I have written articles about how to invest in real estate with little money down and even no money down. I use many of these techniques to buy rentals and flips with less than 20 or 25 percent down. I also make a very good living flipping houses and as a real estate agent. While I use these techniques to buy with less money, I still have plenty of reserves and I have excellent credit. There are many people who want to invest in real estate who do not have any money saved, have bad credit or both. I get emails and comments from readers who want to know how they can get started without any money and without the ability to borrow any money from a bank. So the question becomes should you buy rentals or flips if you have no money?
How much money do you typically need to buy a rental or a flip?
When buying investment properties, most banks will want the investor to have skin in the game. That means the investor has to put their own money into the deal in the form of a down payment. The down payment varies on rentals, but is usually at least 20 percent of the purchase price. Once you get to four mortgages in your name, the down payment jumps up to 25 percent for most lenders. If you are buying a flip, many lenders will want at least 25 percent down or more, if you can find a bank that will finance a flip. There are other ways to finance homes besides banks such as hard money or private money. Even hard money lenders and private money lenders like to see the investor put some of their own money into the deal.
Hard money lenders will sometimes finance the repairs on a flip and may require less than 20 percent down as well. However, almost all hard money lenders will require some form of a down payment from the investor, especially when they do the first couple of deals. It would be possible to find a private money lender to loan you all of the money for a flip or a rental, but you are going to have to find those private money lenders. Usually the best private money lenders are friends or family. The major problem with using private or hard money on a rental property is the loans are usually short-term. You may have to refinance the loan in the next year or two. If you have bad credit, are repairing credit or have no cash available it will also be tough to convince the hard money lender or even a private money lender to give you money.
How much money do you need to finish a flip or hold a rental?
Most people will consider the purchase price and the repair costs when figuring out how much money they need for an investment property. However, there are many more costs that need to be considered. On a flip, you will have carrying costs, maintenance costs, taxes, insurance and more as long as you own the property. It is very unlikely a lender will give you money to cover those costs as well as the repairs and purchase price.
When owning rental properties there will be carrying costs similar to a flip until the home is rented. There will also be costs once the home is rented. There will be vacancies and maintenance that have to be accounted for when you own a rental. Banks will require investors to have reserves in cash to cover maintenance and vacancies. Usually banks will require six months of PITI (Payments, Interest, Taxes, Insurance) held in reserve for each mortgage an investor has including the new mortgage. If you have no mortgages in your name and want to buy a rental with a $1,000 payment, you would need to have $6,000 in reserves plus the down payment. I would suggest investors have at least $5,000 in reserves before they buy a rental and preferably $10,000.
If you have no money and want to buy rentals properties, how are you going to make the payments if the tenants leave? If something breaks in the house, how are you going to fix it with no cash in the bank? If you want to invest in rentals properties there is much more to consider than the purchase price and the repairs needed.
How much money will you actually make when you use no money?
I am able to flip some houses with none of my own money. I have a lot of experience and have proven over and over I will make money on my flips. Because of that, I am able to use lines of credit, private money and bank money to flip houses. Even with using many sources of financing I have to use a lot of my own cash as well to have ten flips at once. My financing comes with pretty good rates, but the worse your credit is and the less of your own money you use to buy a flip, the more interest you will pay. Using hard money is very expensive and private money can be very expensive as well. Rates on hard money can be 12 to 18 percent and the worse your credit is the more you will pay.
If you are buying rentals, the less money you put down, the more interest and costs you will pay as well. Buying as an owner occupant and living in the home for a year, before you rent it out is a great strategy to invest with less money down. When you buy with less than 20 percent down, you will have to pay mortgage insurance and your costs will be much higher. It is much harder to cash flow the less of your own money you use.
Should you invest in real estate if you have no money and bad credit?
The first question I ask people who have no money and no credit is why? Why don’t you save and why is your credit bad? If you want to get out of a bad situation, investing in real estate will not cure all your problems. Buying a rental or a flip with no money may make your problems even worse. Take a look at your life, why was your credit poor, why can’t you save money? Then work to fix those problems before you invest. There are many things you can do to stop living paycheck to paycheck or fix your credit.
- Talk to a lender ASAP: If you have bad credit a lender can tell you how bad it is and what you need to do to fix it. Do not avoid talking to a lender simply because you don’t think you can get a loan. They can help you get a loan faster than trying to do it all yourself.
- Look at your spending habits: I have never bought a brand new car, I think it is a waste of money. I never had a car payment until I was 28, and my daily driver for 10 years was a 1991 Mustang that I paid cash for. Saving money when I was younger was a big reason why I was able to invest and build my future.
- Change careers: Having a career in real estate is different from investing in real estate. You can make a lot of money in real estate as an agent or even as a wholesaler without actually investing in real estate.
- Try not to spend all your money on your personal house: Many people buy the most expensive home they can qualify for when buying a home to live in. When you spend all your money on your personal house it makes it very hard to buy investment properties and save money.
If you have no money and no credit, there are ways to invest in real estate. Just because you can, does not mean it is the best thing to do. I would focus on fixing the core problem of having no money and no credit before you jump into a new venture that could make your life even more difficult. There are many ways to get involved in the real estate business without actually investing. There are many things you can do to learn about investing in real estate while you are working on your credit or money problems.