How to Buy Rental Properties When You’re Broke
Q: How do I get into flipping or buying income properties without money?
D’Lux Real Estate gives you three ways to get the down payment to purchase a property to rent:
1. Loan or withdrawal of your retirement savings
Most of the time, a withdrawal from a 401(k), Roth IRA, or life insurance comes with a hefty penalty fee; however, for a few situations, that penalty is avoided. Buying a first time home, some medical expenses, and education can be penalty-free, but speak with your tax accountant to make sure your circumstances qualify.
If for example, a 401(k) loan is an available option, you can take a loan pay for a down payment. However, there are some drawbacks. It is a loan, so you need to pay it back … with interest. On the plus side, the interest you’re paying back is to yourself. You can borrow up to $50,000 or up to 50 percent of your retirement account (whichever is less). Let’s say you have $40,000 in your retirement account: you can borrow $20,000 for a down payment. That would get you a 20 percent down payment on a $100,000 home.
D’Lux Tip: Withdrawing from your 401(k) for a property or taking a loan from your 401(k) is only feasible if it is your first home and you’ll be living in it. You can, however, have a plan to rent it later. Find out from your lender how long you need to live in the home before renting it out. If you want income right away, buy a property with an in-law suite or separate living spaces. You can live in one unit and rent the other.
2. BRRRR with an investor
If you want to quickly build your real estate portfolio, try the BRRRR method of investing with an investor. BRRRR is buy, rehab, rent, refinance, repeat.
This is how it works. You work with an investor to pay for the down payment on the property. This can also be done with a hard money loan or equity loan. Here is the key: the property should be ugly. Next, you rehab it. Instant equity. After this, you rent it for about a year. Then, you refinance the property, pull out the cash, and pay off the loan or the investor. Last, you repeat this process. By the end of this cycle, you essentially have gotten the property for nothing out of pocket.
Some drawbacks to this plan:
- It’s risky. It relies on high-interest options such as an investor/hard money or putting another property on the line with a home equity loan.
- The property needs to be inexpensive.
- The rehab needs to be low cost.
- You need to know the market to ensure the refinance can pay off the initial investor. Will the property be worth what you need it to be?
3. Take advantage of big cash flows
Use your tax refund and annual bonus for long-term growth by setting it aside for a down payment. Instead of squandering away the $6,000 you got from your tax refund or spending your $10,000 bonus on a vacation or other luxury, put it in a separate savings account for a down payment. With these numbers, after two years, you will have $32,000, enough for a $160,000 property.
Real estate is a solid strategy for diversified investing. But the key to financial growth is adding to your portfolio. That isn’t always easy when your finances are in a non-liquid state. So, by taking advantage of some out-of-the-box ways of getting a down payment, you can build your portfolio quickly.
D’Lux Tip: Please watch your credit score, any kind of borrowing will check for your financial behavior. Clean up all bad scores and keep you credit history clean and in good standing.