How to Become a Landlord with Little to No Money

One of the most challenging parts of becoming a landlord is investing the initial amount of money. This reason stops many people from venturing into the real estate world, despite many other landlords' success.

However, becoming a landlord without any start-up capital is not an unattainable goal. We've gathered the most effective ways you can do this and listed the pros and cons of each option.

We will provide you with insights and give you some options to become a landlord with little to no money.

Buy a foreclosed property

Foreclosure is a process where a home becomes bank-owned after the mortgage holder defaults on payments or misses deadlines for making payments. These properties often sell for a lot cheaper than other homes in the area, so they are great deals when looking for homes in good neighborhoods with low-interest rates.

Related fact: The latest statistics show that nationwide 0.05% of all housing units (one in every 2,112) had a foreclosure filing in the first half of 2021. States with the highest foreclosure rates in the first half of this year were Delaware (0.10% of housing units with a foreclosure filing), Illinois (0.09%), Florida (0.08%), Ohio (0.08%), and Indiana (0.08%).

‍For this reason, foreclosed properties are an exciting investment opportunity for anyone who wants to be a landlord with a minimal budget.

Although this option usually requires an upfront deposit, it is possible in some cases to buy a foreclosed home with no money down using an FHA loan.

So, if you are looking for the answer to 'How to become a landlord with little money,' buying a foreclosed property is the one. Individuals who buy foreclosed properties usually gain an attractive return on their investment since they are typically sold at auctions or through foreclosure proceedings by lending institutions.

In most county foreclosure auctions, you need to pay a certain percentage of the purchase price as a deposit. It varies by municipality, but it generally falls between 5% and 10%.

• Pros - A foreclosed property is sold at a lower price than its market value, so you can make an instant profit by buying it. Moreover, the fact that a property has been foreclosed also means that the seller has already gone through moving out, which means it will require less work for you to take ownership after closing.

• Cons - Foreclosed properties, like any other property on the market, can have unforeseen or undiscovered defects that make them unsafe or uninhabitable. If you don't do enough research on the property before making your purchase, you could end up with a headache down the road — especially if you plan to rent out this property.

Use Seller Financing

Seller financing is an excellent option for those who cannot pay cash upfront for their purchase. It is often used by buyers who cannot afford to purchase a property in cash but have the necessary funds to make monthly payments.

In this type of financing, the buyer and seller agree on an amount of money that needs to be repaid every month. The total purchase cost is paid off over a set period, such as one or two years.

If offering cash upfront is an obstacle for you, consider offering the seller some concessions. An example of a possible concession could be delivering larger monthly payments for a certain period to finance the transaction.

Seller financing can benefit those who want to become landlords but don't have enough money for a down payment or need time to fix credit issues before going through with a traditional mortgage.

• Pros - A future landlord might find seller financing advantageous because they do not have to worry about getting funding from a bank or other lending institution. This type of financing also offers landlords the opportunity to have more time to get their finances in order before taking over ownership of the property.

• Cons - While this seems like a huge opportunity for novice landlords, only a tiny fraction of all sellers are willing to take on the role of financier, typically under 10%. That's because the deal requires legal, financial, and logistical obstacles.

Assumable Mortgage

If you are starting as a would-be landlord with little money or no upfront budget, an assumable mortgage might be the best solution for you. A mortgage that can be assumed is where the original borrower agrees to let someone else take over their obligation to pay it.

Most lenders offer this option for mortgages they have been making for many years. An assumable mortgage can be advantageous to the new buyer because it allows them to purchase a home without coming up with as much money for a down payment.

It also allows the new buyer to get better interest rates than their credit profile and avoid obtaining their investment mortgage.

A home buyer can take out an assumable mortgage if they plan to become a landlord or if they already are a landlord and want to add another property to their portfolio. The primary requirement for an assumable mortgage is that the person taking over the loan has to have good credit and sufficient income and afford the mortgage repayments.

• Pros - The main advantage of an assumable mortgage is that an assumption loan can be obtained at lower initial interest rates and higher initial principal amounts when compared with a traditional mortgage. It can also help you avoid private mortgage insurance, allowing you to save on interest payments due to the shorter amortization period.

• Cons - You will have to pay interest on the loan and pay back more money in the long run than if you had made payments in cash. The interest rate of an assumable mortgage is based on a higher risk than a traditional mortgage. This increased risk will cause the interest rate to fluctuate, which can cause problems with budgeting.

Your total monthly payment may be higher than a Federal Housing Administration (FHA) or Veteran Affairs (VA) loan. However, this difference may not show up when comparing it with an adjustable-rate mortgage from another lender.

100% Mortgage  

Historically, the process of getting a mortgage was not nearly as straightforward as it is today. Several hoops and hurdles needed to be jumped through before landlords could purchase a property and rent it out.

Related fact: For decades, the national average for a down payment on a home in the US floated somewhere around 20%. In 2021, the average down payment reached an average of 6%.

However, with the introduction of 100% mortgages for buying rental properties, the process has become much easier than before.

A 100% mortgage means no down payment on your mortgage.

Aspiring landlords now only have to take out an interest-only mortgage for 12 months and turn it into a full-priced mortgage after the period has passed.

• Pros - Gives future landlords a break from paying a down payment.

• Cons - The risk of defaulting on a 100% mortgage is that the landlord could lose all their equity in the property and pay the cost of selling and buying another home. Many landlords become alarmed by this thought and decide to avoid risk at all costs by not taking out a 100% mortgage.

Rent Out Your Own Property "House Hacking"

House Hacking is an alternative to traditional rental income that has been gaining popularity in recent years.

It is the practice of renting out a portion of your house to cover the Mortgage or other costs associated with owning a home. It can also be defined as purchasing a home near your current residence and renting it out while living in the main house. This allows you to avoid paying for two mortgages or having the equity tied up in two homes.

An excellent way to rent out a portion of your house is through Air BnB. This platform is also great for vacation rentals. When you become more established as a landlord having a vacation rental is a great way to diversify your portfolio.

House hacking makes it possible for future landlords to have the best of both worlds. They can enjoy the benefits of homeownership and get into investing at the same time.

This is not just a way to buy homes. It's also an investment technique that can help people who don't have enough cash to purchase real estate properties and own them.

The idea of living in a home you're renting out may sound very appealing if you're willing to put in the work and spend more time at home. It can be cheaper than renting space elsewhere too.

Given these points, house hacking is an opportunistic strategy for looking for ways to become a landlord with little or no money. It's also a great way to get into real estate investing without the hassle of property management or building equity from scratch.

• Pros - House hacking is a simple way of owning a home without paying the full price. It offers a way for landlords to reduce or even eliminate their costs associated with the rental while also investing in the property. It requires minimal time, money, and effort.

• Cons - House hacking is not legal in all areas. You might not get tax breaks as regular homeowners do, and you should be well informed of insurance implications and potential liability before renting out your own property.

The highest risk comes from the tenants. If they don't pay the rent, that could leave the landlord without an income and no place to live.

Home Equity Line of Credit - HELOC

The HELOC is a loan that allows homeowners to borrow money against their home's equity - the value of their home minus what they owe on the Mortgage. Landlords can use this financing in two different ways:

First, landlords might purchase or refinance a property with the HELOC funds and then rent it out. They can then use the remaining HELOC money as an emergency fund for repairs or other expenses.

Second, landlords could use the HELOC to pay ongoing expenses such as mortgage payments, taxes, insurance, and utilities without worrying about cash flow. This helps landlords avoid taking out a second mortgage which would incur additional interest charges.

One of the great things about a HELOC is that landlords can borrow as much money as they want, and they will receive a set time frame to pay it back. This is a perfect way to invest in a property that needs work because you only need to borrow what is necessary for work on the property and not its total value.

The interest rates are usually pretty low, so this is also good if you want to purchase something with an opportunity for appreciation but don't have all the cash right now.

• Pros - This option can provide a steady source of income, and it can allow you to buy a property without having to take out a loan or Mortgage. The HELOC loan also covers the initial costs for renovations. It can help you buy property in an area that is not yet crowded and has high growth prospects in the future.

• Cons - A drawback of this strategy is that there may be penalties or fees if you don't stay within your original borrowing limits. You may have difficulty selling your property if you cannot make payments on your home equity line of credit.

Partner up with a friend or relative

If you are lucky enough to receive financial help from a loved one without the condition of returning the money, then this could be the easiest way to become a landlord with no funds at all.

Related fact: About 20% of households in the United States have received inheritances.

However, not many have been blessed with a wealthy family or a life-changing inherence. Because of this, teaming up with a friend or relative may be a favorable option.

Joining forces with someone who is also a first-time landlord can be a great way to share the burden. When you're teamed up with a close friend or relative, this could be the most comfortable situation for those with little or no money.

Your partner will understand the necessity to keep on top of things and take care of your property, and they could be an essential source of support for you in times of need.

Pros - Friends and family may not have the same level of expertise as real estate agents, but they are people you know and trust. Joining forces with them can provide you with financial support while becoming an experienced landlord, bringing more peace of mind along the way.

Cons - When you take out a loan from a family member or close friend to invest in real estate, the pressure to pay the money back is more significant than if you had received the money from anywhere else due to the emotional implications. If you decide to share the purchased property with a friend or relative and collaborate as a team of landlords, disagreements and misunderstandings about the money may arise. This contention can significantly affect your relationship with your partner.

Insights From Real Estate Professionals

We asked some real estate professionals their opinions on becoming a landlord with little to no money. They provide their insights based on their personal experiences.

What is the minimum amount of money needed to become a landlord?

"If you are creative and prepared to learn, there is no reason you can't make a start as a landlord with none of your own money down. Personally, I partner with older, passive investors - largely retirees. These guys are typically looking to generate monthly income from their 401k and IRA investments, but they don't want the hassle of becoming a landlord.

The older you get, the less appealing it is to get phone calls in the early morning with tenants and/or property issues." David Garner | Chief Executive Officer | The Garnaco Group of Companies

Let's look at an alternative perspective on the minimum amount of money needed to become a landlord:

"The minimum amount of money to become a landlord is $2,500 - if you find a seller willing to offer seller financing, 0% down, pay closing costs of around $2,500, and you officially have yourself a house.

However, that being said, I strongly recommend having $10,000 or so in reserves; that way, if you buy a house and the A/C goes out, you have sufficient funds to cover that. For a good rule of thumb of how much money to keep in reserves, I recommend about $7-8/Sq Ft for each rental property to be safe!"  RyanWhitcher | Manager | Harmony Home Buyers

It's fair to say that if you network with the right people and make good business relationships, it is possible to become a landlord with little to no money. However, it is always good to have a solid plan for funding your rental property to mitigate risks.

Here is what Martin Boonsaayer | CEO of  The Trusted Home Buyer, says on the matter:

"Partnering with someone who has enough money for a down payment is a fantastic financing option. If you have a friend or family member who is interested in property investment but isn't interested in the day-to-day work of screening tenants and collecting rent payments, this is a good strategy to use.

In this scenario, one partner typically puts up the money while the other handles all of the actual work of being a landlord. The key to success here is to agree on how to divide the profits. I suggest thinking about it in terms of risk and reward, as well as costs and benefits.

Your partner is taking all of the financial risks, but you're doing all of the legwork in terms of generating revenue through rent. Make sure your profit split reflects your contributions. It's best to have your terms in writing, no matter what you decide."

A Personal Journey of Becoming a Landlord With Little to No Money

Meet Julie, CEO of Julie Aragon Lending Team, a housing finance expert and avid property investor. Here is her tale of her buying her first piece of real estate.

"The first investment property I had was using the FHA loan to buy a duplex. I still have that property, and it's had positive cash flow for years (currently over $1K/month in profit). The funny thing is that I wasn't even in the market for an investment property, but my friend was the agent who set the deal up, and she promised to manage the property if any issues came up.

To be honest, though, the low down payment is what made it a no-brainer. It required so little work that for the first 5 years, I owned it. I only visited the property once...talk about passive income!"

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Conclusion

Becoming a landlord with no money at all is not very realistic. The truth is that no one can become a landlord without investing some cash because they inevitably must pay property taxes, insurance, management fees, and maintenance costs.

However, as shown above, there are some ways to buy properties with little or no down payment. It's up to you to choose the most suitable one for the beginning of your professional adventure as a landlord.

We recommend doing comprehensive research before making up your mind on which option you choose to help you on your way to becoming a landlord.

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