How to Buy Your First Rental Property with No Money Down

A study of asset returns over 145 years in 16 developed countries found rental properties outperformed stocks.

But how can rental properties perform better than stocks, with lower volatility and risk? Don’t higher returns mean higher risk?

The answer is simple: there’s a higher barrier to entry to invest in rental properties.

Buying Rental Properties Requires Money & Skill

Anyone can throw $100 into an index fund. No minimum cash requirements, no education required. It’s one of the great advantages of investing in equities, despite their volatility.

But rental properties pose two huge challenges to new investors: they require more money to purchase, and they require more skill than index fund investing.

At SparkRental we can help you with the “skill” part of that equation. We offer free rental investing courses, free webinars, a free weekly real estate investing podcast, and of course hundreds of free articles. But what about cash? Doesn’t it take tens of thousands of dollars to buy a rental property?

Yes — but that doesn’t mean you can’t use tricks and hacks to get around the down payment requirements for real estate investment.

Buying a Rental Property with No Money Down

If you’ve ever wondered “Can I buy a rental property with no money down?” you’re far from alone. Every real estate investor has asked the same question at one point or another.

Here are ten ideas for how to buy a rental property with no money down. Or at least less money down — there’s no free lunch in life, but you have several options to slim or even eliminate the down payment you need to buy your first rental property.

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1. Consider House Hacking First

House hacking is the easiest way to buy your first rental property. And in the bargain, you score free housing!

The traditional house hacking concept is simple: you buy a small multifamily (2-4 units), move into one of the units, and rent out the other(s). Your neighboring tenants’ rent covers your mortgage and other housing costs, for effectively free housing.

And when you move out, you keep it as a traditional rental property, and the cash flow only improves from there.

How does this help your down payment? Traditional lenders require far lower down payments on owner-occupied properties than investment properties. It’s a simple risk calculation for them: borrowers are far less likely to default on their home mortgage than a rental property loan.

One popular low-down-payment loan program is FHA, which allows a 3.5% down payment as long as your credit score is over 580. (And let’s be honest, if your credit score is under 580, you should probably work on paying down debts before buying a rental property.)

But FHA isn’t the only option — there are conventional mortgage programs out there that require even less money down, sometimes no money down at all.

Down payments aside, conventional loan options also come with lower interest rates, for lower monthly mortgage payments. Compare interest rates and loans on Credible, and talk to at least three traditional mortgage lenders or brokers before settling on a lender and loan program.

As a final thought, keep in mind that multi-unit properties aren’t your only option for house hacking. Try these other house hacking ideas as well to score free housing!

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2. The BRRRR Method

One traditional model — which still requires cash up front, but you get it back — is the BRRRR method. The BRRRR strategy acronym stands for buy, renovate, rent, refinance, repeat.

It works like this: you buy a fixer-upper with a purchase-rehab loan, which does involve a down payment. You then renovate the distressed property, financing the upgrades with the purchase-rehab loan (try Kiavi or LendingOne for the initial renovation loan).

When the renovations are finished, you refinance the property with a long-term landlord loan (try Visio) and pull your original cash back out. It works because the new landlord loan is based on the new, after-repair value (ARV) of the property, not what you initially paid for it. So, if you created sufficient equity, you can pull some cash out when you refinance, to cover your initial down payment.

And if you’re struggling to come up with that initial down payment, try some of the strategies below to borrow the down payment elsewhere. Keep in mind that while beginners love the idea of 100% financing, the BRRRR method is actually better suited to more experienced investors, given the higher risk that comes with higher leverage. Start with lower-risk strategies if you’re a beginner at real estate investing.

buy investment property with no money down 13. Seller Financing

Of course, no one says you have to go through a loan program at all.

Sometimes sellers will finance the property for you, allowing you to negotiate any loan terms you want. Including the possibility of buying a rental property with no money down.

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This works especially well with property owners who have no mortgage, or sellers who inherited the property and don’t know what to do with it. Maybe the property needs repairs, and the seller doesn’t have the cash to make them.

Often, they’re happy to accept regular monthly payments for the property, and take the income along with a quick settlement and not having to hassle with real estate agents and commissions.

Not every seller is open to owner financing, but many are. It’s worth exploring with them, and can prove an effective way to buy your first rental with no money down.

4. Assume the Seller’s Mortgage

Even if the seller isn’t willing to directly finance the property, you still may be able to work out with them how to buy a rental property with no money down.

You can offer to assume the seller’s mortgage and make payments on their behalf. You step into their (presumably low-interest) loan, leaving you with only the remaining difference to come up with. Just be careful about triggering the “due on sale” clause in the existing mortgage.

Remember, when you buy a property with conventional financing, lenders often won’t let you borrow the down payment. They want your skin in the game.

But in this case, you’re not borrowing a purchase mortgage, you’re just assuming the existing one, and paying the seller separately for any difference.

That means you can pay them however you want!

You could borrow money from friends and family. Borrow from your credit card, or a personal loan. Or work out a loan with the seller themselves!