10 Ways To Reduce The Money You Need To Buy Rental Property »RealtyBizNews: Real Estate News

Most of us would like to have five or ten rental properties generating passive income for us each month. Far fewer of us actually own rentals, having encountered a big barrier to entry: cash.

It takes investment capital to build a portfolio of rental properties. Cash for down payment, cash for closing costs, cash for repairs, cash for operating reserves.

Which begs a simple question: if money is what keeps you from generating passive income from rental property, how can you get into the real estate investing game with less money?

Try these ten ideas for minimizing the money you need to start building your own rental portfolio. With every property you add, the income makes it easier to save and buy the next!

1. Improve your credit to reduce your down payment

All lenders price their loans based on perceived risk. The higher the risk of default by the borrower, the more the lender must charge to justify the risk, and the less money they will lend against the same collateral.

Which means if you want a lower down payment and lower interest rate, you have to become a low risk borrower.

It starts with improving your credit. If you don’t pay every bill on time, automatically, every month, set up automated recurring payments so none slip through the cracks. Your payment history is the most important factor in determining your credit score. You may even be able to remove some late payments from your credit history, which will instantly boost your score.

Then pay off your credit card balances below 30% of the maximum credit lines. This shows the credit bureaus that your credit usage is under control.

If you don’t have a lot of credit history, you may need to establish it. Consider a secured credit card (which holds some cash as collateral) or a “home equity loan” (essentially a loan to yourself, held in escrow by the “lender” who reports your monthly payments as if it was a regular loan).

2. Pay less in points

Lenders make a net profit by charging you origination fees or “points” at the settlement table. One point is equal to 1% of your total loan amount. They add up quickly – two points on a $ 300,000 mortgage comes down to $ 6,000 in set-up costs alone!

The worse your credit, the higher the origination fee charged by the lender. So by cleaning up your credit history, you can not only reduce your down payment, but also reduce the points you pay at the closing table.

Some lenders also allow you to pay more in points to lower your interest rate, or vice versa. This can offer another route to getting less money at the close, even if you pay later.

3. Consider the BRRRR method

Acronym for buy, renovate, rent, refinance, repeat, the BRRRR method essentially consists of buying a building to renovate, renovating it, then refinancing it to keep it as a long-term lease.

What does this have to do with your cash investment? Well, the beauty of the BRRRR method is that you can withdraw your original money when you refinance.

The idea is that you create enough equity when you renovate the property and then refinance in cash after the renovations are complete. Lenders base the refinance amount on the repair value, not the price you paid to purchase the renovator originally.

So you can end up with $ 0 of your own money tied up in the property after the renovation. This allows you to recycle the same money back to another property, maybe even another BRRRR deal to keep using the same money over and over to grow your portfolio.

4. Charge the renovation costs to your credit card

When you buy a renovator, you pay less upfront for the property, which means a lower down payment and lower closing costs than comparable turnkey properties in the same neighborhood. All this saves you money at the time of payment.

But then you have to renovate the property, which costs money. Fortunately, you can pay for all the materials using your credit cards to fund them. Nowadays, many contractors also accept credit cards, which also allows you to finance labor costs with plastic.

However, if you are new to property renovations, be careful not to go through your head. Cosmetic updates are a great place to start, but once you get started with structural or commercial repairs like rewiring an old house, you need to start getting permits from the local housing authority, undergo. inspections and coordinate repairs with multiple specialist contractors rather than a single crew.

5. Negotiate a seller’s concession

As my grandfather taught me growing up, you don’t get what you deserve in life; you get what you bargain for.

When making offers and negotiating prices, consider negotiating a seller’s concession, not just a lower price. Your lender will cover the majority of the purchase price, but you will have to pay all closing costs in cash yourself, unless the seller pays them for you, in the form of a seller’s concession.

6. Negotiate a second mortgage held by the seller

While you are negotiating, discuss with the seller the possibility of holding a second mortgage to cover some or even all of your down payment.

Of course, not all sellers will take this into account. But if the seller lends you the down payment, it certainly reduces the amount you have to bring to the table!

7. Press a HELOC

Have equity in your home? Take advantage of it with a Home Equity Line of Credit or HELOC.

As a revolving line of credit, you can draw on it whenever you want, much like a credit card. You then pay it back at your own pace, also like a credit card. At least until the drawdown phase ends and the HELOC enters the fixed repayment phase.

You can even take out HELOCs on rental properties, if you have equity capital.

Pull on your HELOC to cover your down payment, closing costs, renovation costs, or any other expense as you see fit. Just note that conventional mortgage lenders don’t allow you to borrow the down payment, so this tactic works best when borrowing from a hard money lender or portfolio lender (a lender who keeps the loan in internal rather than selling it to the secondary mortgage market).

8. Pull on lines of credit and business cards

Just like a HELOC, you can use lines of credit and commercial cards to cover the down payment or closing costs as well.

In fact, it works even better. First, business lines of credit aren’t secured against your primary residence, so if the worst happens and you default, you don’t lose your home. Second, these lines of credit remain in rotation indefinitely, never going into a fixed repayment phase like HELOCs do.

Remember, however, that the more debt you incur to purchase a rental property, the higher your expenses and the poorer your cash flow. At some point, the property ends up costing you more money in a given year than what you earn in rental income.

9. Use homeowner financing

There are several tricks and loopholes that real estate investors can use to borrow financing from homeowners to pay for investment property. This dramatically reduces your down payment, as homeowner loans require much lower down payments than investor loans. For example, FHA loans require only 3.5% down payment for homebuyers with credit over 580, and compliant loans (Fannie Mae & Freddie Mac) require as little as 3% down payment. . Learn about the differences between FHA and conventional loans for more details.

First, they can move in for a year, then move out and keep the property rented. Conventional mortgage lenders require at least one year of residence to qualify as a homeowner, so technically you can buy a new property every year with homeowner mortgages.

Second, investors can hack the house. While there are many ways to find accommodation and live for free, the classic model is to buy a multi-family property, move into a unit, and rent out the neighboring unit (s). Conventional mortgages allow properties of up to four units, so you can build your rental door portfolio by moving into the property for at least a year.

And hey, it doesn’t hurt that your tenants cover your mortgage and other housing expenses!

With a 3% down payment instead of a down payment of over 20%, it’s much easier to find the money, and maybe even buy a house without any down payment.

10. Organize a discount for the buyer

For even more money for your closing costs or down payment, consider arguing for a buyer’s discount from your buyer’s agent.

A buyer’s discount involves the real estate agent giving you a portion of their commission (usually paid by the seller). While this should normally be negotiated with your real estate agent, there are preexisting networks of buying agents who agree to pay you a portion of their commission up front. This way you can get a buyer’s discount without having to negotiate it!

Last word

With each property you add to your portfolio, it becomes easier to buy the next one.

First of all, you generate more income with each rental property you buy. This income helps you save a down payment faster and qualify for better mortgages.

Many lenders also look at your experience when pricing their loans – the more properties you own, the more confident they’ll be lending you money. Remember that lenders’ pricing is based on risk.

Finally, with every property you buy, you add another asset that grows in value. As your properties appreciate and build equity, you can then leverage that equity in the form of HELOCs on those rental properties.

This in turn reduces the amount of your own saved money that you have to invest.

What is preventing you from building your own rental property portfolio? What strategies are you exploring to reduce the cash you have to invest?

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