5 Unusual Down Payment Methods Nobody Talks About
There are a lot of books out there talking about ways to purchase property with no money down. You might have even read Brandon Turner’s The Book on Investing in Real Estate with No (and Low) Money Down. Owner financing and seller carry-back are some of the most common ways to obtain a down payment.
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Over the years, I have heard of and used many different ways to buy real estate. Not all of these ways will work for everyone, but hopefully this will provide you with enough tools to get the deal done.
1. Line of Credit
Most people that invest in real estate have heard of a HELOC, or home equity line of credit. This might be one of the most common ways people come up with a down payment for an investment property if they haven’t saved up the funds on their own.
Usually, the terms are great and you're only paying interest on the amount you borrow, not the entire HELOC amount like you would with a cash-out refinance. Talk to the bank that has the loan on your house, and they can usually give you the best options.
You might have other properties you could use for a line of credit. Some farmers use grain stored on their farm as a line of credit to purchase more farm ground. You might even have a good enough credit score to get an unsecured line of credit. Local banks and credit unions are great for these types of loans.
2. Credit Card Advance
This is a riskier option, but it is an option. Back in 2012, I took a cash advance out on a credit card for $25,000 and purchased a house. Yes, the interest was high, but after a little elbow grease and TLC, the rent covered all the bills including the credit card payment. It even put cash in my pocket.
Although you might be paying a much higher amount for interest on a cash advance, you may be able to transfer that balance to another credit card at 0% interest for a certain term.
Please use this strategy with caution. Although this seems like an easy way to access quick cash, it's also an easy way to rack up hefty interest payments and increase your debt-to-income ratio.
After you have the property rehabbed and cash flowing, you should be able to BRRRR the property and pay off that credit card. Make sure you pay your credit card off with the proceeds—as opposed to taking a vacation.
3. Your Vehicle
If you have a vehicle paid off, that’s great. Not only do you not have a car payment, but you also have a lendable vehicle that you can use to purchase property. This might be the least-known way of making a down payment.
Some banks will take the title of your paid-off car and use it as collateral or lend you the cash to make that down payment. With low interest rates these days, you might be able to get an interest rate lower than what your property might be getting.
Whether you are using your vehicle for collateral or getting cash out for it, just remember that your property needs to cover this added expense. After, you might run the numbers and conclude that everything works out—but did you remember to add your new car payment into the equation?
4. Free Rent to the Owner
I have personally never done this but have heard of this being done. Years ago, I had a friend who wanted to purchase an owner-occupied, four-unit building. He and the seller settled on a purchase price, but when the down payment time came, my friend was short.
Knowing the seller didn’t want to move that badly, my friend offered 12 months of free rent in exchange for the down payment. Not only did this help my friend out, it also gave the seller some time to find a new place to live—all while living free for one year.
Although this might be a rare occurrence, it was one of the best no-down-payment strategies I had ever heard of. Both the seller and buyer won at the closing table, and they both got more than a real estate transaction. The buyer acquired a property with a tenant-in-place—one who would watch over it and help with some minor management. The seller got a free place to live for one year and plenty of time to find a new home.
5. Cross Collateralization
This is my favorite way to buy property with no money. I have literally bought millions of dollars of real estate doing this.
Let’s say you owe $50,000 on a house valued at $100,000. Now, the bank may give you an 80% loan-to-value. So, they will lend you up to $80,000 on that house.
Since you already owe $50,000, that leaves you with $30,000 of lendable equity. Instead of cashing out that extra $30,000, just leave it "on the books."
This way your loan payment is lower. Your debt-to-income ratio is lower. And your debt-service coverage ratio is higher.
With that $30,000 of lendable equity, you can now purchase a $150,000 property.
Here’s the math: 20% x $150,000 = $30,000
Both of these properties will be tied to the same note, so be careful. If you default on one, the bank could take both.
In this situation, I take the next six to 12 months to force appreciation and rehab the new property. Then when I am done and the property is stable, I refinance. By refinancing, I “untie” the properties, so if I default on one, I won’t lose the other.
Now I can use that first property to buy another $150,000 property. This is a great way to purchase property while keeping your first property loan low.
Whichever way you decide to use as your no-down-payment method, make sure you run the numbers. Since your financing will be at or near 100%, you need to be extra careful.
Don’t buy something because you can. Buy something because it makes sense. Be conservative and always have a backup plan.
What’s your favorite down payment strategy?
Share your thoughts in the comments below.