Investing in Real Estate Without Cash

How to Buy Real Estate Without Cash or Credit

Hand holding House
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Real estate investing can be for short-term profits or long-term rental cash flow. Many people would love to be real estate investors, but they lack the cash for down payments. They think that buying and holding, or buying and flipping, are the only ways to make money.

Not so. You can start with as little as the cost of a few hundred business cards. Your desire and some leg work can turn into cash in your pocket within a short period of time.

Strategies for Investing Without Cash

Numerous investment methods are preached and taught by gurus all over television, in print, and on the internet. You can learn a lot from real estate investment websites, but be careful about paying for expensive courses or mentoring.

It's still up to you to use that knowledge, to go out and implement what you've learned, no matter how much the instructor knows and teaches you.

A few techniques can help you make money from real estate without starting with a lot of cash—or even any at all.

Bird-Dogging vs. Long-Term Rentals

You have to understand who these investors are before you can truly appreciate their value. Most people think of a bird dog as a "flipper," someone who's buying homes, fixing them up, then selling them quickly for a profit, and that's largely accurate.

Bird-dogging is a bit like being a wholesaler, and it requires no cash to get started, just some business cards and effort. It can make real estate investing a business for the average person with not much cash.

Then there's the long-term investor who buys homes as rental properties, realizing cash flow and appreciation over time. Either of these real estate investment strategies can be very profitable. Which you choose is about your goals, temperament, and risk tolerance.

The Art of Bird-Dogging

Many of your target investors will another successful business and some cash that they want to invest in real estate. Running their businesses requires most of their time, so they rely on traditional resources like real estate agents to help them locate investment property deals.

They'll usually pay more than they should for these deals because the agents are working out of the Multiple Listing Service (MLS) inventory. There isn't a lot of flexibility in pricing, especially with the agents' commissions involved.

Many of these investors buy multiple properties. How do you think they'll react if you told them you could bring them deals for 10% to 40% less than what they're currently paying? 

The less these investors pay for a home, the better their return on investment (ROI) from cash flow will be, and the sooner they'll have locked-in equity. They want a bird dog to bring them deals.

You can find homeowners who need to sell and haven't yet been able to, or homeowners with mortgage difficulties or looming foreclosures, through work, research, and investigation.

Look for the homes that real estate agents aren't listing. In fact, some bird dogs have real estate agents who feed them leads when a distressed homeowner hasn't been able to sell. The bird dog delivers profitable investments to the investor, and fees can run between $2,000 and $10,000 per deal when the sale closes.

Assignments: The Pros...

Another way to make money in real estate investing without using any of your own money is through assignments. It's not a complicated process, but it does require that you have your buyer lined up before you lock yourself into a purchase contract.

You're going to actually make your own deal with the seller and write up a purchase contract. The contract will indicate that the buyer is "Your Name and/or Assigns." This wording allows you to assign the contract to someone else, your buyer.

You don't need the consent of the seller. It must typically be a cash buyer, but that's normally the case when you're doing these kinds of deals. The seller will simply be informed that your buyer is now their buyer and that the transaction will proceed as normal according to the purchase contract terms.

...And Cons

You'll have to give an earnest money deposit to the seller. This money is deposited with the title company that's handling the closing, and you won't be refunded at the end of the day or if the deal should head south for some reason. The money will transfer to your buyer at closing.

You'll want to keep your deposit as small as possible because there's always some amount of risk that the deal won't eventually close.

In most cases, you're not paid until the deal closes, although you might be able to get your fees at the time when you do the assignment of the contract over to your investors if you regularly work with them.

Of course, you might also be able to also get that earnest money up front before you lock in the home if you're well-aligned with certain buyers and can describe the deal to them and get a verbal commitment.

Back-to-Back Closings

The housing and mortgage mess that began to unfold in 2007 created a lot of change in the lending and real estate transaction businesses. Title companies used to be willing to do double closings and fund one deal with the proceeds of another, but this is rare in 2019.

There's a way to wholesale and flip properties with back-to-back closings without using your own money, however. The first requirement is that you must have a profitable wholesale flip deal set up. You must have the first property purchased at the right price, and a ready investor to buy it from you at a nice profit.

The profit must be sufficient to cover the fee that will be required in order for you to use other people's money to get the first deal closed so you can close on the second sale to your investor. The fee is usually at least $2,500, and it can be based on a percentage of the amount loaned.

Transactional funding is the process of getting a very short-term loan to fund one deal with a follow-up closing to sell the property the same day or at least within 24 hours. A transactional lender will place the funds that are necessary to close the first deal with the title company.

You can move on to the second deal when the first deal closes, usually scheduled right behind it. The closing statement for that deal will reflect a payment to the transactional lender for the amount they loaned on the first deal, plus their fee. You get the balance and your profits.

Lease Options

The basic components of a lease option strategy are a lease with monthly payments and an option to purchase the property at the end of the lease period.

For example, you want to own a home as a rental property, but you're not sitting on enough cash for a down payment. You might even have credit problems that would make borrowing too expensive. So you locate a highly motivated homeowner who hasn't been able to sell through marketing with bandit signs, newspaper and Craigslist ads, or just word-of-mouth referrals.

A Lease Option Example

The home might be worth $200,000 in the current market. The mortgage balance is $150,000, and the homeowners' payments are $1,100 a month with taxes and insurance. One spouse has been laid off from her job, and the other has located a better job, so they need to move soon.

Offer to lease their home for three years with lease payments equal to their house payments—$1,100 a month. Pay them $1,500 as a non-refundable lease option payment in exchange for the right—but not the obligation—to purchase the home at the end of the lease for $160,000.

Use marketing or other methods to locate a tenant for the home who is willing to pay you $1,200 a month to lease it. The tenant will sign a minimum of a one-year lease. The taxes and insurance will remain as-is during the three-year lease, with the escrow in the owners' mortgage payment taking care of those items.

Here's how it all works out:

  • Your cash out: $1,100 x 3 for first and last month lease payments and a security deposit equals $3,300, plus $1,500 for the lease option payment. Your total cash out is $4,800.
  • Cash in: $1,200 x 3 for first, last & security deposit = $3,600.

This a worst-case scenario for illustrative purposes. You're out of pocket $1,200. But if you had better negotiated with the seller and postponed the security deposit or done away with it altogether, this would work out to a $300 profit. Likewise, you would break even if you could find a tenant willing to cough up $1,600 a month.

It can all come down to your negotiation skills.

And the idea is to control this home and lock in a profitable purchase at the end for that under-value price without putting too much cash out in the meantime. The property is already worth more than the price to be paid, and it will likely appreciate during the three-year lease. That can turn out to be a significant return on your investment.

Sandwich Leases

A sandwich lease is just what the name implies: two lease options with you, the investor, in the middle.

You'll want the option to purchase the property at a discount at the end of the lease period, and you'll have to find a tenant who wants to purchase the home but can't due to credit problems or a lack of cash for a down payment. Most people in this situation are happy to buy with a lease option so they have time to improve their credit and get a down payment together.

It would work out similarly to a lease option, but you're finding someone who wants to lease-purchase or rent-to-own rather than a regular tenant. All the numbers would be the same, but the tenant/buyer would own the home at the end of a three-year lease period.

The tenant/buyer now not only pays the first, last and security deposit upfront, but also makes a lease option non-refundable payment for the right to buy the home at the end of the lease. The tenant/buyer also agrees to pay $175,000 for the home.

Now your cash flow looks like this:

  • The same $4,800 is going out.
  • $1,200 x 3 equals $3,600, plus the $1,500 lease option payment from the tenant/buyer brings in $5,100.

You'll make $300 upfront, $100 a month for the 34 remaining months or $3,400, and a $15,000 profit by selling the home for more than your original agreement to purchase the property. Your gross profit is $18,700 with zero dollars actually invested.

Another advantage of this strategy is that the tenant/buyer is hoping to own the home and might logically, therefore, will take better care of it. In fact, some investors negotiate leases that require tenants to pay the first $100 or more for any repairs.

Expenses are minimal when the insurance and taxes are being paid through the original mortgage payment.

Lease options and sandwich leases are strategies often used by real estate investors to add properties to their portfolios and build monthly cash flow.

Other Rental Options

You have to have a roof over your head while you're doing all this investing, so you might consider combining your own needs with an opportunity to make money and come out ahead. This, too, will require at least a little money out of pocket, but you could come out well ahead in the long term.

You can purchase a duplex for less than 5% down if you have good credit and you personally occupy one of the units. Rent out the other and use the income to pay for some if not all of your mortgage payment until you eventually sell, ideally for a profit after the property appreciates.

Another option is to purchase a single-family home, then live there for one year. The VA and USDA offer loans for no money down, and an FHA loan can be had for as little as 3.5% as of 2018—provided it's your residence, but you don't have to live there forever.

Stay awhile, then rent it out for enough to cover your mortgage payments. Let the property appreciate, pay down your mortgage over time, and built equity and net worth.