Most people think that you need a lot of money to get started in real estate. Some think you have to involve a bank. And some even think you should never buy a house with a mortgage. I’m happy to say that these are all complete myths and it’s very well possible to buy real estate with little to no money involved and without ever involving a bank. Banks will come in handy at some point in the journey and it’s always good to have some money in your pockets, but the purpose of this article is to walk you through some different ways to acquire real estate outside of traditional financing.
Hard Money Lenders
One way to acquire real estate without a bank is through hard money lenders. Hard money lenders allow you to buy properties with potentially no money down. These types of lenders are great for funding distressed/ugly properties that require some level of rehab. They can even fund the rehab itself! The benefit of using hard money lenders is that they don’t really care about your credit score nor do they care about how much money you make. What they mainly care about is the quality of the deal/property. They will give you an unlimited amount of money as long as you bring them good deals. Remember that if you run off to Vegas, they simply take back the property that will probably be worth a lot more than what you bought it for.
The downside to hard money is that the interest rates are very high (12-18% plus points aka extra interest). They also have enormous fees, which can drain some of your profits. It’s best only when starting out or if you don’t have any other funding options. You will receive lower interest rates and fees as you gain more experience and you can either sell or refinance the property to pull out some equity/profits. Hard money can be good for fix and flips (by selling/flipping the property) or long-term buy and holds (by refinancing to get the hard money lender out/paid off). The goal here: to get out quick! You don’t want to hold on to a hard money loan for a long time or they can suck you dry with fees and interest.
Private Money Lenders
Although hard money lenders are not the devil, private money lenders are your guardian angel. They’re very similar to hard money lenders, but they’re a lot nicer and have far more favorable terms. Private money lenders are nothing more than your family and friends along with people you meet at networking events. Since they’re so friendly. they carry much lower interest rates and very minimal fees. I personally use a mix of hard money and private money and the goal is to utilize private money far more often than hard money.
Seller Financing/Seller Carryback
Remember the myth about needing a bank? Well it couldn’t apply more here. Sellers can act as lenders/banks and give you a mortgage on the property of interest. Yes, I do mean that a seller themselves can give you a loan on the property. Since they already own the property, they don’t have to go get the money anywhere and instead, put themselves in the position of the lender and ensure they still have their interest in the property secured. This can be great if you’re having trouble finding traditional financing (i.e. banks) due to a low credit score, not enough income, etc. Excellent way to buy properties with little money and minimal qualifications. The sellers will usually not report these loans on your credit report, which is huge and they also don’t really care about your credit score.
There’s a limit on how much traditional bank financing you can have on your credit report so this can be excellent. When I go into any deal, the very first thing I ask for is seller financing. Seller financing works well with sellers who are retired and can use the monthly payments or struggling/tired/rookie landlords who can’t seem to handle tenants properly.
So subject to actually does involve a bank/lender, but luckily, this is not your own lender. Rather, this is the seller’s lender. Essentially, you can take over someone’s existing mortgage and gain legal rights to that property. You can then turn around and rehab the property, then either sell it for a profit or refinance it to pull out your equity and turn it into a long-term cash flowing rental property. This strategy works well with sellers that are having trouble paying their mortgage (i.e. they’re behind on payments) and you can come in as their guardian angel, get them caught up on their payments, and help them avoid foreclosure on their credit report. Talk about a win-win for all parties. You have to love real estate.
Most counties have a tax sale auction where they auction off outstanding property taxes. These counties are fed up because they have schools and pensions to fund. Since homeowners don’t want to pay their property taxes on time (or at all), the county sells their taxes to investors and issues a tax lien certificate to these investors. These homeowners then have a certain period of time (i.e. redemption period) to pay back these investors plus interest and if the homeowner doesn’t pay within the allotted time frame, the investor can foreclose on the owner and take legal possession/ownership of their property.
Indiana (Lake County), for example, has a tax sale each year where the starting bid is $500 for each property and the homeowner has to pay the investor back plus 10% interest or the investor can foreclose on the property and gain legal ownership if he/she is not paid back within four months (120 days). This is an excellent way to buy properties for a steep discount and make a nice profit or hold some nice cash flowing rental properties. You can even wholesale these properties to other investors and still make a very nice profit. With this strategy, it’s best to buy abandoned properties (properties that no one lives in them) that may need some type of rehab. Remember that one man’s loss is another man’s gain. You can utilize 0% interest rate credit cards or private investors to make this a true no money down strategy.
So there you have it - five ways to acquire real estate outside of traditional bank financing. Remember to always educate yourself and seek out a mentor/coach when you’re starting out. Once you start making money, be sure to put some away towards retirement and you’ll eventually begin investing in real estate through retirement (i.e. via self-directed IRAs). I still do believe that it’s best to start out in real estate with an FHA loan (i.e. traditional financing) by living in one unit, renting out the other units, which essentially eliminates your housing expense (usually the second biggest expense on someone’s budget next to taxes).
Is not having enough money still your excuse? You should instead make lack of knowledge or the inability to take action your excuse. I know a homeless man who’s now a millionaire because he took action and acquired the knowledge necessary to get ahead in life. When you get into real estate, always remember to continue building until you own the whole world. That’s my motto in life.