Buying investment property without cash? Yes, it’s possible. No, it’s not easy, but it’s not hard either.
These are your six options: (1) hard money, (2) home equity, (3) partnership, (4) private money, (5) subject-to and (6) wholesale or option the property.
“I wish I could say it was easy. It wasn’t, but it wasn’t hard either. But without a strong reason or purpose, anything in life is hard. ”-Robert Kiyosaki, Rich Dad, Poor Dad
Buying investment property without cash isn’t complicated, but it takes work. You’ll typically need to find an even better deal than an investor with cash would need to make it happen. As always, stay motivated, look at a lot of leads and keep your ultimate purpose in the forefront of your mind.
#1 Hard Money
Hard money lenders base their loan on the value of the property. You’ll need to find an excellent deal to do it with hard money and no cash though. Let’s look at an example. You have a property under contract for $100,000, it needs $25,000 in repairs and it will sell for $175,000 fixed up.
- $100,000 purchase + $25,000 rehab = $125,000 investment
- $125,000 ÷ $175,000 retail = 71%
So at face value, 71%, this looks like a pretty good deal. This isn’t a deal that’s good enough to do with hard money and no cash though.
- Maximum hard money loan is 70% of retail: $122,500
- Estimated closing costs at purchase: $5,650 for closing costs, points and fees
- Estimated holding costs based on 5 months holding time: $9,135 for property tax, utilities, interest and insurance
- Estimated selling costs: $15,541 for real estate commissions (6%), title policy, closing costs and buyer concessions (2%)
- Potential profit: $18,399
- Cash needed at purchase closing: $9,425
- Cash required for project: $18,560
That’s pretty close to 100% cash on cash return, which is great, but this isn’t a deal you could do without about $20,000 to invest. Keep in mind that most hard money lenders will also want to see some reserves if you’re running a renovation. Unfortunately, cost overruns are the norm, not the exception when it comes to remodeling.
In this example, you would have to negotiate the seller down to about $82,000 to finance the entire project without any money out of pocket. That would put you at around 60% for purchase + rehab ÷ ARV, which is a good goal for any investor, but particularly important if you want to use hard money and buy an investment property without cash.
#2 Home Equity
If you have equity in your home, you may qualify for a home equity line of credit, or HELOC. These typically have favorable rates and use of the funds is generally not restricted.
For the example deal above, you would need to qualify for about $140,000 on the HELOC in order to buy this investment property without cash.
If you had the example above under contract in central Austin, we would consider partnering on your deal and funding the entire project with no cash out of pocket for you, the second partner.
Here’s what that might look like:
- $100,000 purchase + $25,000 renovation
- $250 closing costs at purchase
- $5,052 holding costs with 5% interest
- $10,291 selling costs with 3% commission (Little City broker lists the property)
- $33,132 potential profit – split 50/50
- $16,566 for each partner
Partnerships can be an excellent way to get into an investment property without cash AND lower your risk, particularly if you don’t have a lot of experience. The hard part is finding a deal, but when you find a great one, finding a partner should be relatively easy.
Worst case, your potential partner will find the holes in your property evaluation. Most investors are too optimistic about retail value and repairs, but if someone more experienced is evaluating your deal to participate, they’ll make sure you’re on track.
#4 Private Money
As we discussed in a past post, private money and hard money are essentially the same thing. Sometimes “private” money can be less expensive and/or have less stringent terms than “hard” money even though by definition hard money loans are private loans.
In short, if you have friends or family who will lend to you at more favorable rates than hard money lenders, private money may be an option for you.
#5 Subject-to and owner financing
If the seller owns the property free and clear or they would consider financing you “subject-to” their existing loan, you might be able to make this deal work without cash as well. Subject-to is also known as wrap financing. There are some legal hoops, but essentially the seller’s loan stays in place and you take over the payments.
If the seller is expecting substantial cash at closing and you want to buy without cash out of pocket, this strategy may not work. For example, if you’re paying $100,000 and their underlying loan is only for $50,000, financing subject-to or wrap financing may not be a win-win for everyone.
If the house needs work, the existing loan isn’t going to pay for it either. You might need to combine strategies and use a private lender, HELOC or other funds to get the renovations done without any cash. If the house doesn’t need work, you may be in luck using owner financing or subject-to to get into an investment property without cash.