to take:

Step #1: Inquire about a personal loan

Reach out to The Loan Exchange to see how much of a personal loan you can get approved for.  The Loan Exchange offers personal loans up to $100,000.  You’re not committing to anything; you’re just seeing how much you can borrow.

Step #2: Talk to your lender about a purchase mortgage

Once you know how much you can get approved for with The Loan Exchange, reach out to your lender to inquire about a purchase mortgage.  I recommend using a portfolio lender instead of a big national lender.

Step #3: Look for an investment property

Once you’ve got your financing lined out, start shopping for an investment property.

Step #4: Speak to a lender about a cash-out refinance

Once you acquire your property and renovate it, go back to your lender, or possibly a different lender, and tell them you want to do a cash-out refinance.  

A cash-out refinance will allow you to borrow usually 80% of the property’s current value. I say “current value” because the property has been rehabbed at this point.

Example of a cash-out refinance

So, here’s what it might look like.  Let’s say you buy a fixer-upper for $50,000.  The bank finances 80% of the purchase ($40,000), and you pay the down payment of $10,000 with a personal loan from The Loan Exchange.  You spend $20,000 rehabbing the property, and it’s after-repair-value (ARV) is $100,000.

Let’s assume with a cash-out refinance that the bank will loan you 80% of that $100,000, so $80,000.  After you pay off your $40,000 mortgage, your $10,000 personal loan, and the $20,000 in debt you acquired to renovate the property, you put $10,000 in your pocket.  

Note: to keep the math simple I didn’t factor in bank fees for doing a cash-out refinance which, in my experience, will equate to around 2% of the loan amount.

This strategy is exactly how I was able to buy nearly 40 rental properties in two years with very little money out-of-pocket.

Don’t forget about closing costs (use seller concessions)

A common misconception among newer real estate investors, is that the down payment is the only out-of-pocket expense when purchasing an investment property.  This is not the case. We also have to figure closing costs.

Typically, buyers will pay between 2%-5% of the purchase price in closing costs. So, if you’re purchasing an investment property for $50,000, you can plan on $1,000-$2,500 in fees you’ll have to pay at closing.  Check out this Zillow article for a list of closing costs.

However, there is a way to get around this as well: seller concessions.  

Seller concessions are a beautiful thing because the seller is paying part or all of the buyer’s closing costs.  Now, you may have to agree to a higher purchase price to get a seller to do this, but it is a very viable and legal way to get your closing costs paid for.

Final thoughts

Is it possible to get investment property loans with no money down?  Yes, but it will likely include funding the down payment with money from a personal loan.  

Also, there are other ways to minimize or eliminate your down payment such as private money & owner-financing.  Check out my post on investment property loans for more on this topic.

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