Being a landlord investor in Colorado is incredibly profitable and seems to be getting more profitable as time goes on. Rents in Denver are up to 13% since last year, with a small vacancy rate of 4.3%. Rentals in Colorado Springs have increased more than 40% during the last five years. And as mortgage rates continue to rise, locking more people out of the home buying market, the demand for rentals will only increase.
If you don’t have the money for a down payment, it may seem impossible to get in on this rental gold rush. But for a smart investor, it is very possible to invest in a rental property with no money down. Let’s look at some of the best methods to get a profitable rental investment without putting a lot of money up front.
Home hacking
This well-known investment method can get you your first rental investment for very little money AND live rent-free.
Here’s how it works: You simply buy a small multifamily home as an owner-occupied property, which requires down payments that are much lower than for investment properties. An FHA loan, for example, requires only 3.5% down, with a qualifying credit score.
You then live in one of the units – say, one of the bedrooms, or a self-contained basement unit – and rent out the rest of the place. Your rental cash flow should cover your mortgage payment as well as maintenance and other related expenses, meaning you’re essentially getting free housing and can pay off your mortgage in record time. And once you’ve paid off the mortgage, you can come back and sell the property to a company that pays cash for housesor sell it themselves to avoid real estate commission.
Home equity loan or line of credit
If you already own your home and are open to using it to purchase an investment property, a home equity loan or a home equity line of credit (HELOC) can help you get into the game without breaking the bank. no money.
If you have equity built up in your current home, you can take out a loan against that home equity and put that money into a rental investment. One of the big advantages of this method is that, since you’re using your home as collateral for the loan, your credit score doesn’t matter. Home equity loans come with very low interest rates, although they also come with many of the same closing costs like a mortgage.
A HELOC is a line of credit that you borrow against the equity in your home, so instead of a lump sum like a home equity loan, it’s a line of credit that you can draw on as needed. One of the advantages of a HELOC is that, unlike a home equity loan, there are no closing fees and you only pay interest on the funds you actually withdraw. However, the interest on these withdrawals tends to be higher than on a home equity loan.
Seller financing
We are so used to thinking of bank mortgages as the only way to buy a home that we often forget that there is a way to buy a home without involving a bank at all.
Seller financing is exactly what it sounds like: You and the seller enter into a purchase agreement between the two of you, and you make payments directly to them. Because you are negotiating the terms of the deal between the two of you, you can simply negotiate zero down payment.
Most sellers likely won’t be interested in this type of deal, but you may find motivated sellers who will be open to it. Sellers who know you personally, or sellers who are motivated to sell by personal circumstances or unwillingness to perform necessary repairs and maintenance on the property, are good candidates for seller financing. The main advantage for them is convenience; after quickly drawing up a simple sales agreement, you start paying them right away. Don’t hesitate to ask a seller if they are open to seller financing – the worst they can do is say no!
Gap Lenders
If you don’t have cash to spare, gap lenders will cover the down payment on your investment property – but they charge a moderately high price.
Gap lenders can take a second lien position behind your primary mortgage lender, a risky position (for them). Consequently, they will pay high interest and fees to mitigate their risk.
Alternatively, they may have a partial ownership interest in your property, essentially becoming your partner. While that’s a pretty high price to pay, it might make sense if you’re eager to get into a hot market and don’t want to worry taking a full loan for investment property.
Assume the seller’s mortgage
Similar to seller financing, this type of deal sees the seller simply transfer their mortgage to you. You’ll make payments on the existing mortgage (which probably has a much better interest rate than a new mortgage you’d buy today) and pay the difference directly to the seller.
This approach can work well for unconventional buyers because it allows you to use many different sources of financing to pay the seller—personal loans, friends and family, even credit cards—whereas a conventional loan generally won’t allow you to borrow money to make a down payment. And it can attract sellers who don’t want to go to the trouble of learning how to do it unload their house in a turbulent market and would rather make a simple, hassle-free transfer.
Just keep in mind that not all mortgages can be transferred between individuals, so it’s up to you to do your due diligence!
Luke Babich is the co-founder of Smart Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured in BiggerPockets, Inman, the LA Times and more.