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7 Ways to Buy Real Estate With Little (or No) Money

7 Ways to Buy Real Estate With Little (or No) Money

7 min read
G. Brian Davis

G. Brian Davis is a landlord, personal finance expert, and financial independence retire early (FIRE) enthusiast, who...

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The most common concern I hear from aspiring real estate investors is “I’m having trouble saving up a down payment.”

And I get it. Most investment property loans require 20 percent down, at least. On a $200,000 property, that comes to $40,000 for the down payment alone and says nothing of closing costs, cash reserves, or money to get started on any repairs.

The best solution to this problem is also the one that new investors least want to hear: improve your savings rate. Spend less money on your housing and car and food, and put more aside for investing. Even without resorting to extreme budgeting strategies, it’s entirely possible to save $50,000 in two years while earning the median U.S. salary.

Now that I got that preachiness out of my system, we can get into what you do want to hear: ideas for buying real estate with less cash. Here are seven of those ideas, each with their own pros and cons, but all can help you get started with little money.

7 Ways to Buy Real Estate With Little Money

1. House Hack

In the traditional house hacking model, you buy a small multifamily (two to four units), move into one unit, and rent out the others. This helps you in two ways.

First, you can buy using a traditional owner-occupied mortgage with 3 to 5 percent down. Beyond the lower down payment, you also get a cheaper interest rate.

Second, your tenants ideally pay your entire mortgage and then some. You get to “live for free” with no housing payment, which incidentally helps you save money much faster for your next investment property.

It’s worth mentioning that multifamily properties aren’t the only option for house hacking. You can house hack single family homes with roommates, renting rooms on Airbnb, creating a basement apartment, building a casita, renting out storage space, even bringing in a foreign exchange student. My business partner Deni has been house hacking suburban homes for years. I house hack by living overseas where my wife’s employer provides us with free furnished housing.

Related: A Suburban House Hacker’s Story: How a Single Mom Paid Her Single-Family Mortgage

Get creative with it!

Friends watching tv and eating popcorn, rear view.

2. Do a Live-In Flip

Another variation on the theme of house hacking is a live-in flip. It’s exactly what it sounds like. You buy a fixer-upper, move in, and gradually update it over the course of a year or two.

You can finance it with low-down-payment, owner-occupied financing. And if you like, you can get a loan that includes money for the renovations, as well.

Just keep in mind that if you do that, you probably won’t be able to make the repairs yourself—the lender usually requires you to hire a licensed contractor.

But if you do the work and pay for the materials yourself, you can make the repairs at your own speed. While you still need to make monthly mortgage payments, you build sweat equity and earn a hefty payday when you sell after a year or two.

If you wait at least two years before selling, you don’t even need to pay capital gains taxes on your profits!

3. Wholesale Properties

Whether wholesaling counts as “investing” is open for debate. But either way, it helps you build skills and a network that will serve you once you’re ready to buy properties for yourself.

If you’re new to the term, wholesaling involves finding a great deal on a property, putting it under contract, and then selling that contract to another investor for a margin. You find a property worth $100,000 and get it under contract for $75,000, and you sell the contract for $85,000 to another investor. They still get a good deal, and you get a $10,000 profit without ever having to take title.

The only cash required on your part is the earnest money deposit to put the property under contract. Granted, there’s a risk that you don’t find a buyer, in which case you’d either need to cancel the contract (and lose your deposit if you didn’t build in a loophole) or buy the property yourself.

Beyond earning you money, wholesaling helps you learn how to find great deals on properties—a skill that will serve you as an investor, as well. It also forces you to network with other local investors, which will also help you in the years to come.

4. Negotiate Seller Financing

Some sellers are more flexible than others—particularly with properties they’ve had trouble selling.

When you negotiate with sellers, everything is on the table for negotiation, not just price. You can also negotiate for seller financing, whether for a primary mortgage or for a second mortgage.

The only limit is what the seller is willing to do. If you can get an 80 percent LTV mortgage from a portfolio lender but need help with the 20 percent down payment, maybe the seller will finance half of it. Or maybe they’ll lend you most of the purchase price themselves, so you can skip the portfolio lender altogether.

Before trying to negotiate seller financing, however, do a little homework on how to structure it legally. Most sellers will react with bewilderment when you propose it. Their first thought will be, “I don’t know the first thing about how that would work.”

So, it’s up to you to explain it to them, in detail and in a way that leaves them comfortable with the idea.

5. Draw on Your Roth IRA

Have a Roth IRA?

Good. You should absolutely, positively be investing in stocks as well as real estate, and a Roth IRA is a great vehicle to do it. Your investments grow and compound tax-free, and when it comes time to withdraw the money, you don’t have to pay any taxes on your retirement income from it.

Related: 5 Core Concepts in Both Real Estate and Stock Investing—and 5 Key Differences

But if you want to raid your retirement piggybank, Roth IRAs also offer more flexibility than any other tax-sheltered retirement account. You can withdraw the money you contributed to it at any time, both tax-free and penalty-free. And then use the money to invest in real estate.

If you want to get more advanced, you can even set up a self-directed IRA or Roth IRA and invest in real estate in it. But I recommend getting a few properties under your belt and learning the fundamentals before you get into more advanced tactics like buying real estate in a self-directed IRA.

Young woman relaxing in a kitchen with a laptop computer balanced on the counter looking over the top to smile happily at camera

6. Bring in a Partner

No one says you have to go it alone. If you don’t have enough money to buy your first property, one option is to join forces with a partner.

You can split the financial investment evenly or agree that one partner will do more work and the other will provide more funds. Ideally your partner brings some experience, since you’re not bringing much, but you can always figure it out together. Perhaps by applying both of your minds to the task, you’ll make fewer beginner mistakes!

Having a partner can also help you qualify for a mortgage if your income falls a bit short.

But having a partner comes with its share of downsides, too. All decisions must be made jointly, and you may not always agree. What happens if one partner wants to sell, and the other doesn’t but can’t afford to buy out the other partner?

The same goes for joint expenses. Sometimes big, unexpected expenses hit you as a real estate investor: a new roof, a major HVAC repair, a defaulting tenant and lengthy eviction process. What happens if one of you doesn’t have enough money to cover their share of the expense? Or worse, what if neither of you does?

And who’s going to manage the property on a day-to-day basis? What if they do a bad job and cost the partnership money?

These are all questions you need to answer before going in on a property with a partner.

7. Use Equity in Your Home

If you have equity in your home, you may be able to tap into it to help you buy an investment property.

One option is taking out a home equity line of credit (HELOC). You can draw on the line of credit as you need it, then pay it off, and potentially repeat the cycle to buy new properties. It can make for a flexible source of funds, although it typically requires a full settlement with all attendant closing costs, such as lender fees, title fees, appraisal fees, recordation fees, and so forth.

Alternatively, you could borrow a second mortgage. That comes with far less flexibility, however.

Another option is getting a blanket mortgage, where the lender for your investment property puts a second lien against your home as additional collateral, in lieu of a cash down payment.

Of course, these strategies all share one giant drawback: if you default, you lose your home. You’re putting your home on the line for the sake of an investment in an asset class that you’re new to, which only adds to the risk.

Final Thoughts

Like I said at the start, the best option is boosting your savings rate and coming up with the down payment without having to resort to these sorts of tactics. But if you’re willing to take on risks or compromises, you have plenty of options.

That’s the beautiful thing about real estate investing: there’s no one right way to do it. You can approach it from a thousand different angles and get as creative or as traditional as you like.

If you’re just starting out and you’re short on cash, I recommend house hacking as a great first step. You slim or eliminate your housing payment, you get low-interest, low-down-payment financing, and you get practice with investing under easy conditions.

But any of the ideas above can work to help you bridge the gap between the money you have and the money you need for your next down payment. Regardless of your approach, I recommend chopping your spending and maximizing your savings rate.

After all, it’s your savings rate that determines how quickly you build wealth. No matter how much you earn, you’ll never get rich if you spend every penny of your paycheck.

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What’s your plan for coming up with your next down payment? What’s worked for you in the past?

Let’s discuss in the comment section below.