3 ways to buy rental properties without a Bank Loan?
Traditional lenders, like a bank or credit union, require a down payment when you buy rental properties, which is typically 20% or more of the purchase price. That can equate to tens of thousands of dollars just to get your foot in the door to owning your first rental property. Here are three ways to buy rental properties without a bank loan.
One of the most common methods of investing in real estate without a bank loan is to buy an investment property using other people's money (OPM). You can find a private lender or funding partner willing to partner on the investment, giving you the funds needed to purchase the property. This could be the down payment alone or the entire purchase price in cash in exchange for a return on their investment.
Partners could be family members, friends, or colleagues, and there are a variety of ways to structure their return, like:
· A joint venture (JV), where ownership of the property or company is shared in respective percentages. Rental income, equity, and appreciation are typically shared with the partners respectively.
· A lending agreement, where the investor receives a preferred return on their initial investment
· A private loan, where the partner is repaid with a monthly payment, which could be interest-only with a balloon or a principal and interest payment.
· A combination of the above.
Seller financing, also called owner financing, is a nontraditional form of financing in which the seller or owner of a property holds financing for the buyer. The Sellers or owner of the property acts as the lender for the buyer instead of them going to a bank to get traditional financing. The buyer repays the loan over time according to the repayment terms outlined in a formal agreement, like a note and mortgage.
Some sellers will know exactly what terms they will accept or hold for the financing, such as a specific interest rate, down payment, or loan period, while others are open to negotiation. If you are a strong negotiator and can determine the seller's needs, it is possible to negotiate financing with no money down or have the seller carry a second mortgage, while getting a first mortgage from a bank. Usually, this only works when the need to sell or reach the desired sales price exceeds the owner's desire for a down payment.
Hard Money Loans
Hard money loans are an alternative financing option commonly used to finance properties that won't be approved for traditional financings, like a fix and flip. Investors can secure financing for a property up to a certain percentage of the property's current or future value (after repair value) and will include the cost to renovate or repair the property into the loan.
This means if you negotiate a great deal with a super low purchase price, and you are within the hard money lender's loan-to-value requirements, you could purchase the property without a bank loan.
Hard money loans are normally short term, lasting anywhere from 6 to 18 months, with very high-interest rates, around 5% to 10% higher than a traditional mortgage. So this method of buying a rental property with no money down is typically best if you have good credit and plan to do a cash-out refinance after the property is repaired and rented.
If you have any questions, you can schedule a coaching call with Real Estate coach SAWAND L. BELCHER.