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How To Invest In Real Estate With No Money Down: A Beginner’s Guide

Published on Friday - July 01, 2016

The ability to understand, recognize and take advantage of nothing out of pocket — or bad credit — strategies are the hallmarks of successful real estate investors. Why? Because they’ve mastered the art how to invest in real estate with no money down. For newer and financially strapped investors, this is an attractive way to get their foot in the real estate door without having the financial resources and credit to do so.

The answer to “how to invest in real estate with no money down” is easier than one might suspect. The trick is knowing the options available to you, and how to use them. The following is a beginner’s guide to getting started in real estate investment with no money down, including tips for investors with bad credit:

Getting Started In Real Estate With No Money Down

No money down

There are many investment deals that transpire throughout the real estate market on a yearly basis. The majority are achieved through traditional lenders and institutions like banks, but some are accomplished through less traditional means. In most cases, it’s because the investor couldn’t raise the capital or didn’t have the credit score to do so.

It’s important to note that while investing in real estate with no money down offers numerous benefits, not all cashless deals are worthwhile. In fact, investors equipped with a superb credit score will not only receive a wider array of options for working capital, but they’ll have more control of their financial obligations. It’s in your best interest as a real estate investor to ensure that score remains top notch, as it will provide the best money saving outlet.

There are, however, situations where utilizing these options makes more sense. Consider the fact that cash buyers are viewed as more direct than conventional loan purchases when compared to traditional loans, which are slow to fulfill. With cash in hand, this strategy can provide an unprecedented upper-hand at the negotiation table.

For investor with neither the credit score nor financial capability to purchase a property through traditional means, it’s important to remember you still have options available. The following provides an understanding of the financial alternatives accessible to investors:

Hard/Private Money Lenders: The most popular course of action when financing real estate deals with no money down is through the use of hard or private money lenders. These loans are not given from banks, but rather individuals and businesses aimed at financing investments for a return. In addition, these loans are generally comprised with their own set of criteria, which also include more fees and higher interest rates to deal with. When using these types of lenders, a good rule of thumb is to find homes that can be purchased at 50 cents on the dollar.

  • Hard Money Lenders: Unlike private money, hard money lenders set forth fees in the form of points. Ranging from three to five, these points represent an added, upfront percentage fee based on the borrowed amount; this is on top of the interest rates hard money lenders charge, which range between 10 and 18 percent. Fees and interest rates are not universal with hard/private money lenders, so investors need to do their due diligence.
  • Private Money Loans: These loans, which bring speed and efficiency to every transaction, will typically costs investors somewhere in the neighborhood of six and 12 percent interest on the money borrowed.

Wholesaling: As the introductory course to real estate investment, wholesaling requires neither a high credit score or large sums of money down. Instead, it simply comes down to having the right numbers in place. Real estate wholesaling, at its core, consist of finding discounted properties, assigning the contract to a potential buyer and getting paid to do so.

Partnership: A very common path in real estate investment is through partnerships. What one investor lacks, the other can make up for — and many partnerships will entail one partner finding a distressed property at a discounted price, while the other one uses their credit score and working capital to finance it; just make sure everyone is bringing something to the table. For better investors, aspects such as goals, risk, roles, and return should always be discussed before creating any type of partnership.

Alternative Options For Cash Strapped Investors:

Home Equity: An alternative option for investors with no upfront money is home equity. This can be a viable option since property values have gone up in recent months, meaning their could be more capital available than you think. For investors looking to capitalize on this route, there are generally two options: rewrite the first mortgage and do a cash out refinance, or keep the first loan in place and add a home equity line of credit.

Option To Buy: Sometimes referred to as a “lease-option,” this method allows investors to acquire properties without initially taking legal ownership. However, the investor will sign a legal “option to buy” from the homeowner at a specific price in the future. In return, the investor rents the property out on a long-term basis with an agreement in place to purchase the property at a later date for a previously set amount.

Seller Financing: Unlike traditional loans, seller financing works like this: the investor purchases the property from the homeowner/seller, rather than a bank, and the two sides sign an agreement that states an interest rate, repayment reschedule and consequences of default that both parties have agreed upon.

Can Someone With Bad Credit Invest In Real Estate?

How important is your credit score

No cash or credit? No problem.

For beginners seeking how to invest in real estate with no money down and bad credit, the first step is understanding your credit score. This number, which is essentially a statistical method for lenders to determine the probability of you paying back the money borrowed, is a critical component when acquiring financing for real estate. Quality scores equal better mortgage rates, which results in long-term savings, and ultimately ends up benefiting you — the investor.

Credit scores are almost always based on a scoring model, with the most popular model being FICO. These scores range from 300 to 850, and ultimately determine a person’s creditworthiness. It looks somewhat like this:

  • Bad Credit: 300 – 600
  • Poor Credit: 600 – 649
  • Fair Credit: 650 – 699
  • Good Credit: 700 – 749
  • Excellent Credit: 750 – 850

Although each credit agency will have its own evaluation systems, which are based on different factors, the most common credit score calculations are based on five major factors:

  1. Payment History = 35 percent
  2. Outstanding Balances = 30 percent
  3. Length of Credit History = 15 percent
  4. Types of Accounts = 10 percent
  5. Credit Inquiries = 10 percent

The first step is knowing what your credit score is, and understanding how it impacts your investment strategy moving forward. Depending on what your score is, you may qualify for a traditional loan and be eligible to secure down payment assistance. Comprehending where you stand in the financial realm of credit will only enhance your real estate investment strategies, as well as your financing options. Learning how to invest in real estate with no money down is important as an investor, but it’s not always your only option.

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