How to Buy a Rental Property with 5% Down or Less (5 Ways)

Ashley Kehr:
You’ve probably heard that you need to put at least 20% down to buy a rental property, but do the math on a $300,000 house that’s $60,000 plus closing costs and reserves. Even if you can save that money, you’ve got to start all over again to buy the next property.

Tony Robinson:
And that’s a tough ask without a super high paying job. And for the average rookie, it’s just not a viable way to scale, but thankfully you don’t need to put down 20% or 15% or even 10%. Today, we’re sharing five legitimate ways to purchase your first or your next rental with just 5% down or potentially even less.

Ashley Kehr:
And no, these are not gimmicks or loopholes. These are real strategies that investors use to buy rental properties with significantly less money out of pocket. So we’re going to walk you through each one, weigh the pros and cons, and help you figure out the option for you so you can buy your next property much faster. This is the Real Estate Rookie Podcast. I’m Ashley Care.

Tony Robinson:
And I’m Tony J. Robinson. And with that, let’s get into strategy number one, which is house hacking. We’ve talked about house hacking a lot on the rookie podcast, but for those of you who maybe haven’t heard before or new to the podcast, house hacking is basically a strategy where you take a property that you’re going to live in and then you rent out some of the extra space that exists inside of that property. And there’s a few different ways you can slice and dice this. You can buy a large single family house and maybe you live in one room and you rent out the other rooms. You can buy a large single family house with an ADU in the backyard or a walkout basement beneath. You can buy a three-plex or a four-plex and you live in one unit and you rent out the others.
Or I was talking about our friend Craig Kerlap who basically combined all of those. He bought a small multifamily, rented out the other units, also rented out all of the other rooms, the unit he was in, and he was sleeping on the couch. So you can get as extreme with the strategy as you want, but that’s the simple idea of house hacking is that you’re taking the space that serves as your primary residence, but also finding a way to generate rental income with it.

Ashley Kehr:
And if you’re already turned off by this idea of thinking that I don’t want to live with tenants, I don’t want to move, I want you to really think about what are you willing to sacrifice to reach financial freedom or how bad do you actually want that next property? Because with a lot of these loan options, the FHA loan, the 5% conventional loan, the VA loan, you will only have to live in the property for one year. So would you rather start now, buy a property, live there for one year, or how long would it take you to save up that $60,000 that you would need plus reserves, plus your closing costs, things like that on top of that $60,000 down payment? Would that take you one year? Would that take you two years? Would that take you three years? So maybe it’s actually worth the sacrifice of living in a property for one year, living for very low costs because you’re having the other tenants in the property pay the majority of the mortgage payment or all of it.
So on top of getting an investment early, you’re also able to reduce your own living expenses for that year. So I challenge you to really think about that. What is actually harder for you? Is it living somewhere for a year or is it taking three years to save up the $100,000 that you may need to actually buy that first property or your next one?

Tony Robinson:
Ash, I’ll play devil’s advocate a little bit there because I’m thinking about had I told Sarah when I was trying to buy my first rental, “Hey, let’s let some strangers move into our extra bedrooms. She probably would’ve kicked me out the house as well.” So if you’re the person who’s listening and you’ve done on the podcast and you’re super on board with that, makes total sense. But a lot of times if you’re like me, you’re married, you’ve got kids, maybe your spouse isn’t as on board with the idea of house hacking. So maybe ease into it and maybe run the math out for them. But we have met a lot of and had a lot of guests on the podcast who have leveraged house hacking even while they’re building their families to still go out there and build wealth. So maybe it’s not, “I’m going to buy a five bedroom property.
My wife and my kids and I are going to use bedrooms one through two, and then we’re going to have someone else renting out the other three bedrooms.” But maybe it is, “Hey, let’s buy a nice large single family home that we can enjoy with an ADU on the backside of the lot so it still feels like we have our own space.” So even if you’ve got some other life circumstances, maybe find the version of house hacking that aligns with what you and your family are willing to do.

Ashley Kehr:
And Tony, that also brings into mind that this isn’t strictly for long-term rentals. You could house hack by renting out your property as a short-term rental. So if you go on vacation, you can rent it out. There’s also the Augusta rule where you can actually rent out your primary residence for two weeks and be tax-exempt from paying income taxes on renting out your property. And it was all started with the golf tournament in Augusta, Georgia, where they actually, people would rent out their homes during the tournament and it actually became called the Augusta rule, this tax loophole. So there is one tax loophole that you don’t have to pay tax if you short-term rent your property for two weeks out of the year. But also too, if you have somewhere else to go or something else to do, you could rent that out or maybe you do have a guest bedroom and a spare bedroom where you can pick and choose when you want the listing active to be able to rent it out.
There’s this family I follow on Instagram where every summer they go camping and they take their camper and they’re gone and they shove all of their personal items I think into the primary suite and they lock the door and then they rent out the kids’ bedrooms as they rent out the house, but just the kids’ bedrooms are available to use or whatever. And then maybe they have a guest bedroom or something that acts as the master. But they do that every summer and it pays for a lot of their mortgage payments for this property. And also they don’t have to pay for their property and to actually go out and travel and pay for travel. So it all depends on the sacrifice you’re willing to make. But just remember, it’s not just you have a long-term tenant in your property. There are other options to generate revenue off of your property besides just doing long-term rentals.

Tony Robinson:
Ash, one last example I’ll share is our friend Rob Apasolo, he used to host the BPRE podcast. Rob Bill, as a lot of you know him, but he bought a house in LA that he said himself that they really couldn’t afford. They had no business buying, but it was a house that had a walkout basement. So they moved in, they did some renovations on the basement and they put it up on Airbnb and it did incredibly well and that’s what helped kind of subsidize their mortgage cost. And then with the money they made from that, they’re like, “Well, hey, what if we try and do this again?” And Rob built a little ADU tiny house in his backyard. So now on this one property in LA, he’s got a basement that he’s renting out short term. He’s got this ADU that he’s now renting out short term.
And they’ve since moved on, so now they rent all three places out short term. But it all started with this one little basement unit that, again, attached to the primary residence, but still separate enough to give him and his family the kind of privacy they were looking for. So let’s talk about the pros and cons though of house hacking or the pros maybe. We talked a little bit about the pros and the cons, but one of the biggest pros, and the reason it’s on this list is the down payment. So I’m going to give you three options that folks can use for house hacking that are significantly less than 25% down or 20% down. First is just a straight conventional loan at 5%. So people oftentimes think conventional has to be 20% down, not necessarily true. You do get PMI once you go below 20%, but there are conventional loans at 5% down.
So super easy. The next lowest down payment option is the FHA loan at 3.5%. Now it is a little bit harder to make the deal work with FHA. And a lot of times if sellers see one deal that’s conventional versus one deal that’s FHA, they’ll take the conventional because it’s just less resistance to get to the finish line. But it is there, 3.5%. And again, we’ve talked with and interviewed a lot of folks on the podcast who used three and a half FHA on a house hack to get into their first deal. So that is an option. VA loans, Ash always talks about USDA loans. I’ve talked a lot about NACA loans and a lot of these are 0% down. VA loans, 0% down. NACA loan, 0% down. So if you are buying something single family, small, multifamily, I want to say most of these I think cap out at.
So most of these cap out at four units or less. I know NACA does as well. Don’t quote me on the VA loan because I’m not sure about the VA loan.

Ashley Kehr:
The VA loan is the same too, four units or less. Yeah. Because then after that, you’re going into commercial lending.

Tony Robinson:
But even Sue, four units for your first deal is not a bad way to start your investing career, especially close to 0% down. So that’s the biggest benefit here guys in terms of capital to get into these deals. Very, very little down, but you still get to control this asset.

Ashley Kehr:
Now some of the cons are you have to share space, share walls with your tenants. I’ve known people who have done this and they have not disclosed that they were the actual landlord, that they have used a property management software or all the messaging is done and everything like that. And they have no idea that this person living in the one unit is actually the owner of the property. But that’s completely up to you if you decide that you want to disclose you’re the landlord. We did have a guest on one set bought a property with, I think it had eight units on it or something and it was split up, but somehow we ended up living on the property and the tenants would come and knock on his window to actually say that something is wrong or they needed something or to ask questions and knock on the window or whatever.
So definitely want to set some boundaries, but that is definitely a con of you don’t get your own private space and your own single family home. And then another thing is you actually won’t most likely see a ton of cashflow while you were living there until you move out of the property and can rent out that other unit. And you’re just offsetting yours. So you’re still reducing your living costs, your expenses. If you were to go and buy a property and live there yourself or if you were going to go and rent somewhere else, the goal would be that you were paying less towards your monthly expenses, your mortgage, your insurance, your property taxes than you would if you were going to go and live somewhere else. Then you have these tenants paying down your mortgage for you. So the con is that it’s not like you’re going out and buying a true investment property where it’s cash flowing from day one and generating you additional income.
You may see no cash flow at first while you are living in the property. So also I have to think about what are your goals? Do you need additional cash now? Do you need to increase your income? House hacking is just going to reduce your living and costs, which can increase your income by not having to pay those, but definitely a con to think about as terms in what’s your goal and your why for actually investing in real estate.

Tony Robinson:
So I just always chuckle when the folks are like, “I’m just going to tell everyone that I’m not the owner.” And what happens in that one-off conversation where you and your neighbor are talking and they’re like, “Oh, this thing broke at my place. I’m going to call the manager.” And they call and then your phone starts ringing. It’s like how do you even recover from that?

Ashley Kehr:
I don’t know how to keep it a secret if you just never talk to them on the phone. I mean, I guess you could set up a Google Voice number. You can use TurboTenant to message with them or if you never actually have to get on the phone with them. I guess there is ways that you can actually hide that you’re the landlord. I think my sister, I think when she first moved into her duplex when she bought it, she didn’t disclose that she was the owner of the property to the first tenant that she lived with, but they had very little interaction. My sister worked twenty four seven, so she was never there anyways.

Tony Robinson:
Just a funny thing to happen. If that has happened to you, let us know in the comments and what did you do? How did you respond to that? But that’s the first one is just house hacking. Super straightforward. The second one is what we call a live-in burr. Live-in burr. And this is similar to, I guess, kind of like a house hack because it’s still your primary residence and you’re turning it into an investment vehicle. But Burr stands for, basically for those that haven’t heard that phrase, you’re going to buy a property typically under market value. You’re going to then renovate that property. You’re going to new kitchen flooring, cosmetic, all the stuff underneath the hood. Once it’s renovated, you’re going to rent the property, then you’re going to refinance that property. And then ideally with those proceeds, you can repeat that process all over again.
But a live-in burr means that instead of going out and just buying a random investment property somewhere, you’re actually buying your own primary residence that’s slightly distressed, needs a little bit of love. Obviously you want to be in a livable condition. Hard to get a primary loan if it’s not livable, but you’re going to get a home that’s in a livable condition, but maybe outdated needs a little bit of love. You move in and you just kind of take your time during the renovations because you live there, but you get the benefit of those same low cost entry loans that we just talked about in the house act. So you can get in for 5% down or 3.5% down or sometimes even 0% down on these properties and then really take your time with the renovation. So one of the biggest challenges I think with traditional flipping are your holding costs.
It’s like you’ve got a lot of money going into these deals or coming off of these deals on a monthly basis in terms of utilities, property taxes, the actual debt to hold those properties. But when you’re living there, those are your costs that you’re going to incur anyway just for living. So you have a little bit of a longer runway as you’re doing this to get all those renovations done. So that in a nutshell is a live and bur where you buy it under market value, needs a little bit of love, turn into your primary residence, slowly renovate it over time, and then you can refinance in the back end to recoup some of that capital.

Ashley Kehr:
And then too, once you’ve refinanced and you’re ready to actually rent out the property, what some people do is, and this is actually what I’m in the process of doing, is before I move out of the property, I’m going to put a HELOC, so a home equity line of credit on the property since it is my primary and tap into that additional equity and have that line of credit available. And then in the future you decide to rent out the property, you get to keep your existing mortgage. So hopefully you have a nice interest rate, fixed rate for 30 years on the property. And then you also have your line of credit. So just because you decide to rent out the house, your line of credit doesn’t go away or get taken away. You can still keep that line of credit available to you to use to fund your next deal or fund a rehab or things like that.
So that’s also a tool of getting access to more capital by putting that line of credit in place on the property while it still is your primary residence. So if you already move out of the property and rent it, you’ll have to go and find a commercial line of credit because technically it’s no longer a primary and you can’t get that HELOC anymore on the property. So just make sure you’re following those rules and not committing mortgage fraud by going and get the line of credit after. But yeah, I think it’s a great tool to get a rental property because if you were to buy a property, a rental property, you’d most likely put 20% down where if you’re buying it as your primary first, sacrificing that year to live there, do some updates, renovations, adding value to it. There’s definitely huge benefit. And actually just yesterday, James Daynard posted a reel about how he has done these live-in burrs and some turn into live in flips where he would go and buy these properties that were super dilapidated, fix them up, and then sell them for a lot more later on after him and his family had lived there for at least two years or they would decide to rent out the property.
And he went through each property they had done this with and then showed their 9,000 square foot house that they have now that he was able to scale up to by repeating processes like this of just buying dilapidated properties as his primary, fixing them up, either renting them or selling them to be able to get to this property, which was his wife’s dream house for her. So you can go to @biggerpockets on Instagram and find that reel by James Daynard.

Tony Robinson:
I mean, that’s the beauty is that you can combine the house hack and the living bird all together because I can do a bird on a fourplex as well. So I can go in, live in one unit. While I’m in that unit, I’m renovating that unit, then move into the next unit, live in that unit, renovate it while I’m living there, move into the next unit. And we’ve definitely had folks on the podcast who have done that as well. So you can kind of combine these. I think the only con with the live in burr that we didn’t already discuss with the house hack is simply that it’s maybe, not maybe, it’s definitely a little bit more work to be living in a construction zone and just managing a rehab at that scale and maybe a little bit more elbow grease goes into it. But the benefit is that you oftentimes can get a better deal and you get better cash flow, you get that forced appreciation.
And the ability to scale now not only depends on your ability to save capital, but you’re also getting that added boost of the additional equity you generate through the renovation to help you then go out, to Ash’s point, either refinance or get a HELOC to help you buy your next one. So it becomes a cycle that you can repeat over and over again, although it is a little bit more work.

Ashley Kehr:
We’ve covered house hacking. We’ve talked about the live and bur strategy, but there are still three more ways to put 5% or less down on your next rental property. We’re sharing exactly what they are right after a quick word from our show sponsors. So don’t go anywhere. Okay. Welcome back. Maybe you don’t want to house hack or live in the property you’re renovating, in which case the next strategy might be more your speed. And that one is get a partner. And luckily, Tony and I wrote the book on real estate partnerships, and you can find that in the BiggerPockets bookstore or on Amazon or Barnes & Noble. But basically what you’re going to do is find a partner that can bring something to the table, something that you are missing and that’s why you can’t. We call it the puzzle pieces often. It’s something that they can help you to get to your next deal, whether that is capital, the time, the experience, or maybe you were like me, you were just afraid to get started alone and you needed a partner who had some kind of sense of security, whether that’s financial knowledge, things like that.
But there are multiple ways to actually structure a partnership. And two of the main ones are first, a debt partnership. And this is where other investors provide the financing. So this could be a private money lender. This could be like my first partner, what we did was he put up the capital for the property. He was paid five and a half percent interest and his capital investment was amortized over 15 years. So he was actually basically getting a mortgage payment every single month. He was getting his money returned to him and he was also getting interest on that money that he had lent our LLC. Then there’s also an equity partner where both sides have an ownership in the property. So my first partner also had that. So they were a debt partner and an equity partner where I gave him 50% equity. So he got his capital back, he got interest on his capital.
He had invested into the deal and he also got 50% equity in the deal. So he was getting 50% of the cash flow. He was sharing 50% of any capital we had to continue to contribute into the property. He was also going to get 50% of the equity when we sold the property. So I combined those two strategies with my first partner to actually help me get into that first deal. Tony, what structures or partnerships have you used?

Tony Robinson:
A little bit of everything as well. You touched on the debt partnerships. We’ve done a lot of private money partnerships in that way, but also just equity partnerships would be the other side of that where you’re sharing in the ownership and each person brings different things to that partnership and you guys split ownership and equity and profits together. So we have a lot of deals where we came in and we did the majority of the work, sourcing it, putting it together, building all the furniture, managing the property. And our other partners brought the capital and obviously they were for strategic decisions. And we just split the profits fifty fifty. Ownership and profits, we split fifty fifty. So just straight equity based like, Hey, you do this for this amount of ownership. We’re going to do this for this amount of ownership. And again, we’ve leveraged all of them in different scenarios.
There’s some definite pros, there’s some definite cons as well. In terms of the benefits of partnerships is that you get to have someone fill in the gaps that you have as an investor. And sometimes those gaps could be financial where they’re bringing capital to the deal. Sometimes those gaps could be skillset or expertise where it’s like, Hey, I’m not really good at doing X, so I’m going to bring in a partner who’s really good at doing that piece. Someone could say, “Hey, I’m really, really good at swinging a hammer and doing all the work, but I’m really, really bad at talking to sellers and hunting for deals or analyzing the properties. I’m not a numbers person. Okay, so we’re going to make a great team because I can go talk to people. I can go run all the numbers. You go knock out all the renovation once it’s done.” So even from a skillset perspective.
So that’s the benefit. And especially in the context of this episode where we’re talking about low down payment options, if you are able to find a really, really good deal and you can bring in a partner, well, maybe now you’ve just gotten access to a property that otherwise you wouldn’t have been able to without much or sometimes any of your own capital into the deal either. And it’s still a win-win because they get access to this asset they wouldn’t have had otherwise. But I think the cons on this side are that you’re getting a smaller slice of the pie, which means that there’s less cashflow for you personally coming off of that deal. So I think you’ve got to be really strategic about how you leverage it. And I remember early in my investing career, I met these investors who were also based here in Southern California and it was four of them.
And they were doing burrs out in Huntsville, Alabama. And they had done, I don’t know, six or seven Burrs, a small handful of Burrs out there in Huntsville, Alabama. And I remember one of the partners coming to me and saying, “Yeah, it’s been great. But with four of us doing long-term rentals, there’s just not a ton of cashflow coming from the portfolio yet.” And they end up pivoting into larger deals from there. But just know, if the goal is to eventually scale up the cashflow to a meaningful perspective, either you get a lot of these kind of lower cashflow deals, you stack on top of each other, or at some point you end up scaling up into bigger deals that produce more cashflow.

Ashley Kehr:
Now let’s go into option number four, seller financing. So this is one of my favorite strategies. And I just remember my mind being blown when I found out about this, that this was actually an option. I went from the limited mindset that you could only buy an investment property with cash. And that’s why I took a partner in my first couple of deals because I thought you just had to buy in cash. You couldn’t get a mortgage because it wasn’t a property you were living in. Then I realized that was not true. Then I bought properties with mortgages. And then I found BiggerPockets in 2017 and my mind was open to seller financing and what that was. And after I learned that, I had a portfolio I was buying from another investor and negotiated seller financing on a six unit property that he was selling.
So it was like a huge change for me. And so I am always asking and looking for seller financing. And so seller financing is when the owner of the property, so the seller is actually acting as the bank. So just like you would go to a bank, you’d get a mortgage, they would give the lump sum of cash to the seller to pay them off. Here you go, you’re paid, you’re done with the property. Then you make payments to the bank. In this scenario, there is no lump sum payment except if you’re giving a down payment to the seller. Instead, you are going to make monthly payments to them. The benefit of this is that you don’t have to go through all of the bank’s hoops that they make you jump through to get a mortgage. You also can negotiate the terms. You’re not set on what the bank is offering you.
So I’ve done it where you negotiate the interest rate, you negotiate the down payment, you negotiate any balloon payments. So a balloon payment is where you’re going to have a lump sum due at a period of time. So maybe it’s amortized over 30 years, but in five years you will have to pay the balance due that’s due in five years. It’s also negotiated. Let’s see, we got interest rate, we got the amortization period, we got balloon payment. So those are all things that you usually can’t negotiate with a bank. Like you can’t go to the bank and say, “You know what? I don’t want to put 20% down. I think I’m just going to do like 17%.” But with a seller, you’re not into the bank’s restrictions. You can actually sit and negotiate with the seller. So it’s always a good idea to see what their motivation is.
Do they care about the amount the property sells for? Can you actually pay more if you are having to make a lower monthly payment to them than you would the bank? Or maybe it’s a smaller down payment. So I’m going to give you a real life example. I bought a five unit property in four residential units and one commercial space in it. And it was I think listed at 250,000. I offered 225,000 with, it was like a $19,000 down payment. And then the rest was seller finance. And it was seller financed at 3% interest and amortized over 30 years with a balloon payment in four years. So I am making monthly payments. I think it ends up coming out to like 800 something a month or whatever it ended up being, but it might be a little bit more than that. But making those payments over those four years.
And then whatever the balance that’s still left after those four years of paying down a little bit of mortgage, but mostly paying interest, I will owe him that full amount. So my plan here is to slowly renovate the property over those four years so I can refinance with a bank and then pay him off the balloon payment at the end of those by going and refinancing with another bank. So that’s just like an example. This could be short-term solution, this could be a long-term solution for you of having seller financing. And that’s where the negotiation comes into play. There actually could be somebody who wants to hold the mortgage for 30 years. You don’t need a balloon payment baked into there. Or maybe the first time I ever did seller financing, it was interest only payments for one year. It was 7% interest only. So I didn’t pay any principal down.
And then in one year, the balance was due on the property. So I had one year to go and do the renovations and to refinance and get that money to repay the seller. And it actually ended up being down to the exact day that the payment was due, which I don’t recommend doing it that close. It was a little too close for comfort getting exactly on the day that it was due, getting the refinance done. But those are just some examples of seller financing and the benefits of them.

Tony Robinson:
And obviously there’s pros and cons to each approach, but it feels like there’s more pros to seller financing than there are cons. I think the biggest con is just that they’re a little bit harder to find. There’s tons and tons of deals in the MLS that you can just go search across the country. And while some will advertise seller financing, a lot of times it’s between you and the seller. And I do find that counterintuitively, a lot of times it’s easier to get seller financing on bigger deals than it is to get it on single family homes. I don’t know if you’ve seen the same, Ash, but I’ve only done seller financing once and it was on our hotel that we bought, our 13-room hotel that we bought in Utah. And similar terms, I think we have a 10-year balloon, 30-year amortization period. First two years were interest only at 7% and we put down 20%.
And we went back and forth with them even on the down payment, but the reason they needed 20% was because they had a line of credit against the property that they had to pay off in order to sell it. So like, “Hey, we just need you to cover paying off this line of credit and then we’re happy with everything else.” And that’s kind of how we negotiate it. But the pros are that everything you said, you get to control all those different elements. And it’s really up to whatever you and the seller feel is a win-win for both of you. So I would encourage more rookies to explore seller financing as an option, especially if it’s a situation where the seller owns a property free and clear or almost free and clear where a small down payment could pay off whatever balance they owe because it could be a benefit for both of you guys.

Ashley Kehr:
I’ll give you guys two tips on actually negotiating seller financing. The first one is anytime I walk a property with a seller or talk to the seller, I always ask, “Are you open to doing seller financing?” And more often than not, the answer is no. And then I just follow up with, “Oh, okay. I didn’t know if you had talked to your CPA or accountant about the tax benefits and needed those.” And that usually gets the wheels spinning. And sometimes people say, “Oh, well, I haven’t yet, but maybe I should.” And sometimes that ends up working out, but I think it’s coming from somebody that they, a A kind of respect to handle their finances and to do their bookkeeping or to file their tax return. As to the tax advantages, somebody that’s actually licensed to talk about taxes carries a lot more weight than you as the buyer trying to tell them, “Here’s why you should do seller financing.” So I always word it that way.
Sometimes it works out, sometimes it doesn’t. Sometimes they’ll look into it. Sometimes they’re already offering seller financing. And the second tip that I have is, besides just doing that, is to find out what their motivation is. And I usually like to know what they want for a down payment. And then also what do they need monthly? And I say need. So how much do you need monthly? Especially if this is someone that’s retiring. There’s a deal I’m working on right now, this person’s retiring. I asked, “What do you need monthly?” He said, “Probably 2,500 a month.” Okay, so I know I need to get to a $2,500 payment a month. So I could amortize this over X amount of years, do 3% interest and give him his 2,500. I’m paying a really low interest rate. I’ve got it amortized over to a good period of time that it makes it to the $2,500 a month and that makes it a better deal for me.
So I can kind of work backwards based off of numbers that they give me as to what they need. And I have had, when I’ve done this on the MLS and talked to agents, I’ve had the agents say to me, “Well, that interest rate is way lower than what you would pay at a bank. And that’s not what you would have to give as a down payment.” And my response is, “Exactly.
If I would just go to the bank, if those terms would work for the price point that the seller wants, but to make this price point work, this is why I would want to do seller financing.” So there’s always going to be pushback from different people when trying to do seller financing, but I think there’s always different things that you can say or recommend for them to look and do and find out the information on their own to make it worth their while.

Tony Robinson:
Yeah, I love that, Ash. And I love your point too always about the tax side, because to your point, I think maybe a lot of sellers aren’t aware of the tax implications of selling this property that they’ve owned for 30 years and depreciated a ton. And what happens when you go sell that? So maybe even a good question is like, “Hey, Mr. or Mrs. Seller,” just almost assuming like, “Hey, so you’re going to 1031 these funds into a new property?” “Oh no, no, no. I’m done with real estate investing. I’m just trying to liquidate the portfolio right now. “Gotcha. Okay. So what did your CPA say is the best tax mitigation strategy for you here? How are you going to avoid paying taxes on this? I’m just going to eat the taxes. Oh man. Okay. So if I buy this from you for whatever a million bucks and you got to pay tax, what do you think that tax bill will be?
I don’t know, probably about like $300,000, something like that. Man, okay, 300K. Has your CPA talked to you about the benefits of seller financing? And you can just get them to admit that they’ve got no strategy and then it hopefully almost sells itself at that point. But I love that you always plant that question for them. All right guys, we’ve got one more strategy coming up for you. And this is one that rookies have most likely never even heard of, but it’s super powerful. And we’ll cover that right after a quick word from today’s show sponsors. All right guys, welcome back. And we are onto our next strategy. Strategy number five is assumable mortgages. And we honestly haven’t talked a ton about assumable mortgage, but we did interview Alex Reed a few episodes ago. So if you guys go back and look for Alex Reed where she actually assumed a VA loan, which I didn’t even know it was possible.
It’s a great episode. Go back and listen to that one.

Ashley Kehr:
And to be clear, she is not a veteran, not military, neither is her husband that anybody can assume a VA loan as long as they meet the qualifications criteria, but you don’t have to have the same qualifications to assume a VA loan as you would if you were going to purchase with a VA loan.

Tony Robinson:
And just to define what an assumable mortgage is and why it might be one of the absolute best strategies as of this recording is that it’s totally by the book. You’re buying the property, you get the deed. So it’s not like a sub two where there’s a little bit of fuzziness and kind of like a gray area on the technicalities of this deal. An assumable mortgage is totally signed off on by the lender. But basically what happens is you buy the property, but instead of getting new debt, you assume the debt. You basically take over the debt. It transfers over to you from the existing owner. So think about what that means. Think about all the people who bought deals at 4% interest rates, 3.5% interest rates, 3% interest rate, the 2.99s and 2.65s and 2.5s. If you can assume that mortgage, you’re saving tons and tons and tons and tons of money and interest over the life of that loan.
And your payment’s typically going to be a lot smaller today than it would be if you bought it today’s six, 7% interest rates that we’re seeing. So that is the assumable mortgage is that the lender is blessing the transfer of that debt from the current owner over to you as a new buyer.

Ashley Kehr:
So there’s actually a couple websites. I pulled them up here where you can actually go and find assumable loans. So they’ve done all the legwork for you. One is withrome.com and the other one is assumelist.com. So they actually have properties that are listed on the MLS that have these loans, or there’s people that are selling for sale by owner that have listed their properties for sale on here that they do have an assumable loan. One thing that I think of is how many people bought second homes when interest rates were really, really low. So if you wanted to go and purchase a short-term rental or maybe a second home for yourself, going after people who maybe had failed vacation homes because they didn’t realize exactly what they were getting into when running a short-term rental business, or maybe they just need to sell for some other reason.
But where I have a lake house, we’ve seen tons of people put their property up for sale in the last year that actually did buy during the hype of COVID and maybe overpaid for their property and it’s not worth as much now. But you can look up use prop stream, things like that to look up people’s interest rates of what they actually have on the property. And sometimes it will tell too what the loan product was that they actually used. So then you can kind of gauge like, okay, they only put 10% down. They don’t have a ton of equity in this property. Maybe I can make an offer to actually assume the loan with giving them a little bit of cash and then just take over their 2.9% interest rate on this property. So I think this is a great way. You just have to actually do the work to find the properties that actually meet this criteria.
And I know that Alex did say when we interviewed her that it was a long process of actually getting the bank to make sure they meet the criteria, that their debt to income is good, their financials are good, to actually assume the loan. And she said that this isn’t new business to them, so it wasn’t as much of a priority to the bank to actually transfer this loan to them. So just to take that into consideration that it may delay closing on the property.

Tony Robinson:
And they also, Alex, had to bring a second bank into the picture to cover the difference between the current loan balance and what the actual contract price was. So I don’t remember the exact numbers, but the loan balance say was 300K. The agreed upon purchase price was 500K where there’s a gap there of 200K. She actually had to bring on a second lender to help bridge that gap. So they had the assumable mortgage taking up the majority, but they still had a smaller, newer mortgage to help bridge that gap. So there’s some complexity here and that’s probably the biggest con. And Alex actually hired a company to help navigate that whole process for her. So it might be good if you are doing some assumable mortgages to follow along with that same service at least the first time that you’re doing it. So that’s just a big note to remember for this type of debt is that it’s not just the purchase price.
I’m sorry, it’s not just the loan that you’re assuming, but it’s also the purchase price you have to consider as well.

Ashley Kehr:
So unlike seller financing where you want to find properties with a lot of equity so that the seller doesn’t have a mortgage they need to pay off where you can just make them payments where they have that equity sitting in there. This assumable loans, you’d want to look at the reverse. You’d want to look at properties where they don’t have a lot of equity, so they don’t need as much money from you to put down and then you can just assume their home mortgage so the mortgage is wiped out. And this is, I think, a great solution for people who maybe are over-leveraged on their property. And it doesn’t make sense for someone to come and pay what they need to actually pay off their loan. And then me as the buyer, it doesn’t make sense with a 7% interest rate. So my payment would be too high, wouldn’t work for me.
But if I can come in and pay them what they need by assuming their loan, wiping out their debt, and now it’s a 3% interest rate, so it’s a lower payment and that works for me, that can be a win-win for both the seller and the buyer to be able to offload the property. And now I have a new property. Okay, rookies, we want to know which of these strategies would you actually use for your next deal? Comment below and let us know if you’re watching on YouTube. Thank you so much for joining us for this episode of Real Estate Rookie. I’m Ashley. He’s Tony, and we’ll see you guys on the next episode.