A lot goes into purchasing a rental property. But you can’t even begin the process without the cash for a down payment.
If you don’t have the cash, especially if this will be your first rental property, what can you do?
Are you stuck saving until you can put down a large down payment, with no other options?
Fortunately, there are some alternative methods that require little to no down payment and could allow you to purchase your first rental property sooner.
You’ll still need cash or a cash equivalent, but with it you may be well on your way to getting your first rental property sooner than you imagined.
Below, we’ll cover several methods for purchasing a rental property that don’t require a large down payment.
Once you’ve checked them out and find a path that works for you, don’t forget to check out our guide on how to buy a rental property.
It covers everything you need to know to become a rental property investor and landlord and will help you save time and avoid common mistakes along the way:
If you’re new to rental investing, there’s a lot to take into consideration, so don’t overlook the details: How to Buy a Rental Property: Step-by-Step Guide.
Typical down payment
Before we get into how to buy a rental with little or no money down (i.e. alternative methods of purchasing a rental property), let’s briefly talk about the traditional path.
In other words: how much down payment do you usually need to purchase a rental property?
Typically, when purchasing a personal residence, down payment could be anywhere from 10-20% depending on the market.
Purchasing a property for the purpose of using it as a rental requires a larger down payment, typically starting at 20% down payment minimum and as high as 30%.
Is it really possible?
Every possible method for purchasing a rental will cost you.
However, there are some ways that you can purchase a rental with little or none of your own money down initially.
Most methods will require something down in one way or another, but there are things you can do to reduce the amount that needs to come out of your pocket.
Most commonly, depending on your situation there are other resources you may be able to use in place of that down payment.
How to buy a rental property with no money down
Below are several methods for purchasing a rental property with none of your own money down, or very little (depending on the method).
Each is unique and requires something different, whether that be other property you can leverage or connections.
1. Turn your primary residence into a rental property
One of the most convenient and most common, turning your primary residence into a rental property is pretty straightforward.
Why go this route? There are a few reasons.
First, as we talked about earlier, the down payment for a primary residence is less than that of a rental property.
So, if you purchase a new primary residence and convert your old primary residence into a rental property, you’re able to circumvent that and save big.
On average? A 10% smaller down payment. That’s nothing to scoff at, as it can easily mean tens of thousands of dollars in savings.
In addition, interest rates are higher on rental property.
That means you’ll be able to save even more each month on interest by converting as you’ll be paying two primary residence-level interest rates instead of typical rates for a primary residence and a rental.
2. Multi-unit home
What about getting two birds with one stone?
Another option is to purchase a multi-family home which you then use as your primary residence while renting out the other units.
You’ll need to be prepared to start managing your properties as soon as you move in to your new home, which could be a bit stressful, but it can be a good way to get started.
Plus, after a few years you can move out and rent your own unit out as well.
The benefits here are several-fold as you can utilize something like an FHA loan to put very little money down to get the property (often just around 3%).
You’re essentially just putting a down payment down on your own primary residence as well, meaning you’re essentially paying a super low down payment for a rental and primary residence simultaneously.
3. Use a HELOC
A HELOC or home equity line of credit is a great option for those that have a primary residence with equity.
By using the property’s equity, you can obtain a HELOC which you then use as a down payment for a rental property.
This is one of the few methods where you truly can obtain a rental property for no money down, depending on how much equity you have in your home.
It’s also a bit market dependent given you need to have equity. However, if you’re able to make use of it you could get started with rental investing without anything out of pocket.
4. Partner with a co-borrower
Another unique option, this one is for those who have someone who could serve as a full or strictly financial partner that is willing to go in with you on a rental property.
If you’re willing to do all the work necessary toward managing the property, you could convince your co-borrower to put up the cash in exchange.
In this way, you’re able to get started with little or no money down while they don’t have to spend the time learning how to manage a rental property.
It can be a win-win, assuming you have someone that could serve as a good partner and co-borrower with you.
5. House hack
House hacking is the process of dividing (“hacking”) up a single-family residence into a multi-family and renting out the newly created unit, i.e. guest house, duplex, etc.
It’s typically a pretty quick and simple way to turn part of your property into an income-producing rental unit.
Also, new legislature passed during the pandemic in many states (like CA) to ease the housing burden have made it easier to convert a primary residence than ever before.
6. Use a rent-to-own program
A less traditional option, rent-to-own property programs have become more popular than ever before due to the rising difficulty of obtaining a home for many families.
The good news is you can use a rent-to-own program for method #1 we covered earlier, just with an additional step.
In step #1, we talked about turning your primary residence into a rental property.
While not truly a ‘no money down’ option, it does save you tens of thousands of dollars in the average case.
But what if you have no property to begin with and little to no down payment to get started?
Rent-to-own allows you to get started on the house-buying process by renting a property that you eventually purchase.
Your rental payment will be higher than normal with a portion of that payment going toward building up a down payment over time.
Eventually, once you hit the right amount after the preset period of time, the rent-to-own company transfers ownership to you and you’re done.
While this method is a bit of a longer road, you can get approved without ever putting any upfront money down depending on the program, making it a good option for those looking to get into rental property for long-term purposes.
Just remember that you need to live in the property as your primary residence at first, so it could be a bit of a sacrifice.
7. Get a hard money loan
What if you have no cash, but have a property or other high-value item that can be used as collateral and good credit?
That’s a situation where a hard money loan might be perfect.
Hard money loans are often employed by house flippers as they’re an effective way to obtain short-term funding quickly (typically from a private lender).
If you’re approved, you could get the money you need with little to no down payment.
Get started on the right foot
Purchasing a rental property isn’t easy, so getting started with little to no money down can make things a lot easier.
But what about once you have the property, what should you know to make sure your investment is successful?
For that, make sure to check out our guide on How to Buy a Rental Property: Step-by-Step Guide.
For example, you’ll learn the importance of calculating fees and other unexpected expenses you’ll need to pay as a landlord so that they don’t creep up and surprise you, eating into your rental profits:
So, check out the guide and the other amazing resources on the DoorLoop blog.
Then, get started with DoorLoop’s award-winning property management software to streamline your entire system and simplify the day-to-day management of your new property.