- It is possible to buy multifamily properties, even if you don’t have a ton of cash.
- There are at least 5 creative methods to finance multifamily homes that don’t require the use of personal funds.
- For investors interested in obtaining loans, there are several options tailored to multifamily properties.
Chances are, if you’ve been exposed to the real estate investing trade for a while, you’ve started to think about multifamily investing. If so, you’ve probably heard about the numerous benefits available: More cash flow, easier management, huge tax breaks. But if you’re low on funds, you might be wondering how to buy a multifamily property with no money. Perhaps you’ve assumed if you don’t have huge reserves of cash that multifamily property investing is beyond your reach.
And while it’s true many real estate investing deals, and that includes those attached to a multifamily investment property, will be deprived of vital cash flow if there isn’t a suitable down payment placed, this doesn’t mean if you’re strapped on the down payment side you can’t buy multifamily real estate.
In fact, by being creative with your financing options, you might find that initial lesson in your “Multifamily Investing for Beginners” class is a profitable one. To guide you in this endeavor, here are five strategies for how to finance a multifamily property with little or no money down.
Note: As with any financial transaction, it’s vital to do your due diligence and consult with a financial professional, to ensure a particular strategy works for your needs, such as executing a multifamily rehab property. The information provided here it intended for educational purposes only.
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7 Ways To Buy Multifamily Property With No Money Down
Multifamily properties can come attached with a hefty purchase price, causing some investors to shy away. However, when managed properly, these type of properties present an opportunity to earn a great amount of cash flow and offer strong returns. The purchase price need not present a barrier to entry; there are several ways to invest in multifamily properties for those who don’t have a ton of cash, including the methods below:
Real Estate Crowdfunding
Private money lenders aren’t just useful when acquiring single-family homes. Private lenders can be especially useful on the multifamily side of things, such as investing in multifamily apartments, and can be a great way to move forward on a development project if you don’t currently have the funds for a down payment.
Just as with single-family properties, private lenders don’t have to be connected to an investment firm. In fact, some of the best private money lenders out there for you can be found within your existing social network. This includes family, friends, doctors, colleagues, etc.
Why would somebody in your network give you money? The prospect of a better return than many are getting from their retirement account – and backed with real estate – can make this a compelling case for those you reach out to you (and can help you come up with the funds needed for a multifamily property down payment.)
2. Equity Shares
Finding an equity share investor is slightly different than working with a private money lender. With a private lender you are simply promising a regular return for your investor. But with an equity share investor, you are giving them a portion of the equity of a property in exchange for the funds needed for a down payment in buying multifamily real estate.
For example, let’s say an equity share investor gives you $100,000 to contribute toward a multifamily property. You might then, in exchange, give the investor a 40 percent share of the equity of the property. This would allow your investor to receive both 40 percent of the monthly cash flow from the property, as well as 40 percent of the proceeds from the eventual sale of the property.
This is a powerful strategy for the very reason that equity is attractive to investors. And this method gives investors both a chance to generate short-term and long-term cash flow, something you can use to motivate would-be investors in your down payment quest.
3. Material Sales
This isn’t always possible for every multifamily property project, but there are occasions when a property may contain valuable natural (or manufactured) resources that can be sold, upon purchase of a property, to help generate a down payment.
Material examples would include things like dirt, plants, gravel, timber, fertilizer; any resource that may prove valuable to another party. It’s all about seeing past the perceived value of a multifamily property, and determining whether there are hidden opportunities which can make the deal much more realistic and palatable for you.
4. Hard Money
In case you’re not familiar with the term, hard money lenders (HMLs) can be described as private individuals or small organizations that lend “hard money” to a borrower based on the value of a property, not the borrower’s credit score.
Even though the interest rate and origination fees of a hard money loan are much higher than a traditional mortgage loan, it’s not called “hard money” because of its onerous terms, but because hard money is all about the math. Does the loan-to-value ratio (LTV) of the property — ideally 65% or lower — meet the criteria set by the hard money lender?
If it does, you have a good chance of striking a deal especially if you’ve done your homework and found a multifamily property that has all the earmarks of a steady source of cash flow. If not, it’s time for you to keep searching.
5. Repair Allowance
This strategy is often overlooked by investors, but it can be a powerful way to generate the funds of your multifamily property down payment. It works this way: When you inspect a multifamily property, you’ll make a list of what repairs need to be done before the purchase takes place. And then that money, granted the seller agrees to the transaction, will be given back to you at closing.
Then you have two choices:
You do the repairs yourself. Not an ideal solution, but if you have the expertise and time this can be effective.
A better solution is to already have a team of contractors and/or home repair professionals who (or your partner) have worked with in the past to handle the repairs.
Because you’ve given them steady work in the past, or will do so in the future, you can often get a discount on labor and material costs of the repair. Which is money you can put toward your down payment.
House hacking refers to renting out part of a property that you currently live in. Essentially, you can list a spare bedroom, loft or even a shared space online as a short term rental. The most common way to do this is by using Airbnb. Price your rental according to similar listings in the area, and watch your cash flow increase as guests rent out your space.
Both homeowners and renters can utilize this strategy, if lease agreements and local ordinances allow. Research the laws on short term rentals in your area and learn what kind (if any) permits you need to get started. In many popular tourist destinations licensing is required to list your property. After you are free to get started, think about how you can attract guests to your listing. Set up the room, take clear pictures, and list any amenities that come with it. Your room does not have to be over the top, but the better your listing is the more you will be able to charge visitors.
All in all, this underutilized strategy can be a great way to supplement your income and increase your financial reserves. In a few short months, you could even have enough to make a down payment for multi family property.
Instead of raising financing from one lender, consider using crowdfunding as a way to buy a multifamily property. Crowdfunding is a way to raise money by asking a pool of investors for small amounts of capital, rather than one big investment. This strategy was made popular by websites like GoFundMe and Kickstarter, which allow users to easily crowdfund any type of project.
You don’t need any capital to start crowdfunding; however, you do need a reliable network and a strong pitch. Lenders are more likely to be interested in the success of your project, so you need to be prepared to convince them how it will work. It may require some serious dedication, but the good news is after the success of your property investors will be more inclined to refer you to others and support your future projects.
Best Multifamily Home Loans
For those researching ways to finance their purchase with a loan, there are several types of loans for multifamily properties available on market. The interest rates on the following loans typically range between 4.5 and 12 percent, and can be appropriate for investors looking to refinance their properties as well:
Conventional Multifamily Mortgage: Most traditional lenders offer loans large enough to finance multifamily properties, usually for those between two and four units. (Anything larger would qualify as a commercial property.) Conventional mortgages are great for investors who desire a longer-term loan and are able to make a 20 percent down payment.
Federal Financing: Multiple government agencies, such as the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac sponsor multifamily loan programs. These loans are great for investors who do not have much for a down payment, and are willing to live in one of the units.
Portfolio Loan: Portfolio loans are loans that can be used to purchase multiple properties at once. These long-term loans are right for investors who want to purchase up to 10 properties at once.
Short-term Financing: Some investors might need a short-term loan, such as a hard money loan or bridge loan, for flexibility. For example, an investor may want to act quickly on a deal and finance it in the short-term until they can renovate it or increase occupancy until they can meet the requirements of a longer-term loan. Short-term financing is typically associated with higher interest rates.
Multifamily Financing Summary
This isn’t to suggest that putting forth little or no money down is always the most sound and sensible approach. It’s just a reminder to think creatively about your investor-financing obstacles and strategize how to buy a multifamily property with no money in a way that works for you.
By reaching out to your network, exploring hard money options—even calculating the resale value of timber—you might just find avenues for multifamily investing you never thought possible.
Have you ever wondered how to buy a multifamily property with no money? Perhaps now you can.
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