Purchasing an investment property at a lower price then selling it at a higher price for profit is one of many real estate investing strategies that investors use. Instead of selling right away, landlord investors choose to rent the property for several years then sell it to take advantage of real estate appreciation and other tax benefits. To buy an investment home, most traditional lenders require 20% to 30% down payment. Here are 5 ways to invest in Real Estate with little or no cash.
1. Assignments
Investor Amy enters a contract to buy a property from Tim for $102,000. Amy then markets the property for sale at a higher price to other investors. Investor John agrees to pay Amy $120,000 for the property. The difference between the purchased contract and the sale contract is called an assignment fee. In this case, Amy’s assignment fee is $18,000.
Pros:
- No cash out of pocket, except for earnest money and perhaps option fee
- Little financial risk.
Cons:
- Higher busts out ratio due to buyer not performing or buyer and seller unhappy with assignment fee.
- Cannot sell to buyers with Fannie Mae or Freddie Mac loans
- Must have a list of buyers or access to investor buyers
- Time limitations to find the buyer
- Cannot be marketed on MLS
2. Hard money lenders
Most hard money lenders loan to real estate investors, not owner occupants, and these loans are short-term from 6 to 12 months. Borrowers will typically pay higher origination points and interest rates than traditional mortgage loans. Most hard money lenders will loan up to 70% of after-repaired-value or ARV and 80% to 90% loan to cost or LTC. There are a few lenders that would loan up to 100% of the LTC if the investor’s all-in costs are 70% of ARV or less. These are the lenders you want to find.
Pros:
- Some cash out of pocket in some situations
- Having another expert, the hard money lender, to analyze the deal could prevent the investor from buying a bad deal.
Cons:
- Higher holding costs can cause your profit to shrink if you hold the property for 6 months or longer.
- Higher fees
3. Lines of Credit
A line of credit (LOC) is a flexible loan from a bank or a financial institution. The borrower can take money out as needed up to the predetermined limit. As the money is repaid, it can be borrowed again and again. LOCs can be secured and unsecured. Some examples of LOCs are:
- Personal Line of Credit provides access to unsecured funds that be borrowed, repaid, and borrowed again.
- Home Equity Line of Credit (HELOC) is secured by your primary home. The credit limit is equal to 75% to 80% of the market value of the home minus the balance owed on the mortgage. Funds can be borrowed, repaid, and borrowed again over a draw period (usually 10 years).
- Business Line of Credit is used by businesses to borrow money as needed. Some real estate investors use this to purchase investment homes. In this scenario, the advance is secured by the investment property.
- Securities-Backed Line of Credit is collateralized by the borrower’s securities. The investor may borrow 50% up to 95% of the cash value.
Pros:
- Lower interest rate
- Access to more capital with Business LOC
Cons:
- Must meet lender’s requirements
- The amount of paperwork to obtain and maintain the line can be intense.
4. Partnerships
An equity partner is an individual who helps you finance the deal. There are many ways that a partnership can be structured.
Pros:
- No cash out of pocket
- Adding another set of skills and expertise
- Increase your buying power
Cons:
- Profit splitting up to 50% or 60%
- Bad partnerships could lead to losses or lawsuits.
5. Sub-to and Wrap
This is when an investor purchases the property subject to then sells it via wrap mortgage. The best way to explain this is by an example. Homeowner Susan has a mortgage. There are 220 monthly payments of $900 remaining to pay off the mortgage. Investor Joe pays Susan $2,000 and takes over her mortgage. Joe sells the same house to owner occupant, David. David puts $10,000 down to purchase the home from Joe. He also agrees to make 240 payments of $1,100 to Joe. For simple math, Joe makes $8,000 when he sells the house and $200 each month that David continues to make his payment.
Pros:
- Little to no cash out of pocket
Cons:
- Most complicated
- Buyer can default.
- Risk of lender calling the note
- Heavy amount of paperwork
- The investor must be disciplined to make the first mortgage payment.
Key Takeaways: Minimize your risks by understanding what you want to do. Seek advice when needed. Take actions!
