“I’d rather be a pimp with a purple hat . . . than be associated with banks.” – Pete Zamarello (real-estate developer)
A small but growing minority of major lenders will lend you 90% on an investment property. Usually, this will come in the form of two loans. The first mortgage will be for 80% of the purchase price of the investment property, secured by the investment property itself. The second mortgage will be for 10% of the purchase price of the investment property, secured by the equity in your own home.
There are also “hard-money” lenders who lend money based on the value of the property instead of the purchase price. If there is sufficient equity in the property, they may lend you the entire amount, as long as it doesn’t exceed some percentage of the appraised value, usually 70% to 75%. But to make that happen, you’d have to come across that rare opportunity where you can buy at 25% to 30% below appraised market value.
It’s a little easier to buy at discounts of 10% to 15% to market. You might, for example, be able to negotiate a deal for $85k on a property that will appraise at $100k. And a hard-money lender may agree to lend you $75k on that property. In that case, you’d only have to come up with $10k more.
But hard-money lenders aren’t called “hard” for nothing. Their rates and fees are much higher than those of traditional banks. Still, once you’re experienced, this is a technique you can consider for flips or even long-term holds that you plan on refinancing at lower rates once you own the property and have enough equity in it to qualify for a refi.
A safer strategy when you’re starting out is to tap into your network of family, friends, and associates. If you have done your homework in your local neighborhood and you’re a knowledgeable real-estate investor, you could be doing your wealthy friends, family, and associates a favor by offering them the chance to lend you money at, say, 8% or 9%. That may be twice the maximum rate they could get on investment-grade bonds, for instance. And don’t forget, their loan to you will be secured by the property, so it doesn’t have to carry any greater risk if you’re buying the property at a good price.
Another way to start out if you have little or no capital and not very good credit is to invest “sweat equity” instead of cash. Seek out investment partners and offer to do the work of scouting and buying for a piece of the deal, perhaps 10%. You might pick up another 5% to 10% by doing any necessary rehab work. Get a real estate license too, and you’ll be able to collect additional commissions when buying properties with your partners that are listed with real-estate agents.
Also, if you don’t own your own home, look into buying one at the earliest possible moment with a low-money-down or no-money-down loan for “owner-occupiers” (that is, buyers who are buying the property for their principal residence).
There are a number of low-down-payment programs available to people with sub-par credit. The Federal Housing Administration (FHA), for instance, has a program that allows homebuyers to purchase their own homes with as little as 2.25% down. VA programs enable qualified vets to purchase properties with up to 100% financing (that is, zero down).There are even Fannie Mae loan program that allow you to buy a home with as little as 3% down. And some banks combine programs to allow you to buy your own residence with zero down. In fact, some will even finance as much as 103% of the purchase price of the property!
These are great deals — especially for those who are just starting out. As the equity in your home grows, you’ll be able to borrow against it for a down payment on another property. And another. And another.
There are many other techniques for low-money-down and no-money-down deals, from home-equity credit lines to purchase-money mortgages to lease-options, and more. But as you begin to learn these more sophisticated techniques (hopefully through our Main Street Millionaire program), don’t forget to take care of the basics first.
In other words, do all you can to get rid of your high-interest-rate consumer and credit-card debt. And always be a sharp borrower first. Then, being a shrewd borrower will help you make even more money.
(Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s real-estate investment success program.)