The Best Ways to Buy a Multifamily Property With No Money: 7 Options
Apartment buildings are expensive, but there are ways to get into the sector that won't break the bank. Find out seven techniques in our guide.
Buying a multifamily property can be a great investment for real estate investors, whether they’re new to the game or have decades of experience. A multifamily investor can take advantage of strong rental income while also reaping the benefits of increasing property values, making the multifamily sector a generally safe and even recession-proof investment play.
But multifamily properties come at a significantly greater cost than single-family homes. And down payments are generally a higher percentage of the purchase price, too. While getting a family member or a close friend to spot you part of the down payment for your first home may be technically possible, that gets a lot more difficult with multifamily — try going back and asking those same folks for a few hundred thousand or a million dollars for an apartment building.
And if you still can't come up with what you need, keep in mind there are lower-cost ways to invest — multifamily syndication investments, for example, can be a great option for those looking to invest around $50,000 (sometimes more, sometimes less).
If you’re hoping to get into the multifamily sector with little to no cash on hand, don’t necessarily let what I wrote above put you off. There are ways to get where you need to be, but it will take a lot of work. Broadly speaking, you’ll need to look for alternative sources of funding. Here are seven strategies you can use to buy a multifamily property with no money.
1. Partner With Another Borrower
The simplest way to purchase a multifamily property with no money is to find a partner who has the money to invest and can secure the financing. This partner could be a family member, friend, or an investor who’s a complete stranger. The two of you would then split the ownership and profits, and the partner would cover the entire cost of the down payment.
You could also ask a multifamily real estate professional to help you find a partner who is willing to finance the purchase. In this case, the professional would likely take a fee for their services.
Most investors wouldn’t do this without a good incentive, however — so find it. Be the partner responsible for property management, for example, and you’re bringing some potentially serious value.
2. Provide a Share of Equity to Another Investor
Another option for investing with no money is to offer a share of the property’s equity to a partner. The other investor would provide the money to finance the purchase, and you would receive a share of the equity based on the terms you set.
This would mean selling at least part of your ownership in the community, which means a reduced return in absolute terms. That said, if it’s your first apartment building investment, it’s not an unreasonable compromise so you can get involved with little to no cash.
3. Pursue Seller Financing
Seller financing is when a buyer obtains a loan from the seller of the property. The terms of the loan would be set by the seller and could include monthly payments, an interest rate, and a repayment plan. This could be a good option if the owner is motivated to sell the property quickly and doesn’t need all of the purchase price upfront.
For example, let’s say you find a lender willing to finance 75% of the value of your $1 million multifamily acquisition. Great. But how do you get that remaining $250,000? If your seller is in a hurry — perhaps she or he needs to offload the property to pay down a balloon payment — they could offer the $250,000 as loan. Note this is a difficult thing to do in most circumstances, unless you have a very good relationship with the seller or have excellent timing for your purchase.
4. Get a Cash-Out Refi on Your Home
If you own a home, you may be able to use that equity to purchase a multifamily property. This could be a good option if you have enough equity in your home and can qualify for a loan. When you do a cash-out refi, you would borrow against the equity in your home, and you could then use the proceeds to cover the down payment on your multifamily property.
Note that this can be risky, especially in an environment where home prices are falling. If you take a larger refinancing on your home, you could end up underwater on that loan should the property decrease in value.
5. Take a Hard Money Loan
A hard money loan is a short-term loan that is secured by real estate — not by the finances of the buyer. These loans usually have much higher interest rates than traditional mortgages but can be approved quickly and with little documentation.
That said, these loans are typically used by experienced investors who can quickly fix and flip a property, or by investors looking to buy multifamily properties without the traditional requirements of an agency or bank loan. Finding a hard money loan which covers 100% of the property value is a difficult task, though. The asset’s fundamentals must be rock solid to even come close.
6. Invest in a Duplex or Other Small Property
If you’re strapped for cash and own a home, you could sell your property, buy a small apartment complex, and live in one of the units.
Duplexes and other small properties, such as fourplexes, can be a good option for investors who don’t have a lot of money to invest. These properties often require less money to purchase, and can be easier to manage than larger properties — all while still providing a decent return if managed well.
7. Assume a Seller's Loan
If a seller already has a loan on the property, you may be able to assume the loan. This means that you would take over the loan payments and the interest rate, while the original borrower is no longer responsible for the debt. This can be a good option if the onte has a low, fixed interest rate — and the loan is actually assumable. Some aren't!
Still, a loan assumption will rarely, if ever, cover the full asking price of the apartment building. That said, it can be a great tool in your toolbox, particularly if the seller has a HUD loan or another kind of super-competitive financing in place.
Conclusion
If you don’t have a lot of cash available to invest in a multifamily property, you have a lot of work ahead of you. However, there are options — especially depending on your network, if you own a home, and if you’re pursuing a property at the low end of the cost scale.
And even using any of the suggestions above, you’ll still need a loan to finance the deal. When investing in multifamily properties, having the right funding source is key. We can take you through your options; fill out the form below.
Related Questions
What is seller financing?
- Seller financing is when a buyer obtains a loan from the seller of the property. The terms of the loan would be set by the seller and could include monthly payments, an interest rate, and a repayment plan. This could be a good option if the owner is motivated to sell the property quickly and doesn’t need all of the purchase price upfront.
What is a hard money loan?
- A hard money loan is a short-term loan, typically with a term up to two or three years, that is secured by real estate. These loans usually have much higher interest rates than traditional multifamily mortgages but can be approved quickly and with little documentation.
What is loan assumption?
- Loan assumption is a financing option that allows a buyer to take over an existing loan from the seller. This means that the buyer will be responsible for the loan payments and the interest rate, while the original borrower is no longer responsible for the debt. This can be a great way to purchase a multifamily property with no money if the loan has a low, fixed interest rate and is actually assumable.
What are the different financing options for buying a multifamily property with no money?
There are several financing options for buying a multifamily property with no money. These include seller financing, hard money loans, private money loans, bridge loans, FHA loans, and conventional loans.
Seller financing is when a buyer obtains a loan from the seller of the property. The terms of the loan would be set by the seller and could include monthly payments, an interest rate, and a repayment plan. This could be a good option if the owner is motivated to sell the property quickly and doesn’t need all of the purchase price upfront.
Hard money loans are short-term loans secured by real estate. They are typically used by investors to purchase and renovate a property. The loan is secured by the property and the lender is primarily concerned with the value of the property, not the borrower’s credit score.
Private money loans are similar to hard money loans, but they are typically provided by private investors or companies. These loans are usually short-term and have higher interest rates than traditional loans.
Bridge loans are short-term loans used to bridge the gap between the purchase of a property and the long-term financing. These loans are typically used by investors who need to purchase a property quickly and don’t have the time to wait for a traditional loan.
FHA loans are government-insured loans that are available to buyers with lower credit scores and down payments as low as 3.5%. These loans are typically used by first-time homebuyers.
Conventional loans are loans that are not insured by the government. These loans typically require a higher credit score and down payment than FHA loans.
What are the pros and cons of using a hard money loan to finance a multifamily property?
The pros of using a hard money loan to finance a multifamily property include greater flexibility, quick fund disbursement, and less borrower scrutiny. The cons include higher interest rates and fees, and a shorter repayment period. It is important to consider these pros and cons carefully before deciding if hard money financing is the right fit for a particular project.
For more information, please see The Pros and Cons of Hard Money Loans for Commercial Real Estate Investments.
What are the qualifications for getting a loan to purchase a multifamily property?
To qualify for a loan to purchase a multifamily property, borrowers must typically meet certain qualifications, including having good credit (660+ is typically expected) and between 25-30% of the total loan amount as a down payment. Additionally, the property itself will need to have a debt service coverage ratio or DSCR, of 1.25-1.30x. This means that the building’s income will need to exceed its annual debt service by at least 25-30%. Skin in the game is equally important in most cases, but that does not mean first time investors are automatically overlooked.
For more information, please visit Multifamily.loans and Apartment.loans.
What are the tax implications of owning a multifamily property?
Investing in multifamily properties comes with several tax incentives. It’s possible to deduct operating expenses and maintenance costs, including management fees, insurance, and marketing costs, or any legal and professional services, such as property management companies. Additionally, investors may be able to take advantage of a 1031 exchange, invest in an Opportunity Fund, or take advantage of tax-loss harvesting to reduce their capital gains taxes. The Pros and Cons of Multifamily Investing and Capital Gains Taxes for Multifamily and Commercial Real Estate Investors provide more information on the tax implications of owning a multifamily property.
What are the risks associated with investing in a multifamily property?
The risks associated with investing in a multifamily property include expensive purchase costs, rising construction costs, construction delays, and the possibility that the renovation work may not be enough to get the desired investment outcome.
Buying multifamily properties is significantly more expensive than buying single-family homes, therefore, it is usually hard to enter the market as a first-time real estate investor. While banks are usually eager to provide loans, buyers should be able to come with around a 20% downpayment, depending on the real estate market or the size of the property. Source
Construction costs have risen dramatically over the past few years, impacting both ground-up development projects and renovation work. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises. Source
Construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up. Source
Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue. Source
What are the best strategies for finding a good multifamily property to invest in?
The best strategies for finding a good multifamily property to invest in include researching the market, understanding what type of property you're looking for, and knowing what to avoid. It's important to research the market to find the areas with the best potential for rent growth, and to understand the different property classes and sizes that are available. Additionally, it's important to know what to avoid, such as delinquent taxes, busy intersections, and properties with multiple tenants that are late on their rent.
For more information, check out this guide from Multifamily.Loans.