The idea of real estate investing with no money out of your own pocket is enough to pique anyone’s interest. The mere potential of making a good return without having to front the money yourself is simply too exciting to pass on. Meanwhile, investing in real estate with no money down is made possible by several unconventional alternatives. Therefore, if you are interested in investing in real estate, but would rather use other people’s money, try networking with some of the following sources:
Hard money lenders are organized, semi-institutional lenders who are typically licensed to lend capital to real estate investors. More importantly, they represent the single most advantageous relationship an investor may establish in their respective field. Hard money lenders make it possible for investors to secure deals they may have otherwise had to pass on. By offering short-term, high-rate loans, hard money lenders are perhaps the best option for today’s investors to turn to when they need funding to purchase a deal quickly and efficiently.
Unlike their traditional counterparts, hard money loans offer short-term solutions for borrowers who need money to fund both the acquisition and the cost of construction. In return for their loan, however, investors will need to pay upwards of 11 to 15 percent in interest, and perhaps even an addition three to five points (a subsequent upfront percentage fee based on the original loan amount).
Hard money lenders will ask to be named on the insurance policy as a means of securing their investment. Likewise, hard money lenders will require borrowers to give them a promissory note and a mortgage or trust deed to the property. These safety measures are put in place to mitigate risk and allow them to lend money to otherwise unproven investors.
Hard money lenders are asset-based lenders, which means they base their decisions to loan money almost entirely on the subject property’s potential. While they certainly take borrowers’ track records into consideration, the potential of the property represents their highest priority. That said, the better the property, the more likely an investor is to receive a loan.
In return for meeting all of the criteria set forth by hard money lenders, borrowers will be given quick access to funds that will most likely cover acquisition and construction costs. While their capital comes at a high price, investors are often able to receive it within as little as a few hours. The speed of implementation awarded to investors from hard money is one of the primary reasons they are able to acquire deals and exercise an advantage over the rest of the field.
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Private money lenders are similar to hard money lenders, in that they too are often willing to offer high-interest, short-term loans to any investor who can bring them a promising deal. As their name suggests, private money lenders are not institutionalized at all, nor are they licensed to lend money to real estate investors. Instead, private money lenders can be literally anyone with enough money and a penchant for investing. Private money lenders can be anyone from a friend or family member, to a business acquaintance or an investor’s latest attempt at networking.
While private money lenders aren’t institutionalized, they still award investors a great way to take up real estate investing with no money out of their own pockets. However, their lack of a professional structure inherently coincides with some notable differences from their hard money counterparts. Like hard money lenders, private money lenders will request to be named on the subject property’s insurance, as to mitigate the risk of their own investment. Additionally, private money lenders will also want borrowers to give them a promissory note and a mortgage or trust deed to the property. That way, the faith they are placing in a borrower is secured by collateral.
The primary differences between hard money and private money are made apparent in the interest rates and speed of implementation. Typically, private money lenders are inclined to ask for anywhere between six to 12 percent in interest. At that rate, private money lenders are usually cheaper to go through, but their capital comes at the expense of a less professional lending environment. Again, private money lenders aren’t licensed to lend money, and are traditionally less experienced in doing so.
The “rent-to-own” financing strategy functions as yet another alternative to traditional financing. More importantly, it proposes another way to take up real estate investing with no money (at least in the traditional sense) out of your own pocket. When buyers enter into a rent-to-own agreement, they are effectively agreeing to rent a subject property for a predetermined amount of time until they are able to exercise an option to purchase the house from the original owner. This is also known as a lease agreement. As a result, buyers will be expected to pay “rent,” but it won’t coincide with the significant downpayment that has prevented many people from buying a home.
Rent-to-own agreements will let prospective buyers pay rent for a predetermined amount of time (upwards of three years), after which they will be given the option to purchase the home. That’s an important distinction to make, as not all contracts will require the renter to follow through with a purchase. As Investopedia so eloquently puts it, “some contracts (lease-option contracts) give the potential buyer the right but not the obligation to purchase when the lease expires. If he or she decides not to purchase the property at the end of the lease, the offer simply expires.”
Seller financing, also known as owner financing, is exactly what its title suggests: the impending buyer will finance the purchase through the person who currently owns the home. The current owner will act as the lender, effectively removing the need for any third-party lenders. As a result, borrowers (the buyers) will proceed to make payments to the seller for the duration of the loan. To that end, seller financing isn’t all that different from a traditional bank loan. The owner will determine the cost, down payment, amortization, loan amount, interest, and everything else that has become synonymous with traditional underwriting.
The lack of a third party lends itself to both buyers and sellers. Most notably, seller financing is one of the easiest and most cost effective ways to finance a respective deal. However, the benefits of seller financing can’t be realized unless the seller owns the property “free and clear.” In order for the seller to exercise the “seller financing” option, they must be able to carry a first mortgage, which would require them to have paid off the property already. Only once the owner has paid off their mortgage and remains in a 100 percent equity position can they act as the bank for a subsequent transaction.
Seller financing has the ability to benefit everyone involved in a deal. The owner, for example, can simultaneously sell the house, profit from interest, and limit their tax liability by taking the proceeds from the sale in incremental installments. Buyers, on the other hand, may negotiate more favorable terms, like zero money down.
In addition to everything above, real estate investing with no money down is made even more possible for those who have already built up equity in an existing home. Thanks to the home equity line of credit (HELOC), those who have already been paying down a mortgage may be able to use existing equity to facilitate an additional purchase. In its simplest form, a HELOC allows homeowners to take the first position on a loan and put their equity to work. It should be noted, however, that most banks won’t let homeowners use 100 percent of their equity. To mitigate risk, it’s more common for banks to lend somewhere in the neighborhood of 70 to 75 percent of the equity one has in a home. While technically borrowing against the equity in your home, a HELOC will promote real estate investing with no money out of your own pocket.
“No money down real estate investing” takes on a whole new meaning when a partner is introduced into the equation. In fact, it is entirely possible for investors to practice real estate investing with no money of their own if they align their services with the right partner. If for nothing else, there’s no reason one partner can’t fund an entire deal. That said, investors who don’t bring any money to the table will need to make up for their financial shortcomings. In the event a partner can’t help fund the deal, they should be able to bring something of equal value to the table. Perhaps they are great at networking or are expert marketers. After all, money isn’t the only thing with value in the real estate investing industry.
The concept of real estate investing with no money is lost on a lot of people. The idea that purchasing an asset as large as a piece of real estate without any of your own money seems downright impossible. However, there are several alternative forms of financing, not the least of which rely on other people’s money to complete a deal. The more options an investor has to fund a deal, the more likely they are to acquire it.