I am looking to buy my second property, but this one is initially just to serve as a primary residence with my family. I will rent out my current property that I know can yield positive cashflow (I have done it before, and rents have only increased since then). As I do not even really NEED to purchase another property at the moment, I have two options: either wait a while and save up towards a down payment, or just get a 0 money down loan.
Of course with the latter I would be giving up any equity going in, and likely have higher closing costs, but the big advantage that I see is that I don't have to wait to get a property (if I am in a position to act now, why not?), and as long as I am smart with the purchase, I can turn it into an investment property down the road. In this instance, I am ok with not having any equity going in.
My question is this: Has anyone used a 0 money down mortgage but later regretted doing so? If so, what were the unseen "gotchas" that ended up being the killers for you? Was there anything that prevented you from pursuing other properties later on? If you could do it again, would you avoid them altogether or simply shop around for different terms?
All perspectives welcome. Thanks!
There's a few disadvantages to 0% down:
1) No equity in the property to allow for market fluctuations.
2) If you are using a bank, you'll be paying PMI which now has a required carrying period.
3) Interest rate will be higher.
4) Monthly payment will be higher so harder to cashflow.
There's lots of great reasons to do this sort of financing. With the projected payment, would it still cashflow as a rental? If so, you've got a BRRRR and you get to skip some R's.
There is a funding fee that is usually between 1%-4% that gets wrapped into the loan amount. But if you are having the tenants pay it off it's not really a problem. Little equity doesn't mean much since you have nothing into the deal. It shifts the risk onto the bank. If you decide to use one of the construction funding programs, these are usually inflated bid prices. 0% down is ideal and great if you can qualify for those terms.
I purchased my first property (primary residence) with zero down through a VA loan (no PMI is amazing), and also negotiated for seller credits so my total out of pocket was ~$500. The obvious downsides are what have been stated and what you already know-no equity (actually probably a couple k upside down in the first months), higher mortgage payment, etc.-but i also retained all my capital that I'm now putting into a second investment property.
In a year I’ll do it again and rent out this current primary residence, and while the cash flow won’t be incredible due to the increased mortgage payment, I’ll have 2 houses with tenants building equity for me (while still generating cash flow) when I’d otherwise just have 1.
Maybe in a year or two I’ll have a horror story that came out of it (hopefully not), but I’d do it again in a heartbeat. And i will.
Best of luck!
@Frank Geiger thanks for your input. Most folks I see wont even think of buying if they have no equity going in, but your right, of course I wouldn't have equity if I out up none of my own cash so not a problem.
@Patrick Menefee thanks for your input as well. Your plan is exactly what I plan to do, and this property I would hold for a long time, so the equity and cash flow will come down the road. But you share the consensus of what I have seen on other posts... if you can do a no money down mortgage, do it!