10 Oct Can I Buy an Investment Property With Little to No Money Down Using a Traditional Mortgage?
No. Well, maybe. Actually, yes, there are ways to buy an investment property with little to none of your own money by using a traditional mortgage loan. This is a way a lot of aspiring investors get started.
So let’s say you have limited funds and huge goals. You are a little reluctant to try creative financing for your first deal. You have good credit and a source of consistent income. Or maybe average credit and not much in the way of savings. How can you pull off buying an investment property with a traditional mortgage loan? A key lies in the panoply of federal and perhaps state backed loans.
VA (Veterans Administration) loan. This could be a good opportunity for an aspiring landlord. This is for eligible servicemen and women, veterans, and their spouse. The loan could fund up to 100 percent of the purchase price, and the buyer could even negotiate to have the seller cover closing costs up to 4 percent of the price. That means it’s possible for the buyer not to have to bring any money to the closing. VA loans are for owner-occupied homes that are in good shape.
A VA loan could be used to buy a 1 to 4 family home. So, if you’re looking to be a landlord, you could buy a multi-family residential property and live in one unit. Later on, if you decide to move out, you would have to refinance to pay off the VA loan since it is for owner-occupied homes only. One alternative to selling the property is to apply for an Interest Rate Reduction Refinancing Loan (IRRRL), which does not have the same occupancy requirements as a new purchase VA loan.
USDA (U.S. Department of Agriculture) loan. This could be a good opportunity for an aspiring flipper. The USDA’s Rural Development program is a great one. It was designed to help low- and moderate-income households to own a home in an eligible rural area. The buyer must occupy the house as their primary residence.
You can use a USDA loan to buy a minor fixer-upper, as the work to be performed cannot exceed 10 percent of the loan amount. What’s nice is that you could negotiate seller concessions up to 6 percent of the loan amount. If the numbers work, you could buy a single family house with no money down. So, it’s possible for a person to buy a single family home that needs some work and then resell it 2+ years later for a (probably) tax-free profit.
FHA (Federal Housing Administration) loan. This could be a good opportunity for aspiring landlords and flippers. This loan requires a 3.5 percent down payment, which can be gifted. First, coming up with 3.5 percent for many people is doable in a relatively short period of time. Regardless, if you have a family member, friend, employer, or someone else who is willing to give you the down payment with no expectation of repayment, then it’s possible for you to buy a property with no money out of your own pocket. Also, a buyer can negotiate to have the seller cover up to 6 percent of the price for closing costs.
An FHA loan can be used to buy a 1 to 4 family property. If you’re looking to purchase a rental property, it would be smart to buy a small multi-family property in which you can live in one unit and collect rents on the rest. If you’re looking to fix and flip a 1 to 4 family residence, you could use an FHA 203k renovation loan. The 203k product includes a loan for the repairs and upgrades. FHA does require that you live in the property for at least one year.
State backed loans. Many states offer special incentives, grants, or second mortgages for eligible buyers. The overwhelming majority of these benefits go to first-time homebuyers or low- to moderate-income homebuyers. Some residential multi-unit properties are eligible. Consult your local mortgage loan originator to learn more about what you may qualify to borrow. Or, contact us and we’ll connect you with a reputable local lender.
Consider a co-borrower. If there are some credit, debt, or income limitations, it may be possible to join forces with a willing co-borrower who is stronger in those areas. Depending on the type of loan you jointly apply for, it may be possible to purchase an investment property or one that will eventually be an investment property after you reside there for the allotted time. In theory, a co-borrower could be someone who becomes your business partner on the deal. Perhaps they would be open to contributing the down payment money or renovation funds as part of their involvement in the deal. Or, the co-borrower could simply be a benefactor who cares for you and is willing to risk their reputation on your behalf. Not everyone close to you will qualify or want to be a co-borrower with you. There are some banks that are offering conventional loans that require only 3 to 15 percent down.
Not everyone who has limited funds has to put off buying an investment property or resort to creative financing. There are traditional mortgage loans that could be used to help you get started. It’s worth it to talk with your mortgage professional.
Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania. He became a full-time real estate investor in 2004 after serving in the U.S. Navy. Tai has made colossal mistakes in investing (and learned some things along the way). He has owned over 200 properties with various investment partners, and he has been involved in over 200 more transactions as a real estate broker in both Pennsylvania and Tennessee. Tai and his wife Amira enjoy hunting for investment properties. Contact Tai if you need some consultation on real estate investing. Tai may be available for coaching and speaking engagements on a variety of real estate topics. Send an email to tai@investandtransform.com. Tai is passionate about helping investors make money and avoid mistakes.
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