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Start Investing in Real Estate Without Cash or Credit

Updated on September 12, 2014

Invest in Real Estate without Cash or Credit

When I became a Realtor ®, I decided to invest in real estate to provide an extra avenue for income. I'm glad I did. It has proven to be a reasonably predictable method of earning good income without spending hours and hours per day attending to it. As a Realtor, I thoroughly enjoyed introducing newcomers to investment real estate and found great pleasure watching them enjoy the financial benefits they gained.

Today, I own four rental properties if you count a duplex as two. I have owned as many as six, but even as an experienced investor I lost two houses that I built to foreclosure. This article is designed to help new investors enter real estate investing with the least possible risk.

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Yes, You Can Buy Property Without Cash or Credit

(But it ain't easy!)

In recent years, real estate lending has undergone drastic changes. Subprime loans, which once enabled people to borrow as much as 103% of a home's value, have disappeared since the housing market crashed a few years ago.

A few programs still offer no-down-payment loans, though borrowers typically still pay some closing fees to transfer the title. These costs can range from as little as $500 to a few thousand, quite a bargain compared to paying a 10% down payment and closing costs!

These programs often have detailed restrictions that buyers should research thoroughly before entering a contract to purchase or paying for application fees or property inspections. However, they're still easier (and safer) than purchasing a house with no money and no credit, so before delving into the how-to portion, I'm going to describe them.

The Veterans Administration (VA) Loan Guarantee program does not make loans, but they do guarantee banks that they'll repay a loan undertaken by a veteran if the veteran defaults. This reduces the bank's risk and enables them to make loans to people who don't have sufficiently high credit scores or enough down payment to get a conventional loan.

Veterans are required to pay a funding fee in lieu of the origination fees charged by most banks. This fee is 2.25% of the property's purchase price the first time a vet uses his or her VA certificate, but doesn't require the buyer to have a down payment. The VA requires that any home purchased using the program must meet certain standards for safety, security and structural soundness, and the home must be acquired for personal use. In other words, the buyer must live in the home and not be purchasing it as an investment property. Though it has rarely been challenged when a buyer rents the property after purchasing it, some court cases have resulted from fraudulent use of the program. Usage tests typically expects the buyer to spend at least a year in the home to prove that they purchased it for personal, non-commercial use, but it's possible that a homeowner could be forced to move sooner and turn their property into a rental. The program has never established a minimum amount of time that the owner must have lived in the property.

People who are veterans, who do not own rental property, want a home for themselves now, and who would eventually like to be real estate investors are prime candidates for using the VA program.

Rural Development Loans

State and City Programs for Buying Real Estate

Other government loan programs, including those administered by city governments, are often supplemented by funding from the U.S. Department of Agriculture's Rural Development program. Like the VA program, these are loans designed for people who want to live in their homes, not investors, and they require investors to live a minimum of ten years in the property before converting it to a rental property or selling the house. Failure to do so can result in being forced to repay the grants offered to the home buyer.

This restrictive program isn't well-suited for investors, but is included here for people who have low or very low income, who need housing, and who recognize that real estate investing could help them at some point in the future. The program offers loan guarantees as well as direct loans at extremely low interest rates, and often require only $500 or so of a buyer's own money. Qualifying for the program does require an adequate credit score, although some credit dings are not counted (such as unpaid medical bills.)

How to Get There From Here

Making that First Investment with No Cash and Low Credit

This is the riskiest and most difficult method for beginners to enter the real estate market, but sometimes it's the only way for a struggling, would-be investor to get a toehold in real estate investing. Make no mistake - it's not easy street! I am a huge believer in using "other people's money" to get ahead, but if you're able, finding a reputable Realtor and qualifying for a loan will put you in a much better position for purchasing your first investment property than using these principles.

Two primary methods for creating profit in real estate are flipping properties (buying them and selling them for a profit) and renting them to others. This applies to single family homes, apartments, and other commercial properties. If you have no starting cash and your credit scores have suffered, you can use techniques I first learned about in the book "Buying Real Estate Without Cash or Credit," shown here.

This book describes how to wholesale properties by getting a seller to agree to sell to you, and then finding your own buyer who will purchase for a higher price on or before the closing date to which you agreed. Very few wholesalers purchase with real estate agents, and some of them are quite shady. However, those who are reputable can earn a good living. Wholesalers are the people known for using the "ugly yellow sign" method advertising to buy houses for cash, quickly.

Photo used under Generic Attribution 2.0 license. Actual real estate contract terms will vary.
Photo used under Generic Attribution 2.0 license. Actual real estate contract terms will vary.

What's Your Experience?

Thanks to Michael Coghlan for making this photo available.
Thanks to Michael Coghlan for making this photo available.

What's Your Opinion?

How would you prefer to buy a property if you couldn't pay cash?

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How Familiar Are You With Real Estate Investing?

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Other Important Guides for Success - Even experienced real estate investors have a lot they can learn!

Make Money with Small Income Properties
Make Money with Small Income Properties

I love that this book helps future investors understand how to analyze cash flow, avoid hyped up sales gimmicks that promise lot of money and deliver none, and to avoid common mistakes made by fledgling investors.


Contract for Deed: What is It and How Can it Work for Me?

If I'm selling a property and you want to buy it but can't get a loan, I may agree to finance it for you. In other words, I become your banker, and when you've paid me off, the house is yours free and clear. Until then, I hold a lien and can foreclose on the house just like any large lending institution. Once you and I come to an agreement on the sale terms, we create a contract and file it with the county recorder's office to create what's known as "public notice." This allows government agencies and individuals to understand who owns interest in the property and how. An attorney or title company can assist the buyer and seller in completing the process for a reasonable fee.

Once you accept ownership in this manner, you are responsible for maintaining the property, paying taxes on it, and keeping insurance as required in our contract. As a seller, I will be keeping an eye on things to make sure the taxes are paid (and may require periodical proof of insurance) because I don't want to discover later that the county foreclosed on it for unpaid taxes or it burned down and wasn't insured.

You, as a buyer looking for investment property, want to place tenants in the property before you've even closed on it yourself. Alternately, if you'd rather resell it, you can locate a buyer who will purchase it from you once you've acquired it. In either case, you should obtain a signed, enforceable contract with your potential buyer or tenant before you negotiate to buy it yourself. In that contract, you should include a contingency that says the contract you're signing with them depends on your ability to acquire the property.

As you can see, there are several distinct challenges that must be addressed: You must persuade the parties that they will benefit from the transaction without revealing information that will enable them to cut you out of the process; you must be lucky, well-connected, or have great timing to locate both a seller-financed property and a buyer who is looking for exactly that type of property at the same time; and you must have access to suitable contracts for completing the execution. These things cannot be achieved by looking at craigslist ads once a week and talking to your coworkers in the break room. You must be dedicated and determined, as well as prepared to fail numerous times until you find one that succeeds.

You'll build contacts as you start advertising your interest in helping people find affordable housing. This part can take place in your employee break room, but don't stop there! Talk to everyone - friends, family, and social media contacts - to find out who may be looking to buy, rent, or sell soon. You may discover people who have had a property on the market only to find that it hasn't sold. Ask them if you can take a look at it.

If you know a house that's for sale closely matches someone else's needs to rent or buy, you may be able to negotiate a workable deal. Conti and Finkl's book (the one advertised above) offers excellent suggestions for approaching these opportunities - far better than I can do for you. Where the book fell short, in my opinion, was in explaining the obstacles you can expect along the way.

The authors' suggestions for persuading a seller to finance a deal are sound, but they don't explain that the vast majority of sellers are uninformed about how to finance a sale, are unwilling to accept monthly payments rather than a lump-sum, over-and-done sale, or have loans that prohibit what's called wraparound financing. Wraparound financing means the seller has a loan on the property that will be paid by a loan the seller finances for you. Many existing mortgages have an acceleration clause that says the borrow must repay the entire amount immediately upon selling or refinancing the property. If a homeowner owes $50,000 on their existing mortgage, an acceleration clause can make it illegal for them to sell to you with a contract for deed.

For these reasons, your best opportunities will be found with older homes that the seller owns free and clear. You can find (or confirm) this information through your county tax office.

You should be ready to educate the seller on the reasons your offer are beneficial to him or her. For one thing, it relieves them of paying taxes, insurance, and maintenance on the property. If a faucet breaks, they won't have to fix it because you'll be responsible for it. They'll be collecting a monthly payment as if they were the landlords, though without the headaches of locating responsible tenants. If the contract terms aren't met, they can take back the property. In the meantime, your payments (or rather, your tenants' payments!) will have built escrow or provided income.

A couple of additional steps will help you persuade them. Show them the contract signed by your future tenant, along with any due diligence you did to ensure they'd make a reliable, responsible occupant. The tenant's credit score, references you've checked, and the duration of your rental contract (will you lease it to them for six months or three years?) may all influence the seller's decision to accept or reject your offer.

When purchasing for a resale, the most important thing to remember is that you don't make money when you sell the property. Your profit is established when you buy it. If you purchase a house at market value, you are not going to realize a profit for many years (if ever.) You must negotiate for houses you can purchase well below market value and resell quickly at a good profit or you'll be wasting everyone's time.

Also, you should become familiar with your potential buyer's loan program's guidelines. If he or she plans to get an FHA loan, the property itself must meet certain requirements or have non-conforming conditions repaired before closing your sale. This can prove costly and derail the sale if you haven't anticipated it.

The final consideration I'll point out when it comes to contract for deed negotiations is that sellers will likely balk at the idea of long-term owner financing. By offering them a balloon clause that lets your payments be calculated as if you have a thirty-year loan, but requires you to pay the full balance in a shorter period of say, five years, you're more likely to get their agreement. This works to your benefit, too. If you discover that the house has too many problems to make it profitable for you, they can take back the deed at the end of the term and it may not penalize your credit. Most sellers who sell their own homes do not subscribe to credit reporting services.

101 Ways to Buy Real Estate Without Cash
101 Ways to Buy Real Estate Without Cash

Convincing a seller to finance you or let you assume their mortgage is the hardest part of getting your first cash-free investment. These specific methods for presenting your offer are geared toward convincing owners to let you assume a loan (which would require you to qualify with a lender), but many of the same principles can be adapted to persuade them to finance a house they own free and clear.



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