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Podcast Hard Money Lenders Books Washington
BlogArrowMortgages & Creative FinancingArrow5 Unusual Down Payment Methods Nobody Talks About
Mortgages & Creative Financing May 14, 2020

5 Unusual Down Payment Methods Nobody Talks About

Matt DeBoth
Expertise:
8 Articles Written
real-estate-action

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.

Related: No Credit? Bad Credit? 6 Steps to Fix Your Finances

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.

buy-a-house-bad-credit

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?

Related: How to Turn Your Car From a Money Pit Into a Money Tree

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.

By Matt DeBoth
Matt DeBoth has been an active real estate investor since 2011. Matt served in the United States Marine Corps for eight years as a Force Recon Marine and has done multiple deployments to Iraq, Afgh...
Read more
Matt DeBoth has been an active real estate investor since 2011. Matt served in the United States Marine Corps for eight years as a Force Recon Marine and has done multiple deployments to Iraq, Afghanistan, and the Middle East. Matt bought his first investment property while on a combat deployment to Afghanistan. Since getting out of the Marine Corps, Matt has flipped over 25 rental properties and currently owns over 140 units. He specializes in landlording, creative financing, and using the BRRRR method for mid- to large-sized apartment complexes.
Read Less
36 Replies
    Tom Phelan Real Estate Investor from Key West, FL
    Replied 8 months ago
    Great suggestions. In addition or combined, how about using ... 1. Your IRA. Right now you can withdraw up to $100,000 tax free and penalty free. You have three years to repay, if not you will owe taxes. 2. Your Company 401(k). Right now you can borrow up to $100,000 tax free and penalty free. You have five years to systematically repay with current interest rates. 3. Your Life Insurance Cash Values. Some people have a bundle in Cash Value that can be borrowed at very low interest rates.
    Sean Morrisey Residential Real Estate Broker from Aurora, IL
    Replied 7 months ago
    Fantastic point Tom!

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    Don Pham from Fort Lauderdale, Florida
    Replied 7 months ago
    I would talk to a CPA before doing this. From my understanding, it's not the same as not owing taxes on the withdrawal. You MUST claim it as income and therefore pay taxes on it, but you have the option to return the funds over the next three years and amend the return to get the money back. In aggregate it's the same, but it IS a liquidity issue if you can't cover the taxes during the rolling period.

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    Peter Durant from Central Massachusetts
    Replied 8 months ago
    I always thought there was a penalty for using your IRA?
    Michael Hohertz Rental Property Investor from Houston, TX
    Replied 8 months ago
    As part of the CARES Act that was recently passed, anyone affected by COVID19 can make the withdrawals that Tom is referencing above. However, what is not clear - at least to me - is what the word “affected” means. I checked with my employer’s 401(k) and they have an affidavit that I would have to sign swearing that an immediate family member has/had COVID19 AND it created a hardship. This isn’t true for me, so I’m not doing it. I’m trying to determine if IRA withdrawals will have a similar hardship test. Definitely get EXPERT help before claiming a CARES Act Distribution, in my opinion.
    Jacob Cohen
    Replied 7 months ago
    Exactly. If you’re using a 401k check with the provider to see what qualifies under the CARES act; if you’re using an IRA check with your CPA to make sure it will qualify under the rules of the CARES Act.

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    Andrew Slezak from Chattanooga, TN
    Replied 8 months ago
    Exactly right. I’m throwing money in my Roth IRA right now to use a down payment in the future. If the markets are still down, then so be it. Cross that bridge when it comes. I’m house hacking my duplex and have a 401k that seems to be safe. We’ll see!

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    Wenda Kennedy JD from Nikiski, Alaska
    Replied 8 months ago
    I had a friend, Jack, who LOVED vintage vehicles. When he sold his properties, he'd drive up to the meeting or showing in one of those cars. Then he'd throw it into the deal as a sweetener. He always got top dollar for his properties. When Jack bought properties, part of his down payment was usually one of his vehicles, couples with a sweetheart price. There are a hundred ways to skin this cat. Furniture, services, goods, stocks, child care, a vacation package... anything can be put on the table. Good trades can be worked out most of the time. Think about what you can offer that is unique to you and your circumstances. Then listen to their heart's desires to see what deal you can work out with them.
    Vanessa Willard from North Carolina
    Replied 8 months ago
    Would you utilize this in cash offers or when using conventional loans too?

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    Lisa Kinman
    Replied 8 months ago
    Love this!

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    Sonja Sevcik
    Replied 8 months ago
    I like this too!

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    Luis Rivera New to Real Estate from Puerto Rico
    Replied 8 months ago
    Man! What an amazing article! I have to though that number 4 really surprised me!

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    Travis Hill Investor from Multiple
    Replied 8 months ago
    Thanks for the article!

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    James Free Rental Property Investor from Fort Collins, CO
    Replied 8 months ago
    This is not the best time to be advising people to do things that could very easily lead to being over-leveraged.
    Andrew Slezak from Chattanooga, TN
    Replied 8 months ago
    Always invest at your own risk... Just because I’m reading the advice now doesn’t mean I have to use it now. I’m going to keep these in my back pocket and play when the move seems to be right.

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    Matt DeBoth Rental Property Investor from Albia, IA
    Replied 8 months ago
    You’re correct. You should never overleverage yourself when buying a property. That is why you should buy cash flowing rental properties based on actual numbers and not a pro forma. This is why stress testing a property is so important. Using a different method as a down payment doesn’t mean you are overleveraging at all.

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    Christopher Stacy Rental Property Investor from Wiesbaden Germany
    Replied 8 months ago
    Matt, I appreciate your article. I am also a fellow serviceman and still serving. I was wondering if you could clear up the Cross Collateralization technique. I would first like to know if you are talking about using a HELOC for the loan or some other loan. Also, I don't understand how this way makes your loan payment is lower, your debt-to-income ratio lower, and your debt-service coverage ratio higher. Aren't you essentially taking on more debt by borrowing against the property despite leaving it on the books? I'm just not familiar with the technique so if you can clarify a bit more, I would appreciate it. Thanks for serving!
    Scott White Rental Property Investor from Austin, TX
    Replied 8 months ago
    I had the exact same questions, along with what's meant by leaving the lendable equity "on the books". Here's hoping @Matt DeBoth will add some additional detail ...
    Jared Bigman Rental Property Investor from Irvine, CA
    Replied 8 months ago
    Also curious on this one and jumping in here -- some expanded clarification on what this looks like would be great.

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    Evarson Azevedo from Coon Rapids, Minnesota
    Replied 8 months ago
    I think he meant,not cashing out until only when you find an investment property that positively cash flows.

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    Najah Smith Rental Property Investor from New Orleans, LA
    Replied 8 months ago
    Great article. Number 3 was something I’d never thought/known of. Number 4 was the most surprising and something I’ve taken note of, I’d definitely consider it .

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    Eddie Trumble Rental Property Investor from Peachtree Corners, GA
    Replied 8 months ago
    Great article Matt! #5 is very creative, I never considered that! Thanks! Eddie

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    Margo Masri
    Replied 8 months ago
    As an outorced CFO I like the best the cross collateral. The cc is very risky and I've seen to many Real estate professionals suffer there as they don't mange that part well. I actually thought the car one was pretty interesting And did not think of that!

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    Carmen Glancy Investor from Boise, Idaho
    Replied 8 months ago
    Amazing ideas! I really like #5. I never thought of this :-)

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    Johny Omaga
    Replied 8 months ago
    Wow I thought I’ve heard it all. #5 is definitely creative.

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    Tanyal Bricthorn
    Replied 8 months ago
    I've actually used my car. I was buying my 2nd house and wanted to do a true nothing down deal. I had access to 100% financing at the time, and convinced the seller to hold my car title as collateral in leiu of a down payment. I never signed it so I'm not sure it would have done him any good if I backed out, but we closed on schedule and I got my title back.

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    Ryan Garrison Rental Property Investor from Olympia, WA
    Replied 8 months ago
    Owner carry second mortgage?

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    Anthony Greenwood Rental Property Investor from Palm Springs, CA
    Replied 8 months ago
    Thanks for the article! #5 is very helpful I would consider for my next property.

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    Will King Investor from Dallas/Ft Worth
    Replied 8 months ago
    Really good information. We've used our infinite banking life insurance policy in real estate. Which has a ton of benefits when structured and used correctly.
    Grayson Graham Investor from Bend, Oregon
    Replied 8 months ago
    Could you elaborate on this a bit? Thanks Will!

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    Account Closed
    Replied 8 months ago
    Peter, "I always thought there was a penalty for using your IRA?" Did someone tell you this? If so I would seek another Financial Advisor. There can be a "Penalty" but there are many exceptions.

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    Judith Anne Condon
    Replied 8 months ago
    This article is a keeper! Thank you.

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    Joseph M'Mwirichia Rental Property Investor from Sarasota, FL
    Replied 8 months ago
    Great ideas all around! Thanks fo sharing and encouraging folks to think outside the box.

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    Cynthia Campos New to Real Estate from Orange County, CA
    Replied 8 months ago
    I have been studying REI for the past few months and this number 5 suprised me! I love this, thanks!

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    Dave Rav from Summerville, SC
    Replied 8 months ago
    awesome! Love the creativity here! I've used the credit card advance and LOC options on more than 1 occasion. My biz cc offers 18 months no interest and only a 1.99% trans fee! I'll take that all day long!

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    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 8 months ago
    Good list of creative strategies, although I would be very, very careful using credit cards for down payments unless you have a very good plan to get that paid off shortly.

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