Down payments are such a well-known staple of real estate financing, it’s easy to come to the common conclusion that down payments are unavoidable. Investment down payments tend to be especially high — 20-30% down payment requirement to make sure the investor has “skin in the game” and can’t just walk away if the property underperforms. 

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What option does an investor or aspiring investor have if the investor has limited access to capital or wants to preserve their dry powder? Acquiring rental property with little or no down payment requires an investor to think outside of the box of conventional real estate financing.

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When down payments are a stumbling block, investors get creative. Munoz Ghezlan Capital deploys a number of real estate creative financing strategies to help investors acquire 0% down rentals. In this article, we cover seven of them.

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Key Takeaways

• Since most institutional lenders require some sort of down payment as “skin in the game” for the investor, 0% down rentals require one or more methods of real estate creative financing.

• Creative financing strategies include various alternative loans, private loans, loan assumption, seller financing, partnerships, and other methods of replacing down payment cash with equity, debt, or “other people’s money.”

• If part of the transaction is to be financed by a mortgage from a financial institution, only certain lenders allow creative financing in the capital stack — lenders that Munoz Ghezlan can help you identify.

• Each strategy of creative financing has its own risks and considerations, and many deals are done using multiple strategies in tandem. Success partially depends on knowing which strategy is right for which deal.

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What Is Creative Real Estate Financing?

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“Creative real estate financing” is an unofficial term used to describe any financing practice that falls outside of the conventional mortgage market.

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This could be as simple as funding the purchase with a non-QM (that is, “qualifying mortgage”) loan, one that does not conform to the guidelines of Fannie Mae and Freddie Mac. DSCR loans fall into this category, but they are fairly straightforward — really just conventional mortgages based on the income potential of the property rather than the buyer’s personal income.

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It could also be as complicated as seller financing, partnerships, private money lenders … even assuming the seller’s mortgage without the bank’s permission or approval.

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Why 0% Down Rentals Actually Work

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0% down rentals work because they replace the cash usually required for the down payment with some other form of financing. There are three ways to do this:

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• Equity Replacing Cash. The seller taps equity in other properties or assets to raise the down payment cash.

• Debt Replacing Cash. The seller takes on other debt — in the form of private loans, working capital loans, or lines of credit — to raise the down payment cash.

• Partners Replacing Cash. The seller recruits partners — equity partners, seller financing, etc. — to raise the cash or replace the need for a down payment altogether.

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The following strategies use different forms of real estate creative financing to achieve the goal of acquiring 0% down rentals.

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Creative 0% Down Rentals Strategies

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1. BRRRR Financing

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BRRRR financing may not help an investor get their first rental property with 0% down, but it is a long-term strategy to get the next rental property for 0% down. Or the next 5, 10, 20, or however many rental properties the investor is able to acquire.

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BRRRR isn’t a type of loan — it is an acronym for a strategy:

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• Buy – acquire a “fixer-upper” property in need of rehab, renovation, or repositioning — a property you can get for well below its ARV (after-repair value).

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• Renovate – perform the necessary rehab and repair to reposition the property.

• Rent – lease the property out to long-term tenants or use the property as a short-term rental or Airbnb.

• Refinance – borrow money with long-term debt based on the renovated property’s fair market value.

• Repeat – use the cash proceeds from the refinance as down payment on the next “fixer-upper property,” and repeat the cycle.

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Note that the first property in this strategy is the tricky part. With no refinance proceeds from a previous property, the investor must either pay a cash down payment for the first property or use a different strategy to acquire 0%-down financing.

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However, once the first property cycle is complete, the investor has both a buy-and-hold rental in his/her portfolio, and the cash from the refi to acquire the next property for the portfolio.

Important BRRRR Financing Considerations

• Restrictions Against Borrowed Funds for Long-Term Loans. Since the proceeds of a refinance are technically “borrowed funds,” they can run into the problem that many lenders — including all “QM” lenders that conform to Fannie Mae/Freddie Mac guidelines — prohibit the use of borrowed funds as a down payment. Munoz Ghezlan Capital regularly helps connect BRRRR investors with non-QM DSCR lenders who offer long-term rental property loans and accept refi proceeds as down payment.

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• Seasoning Requirements for Down Payment Funds. Even lenders that accept borrowed funds as down payment may have a “seasoning” requirement, where the funds must be in a bank account for a certain period of time — anywhere from 1-6 months or longer. For investors wanting to do back-to-back BRRRR deals in quick succession, Munoz Ghezlan Capital keeps track of DSCR lenders with the shortest seasoning requirements.

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• Caps on the Number of Loans. Certain lenders, especially QM lenders, cap the number of loans they will give a single investor, a potential pitfall for investors who want to build a large portfolio. Fortunately, DSCR lenders don’t cap the number of loans they issue to a single investor. Once the investor has amassed a large portfolio, multiple loans may be able to be refinanced into a “portfolio loan,” a single blanket loan with multiple properties as collateral.

2. Seller Financing

Seller financing is one of the earliest forms of real estate creative financing. Instead of taking cash as payment for the property, the seller carries some or all of the purchase price as a new mortgage loan. 

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No money changes hands for the portion of the purchase price that the seller carries back, but the buyer takes title to the property and owes debt service to the seller on the new note.

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The seller can finance either the whole purchase price, or finance a portion of the purchase price that will cover the down payment, or anything in between.

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Sellers have been known to finance with extremely favorable terms, offering such perks as 0%-interest financing, interest-only payments, even 0% interest and no payments.

Important Seller Financing Considerations

• Seller Must Have Significant Equity. Sellers can’t carry back a loan on the entire purchase price when there is still a loan out on the property in the seller’s name. There must be enough cash coming from the seller’s side to settle any outstanding loan. The seller must have at least enough equity in the property to finance the portion of the deal the parties agree to.

• Seller Must Be Properly Motivated. Sellers tend to opt for seller financing when they prefer cash flow over large lump-sum payments. They might also agree to seller financing to avoid getting hit with capital gains tax assessments. Either way, the reasons the seller chooses this option will color the deal.

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• Not All Lenders will Accept Seller Financing. If the buyer intends to use fractional seller financing in lieu of down payment on a mortgage loan, the lender will have to sign off on it. As will borrowed funds, not all lenders will allow seller financing as the equity in the capital stack, because it leaves the borrower with little or no “skin in the game.”

Seller Financing vs DSCR Loans

One key disadvantage of seller financing vs DSCR loans is that you need a willing seller. If a real estate investor stays in the game long enough, he/she will likely encounter one, but it’s not something you can count on for every deal. As such, it’s best used as a negotiating tool to keep in the back pocket when the investor sees an opportunity to use it.

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DSCR loans, on the other hand, are applicable to a broad range of investment property deals, regardless of the preference or motivations of the seller. If a property can generate income, a DSCR loan is always an option.

3. Assumable Debt

Assumable debt — meaning the buyer can apply to simply take over the seller’s existing mortgage rather than originating a new mortgage to pay off the old debt — is largely thought to be a thing of the past. But this isn’t always the case.

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Before 1982, nearly every mortgage was assumable. The Garn–St. Germain Depository Institutions Act put an end to that. Now nearly every conventional mortgage, DSCR loan, bridge, or hard money loan is not assumable.

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VA, HFA, and USDA loans are still assumable, but only if the buyer’s intent is to use the property as a primary residence, not as an investment property.

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However, certain real estate investment loans may still be assumable. These include certain portfolio, commercial, and seller-financed. Whether or not they are assumable is based entirely on whether assumability is allowed for in the language of the promissory note.

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The buyer who assumes the debt gets the same interest rate and terms of the original note. For notes originated in favorable interest-rate environments, this may be extremely attractive to the buyer.

Important Considerations for Assumable Debt

• While assuming low-interest debt can be attractive, it may not be a viable primary strategy for acquiring 0% down rentals. If the only layer in the capital stack is the existing debt, that means the seller gets no additional money out of the deal. Sellers are only likely to accept this arrangement if they are in financial stress and see foreclosure on the horizon; or if they are a “don’t wanter” and simply want to walk away from the property.

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• Many commercial loans are not fully assumable — only a portion of the debt may be assumed. If the assumable balance is less than the purchase price, the buyer will need other financing to make up the shortfall.

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• Official assumption of debt requires approval of the new mortgagee by the lender. This process can be even lengthier than getting approved for new debt.

4. Subject-To Financing

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Subject-to financing is similar to seller financing, but the seller’s motivations will be very different. In other ways it is similar to assumable debt, but it is much faster … and also more risky for all parties involved. However, it is a classic method for obtaining rental property with zero down.

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In this case, the seller does have a loan on the property. Instead of paying the seller cash to acquire the property and settle the debt, the buyer simply takes over payment of the seller’s mortgage, without officially assuming the note. The seller signs over the title to the buyer, but the mortgage stays in the seller’s name. The lender is usually not even consulted and may not even know it has happened — though they might have their suspicions when payment begins to arrive from an unfamiliar source.

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This is called buying property “subject to the existing financing” — “subject-to” or “sub-2” for brevity. Often, the buyer can acquire the property for no greater investment than taking over payments on the loan — no down payment at all.

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This is not against the law, but it does have the potential to trigger the “due on sale” clause in nearly every mortgage. If the title changes hands, the lender has the authority to call the entire note due.

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But the lender doesn’t have to do this, and an investor who attempts this type of transaction is betting that the lender won’t do it — they would rather have a performing note, no matter who is paying it, than go through the hassle of calling the note or foreclosing the property. In practice, the buyer is often right, but a “due on sale” call is always a possibility.

Important Considerations for Subject-To Financing

• Usually a Distressed Seller. Only a very distressed seller on the verge of foreclosure is likely to agree to a subject-to transaction. The first reason is that the seller gets no money out of the deal. The second reason is that the seller has to bear the risk of carrying a mortgage that can be called due at any time, with the responsibility of paying that mortgage entirely in the hands of the buyer.

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• Fast Closing. However, subject-to transactions can be completed very quickly — no longer than it takes for the seller to sign the deed over to the buyer. For sellers up against a fast-approaching foreclosure date, this may be their best option to avoid that negative outcome.

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• Possibly Necessary to Settle Delinquent Balances. While no down payment is inherently necessary in a subject-to transaction, distressed sellers may have outstanding delinquent loan payments, late fees, and penalties that must be brought current to stave off foreclosure on the note. The buyer may have to find some source of financing to cover this delinquent balance, making it less of a “zero-down” transaction than initially meets the eye.

5. Private Money Loans

Private money lenders — individuals, families, or groups with money to invest — can be a significant source of real estate creative financing. Unburdened by Fannie/Freddie guidelines or even corporate underwriting policies, private money lenders can lend as much of the purchase price as they want, even 100% financing with no down payment, at whatever terms they want.

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Private money mortgages usually work just like conventional mortgages in that the borrower signs a promissory note — the instrument of debt — and a deed of trust — the instrument of lien, which can be used to foreclose the property in the event of default. 

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All other terms, however, are negotiable between the lender and the borrower, including how much down payment (if any) is required.

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Important Considerations for Private Money Loans

• Based On Relationships. While private money lending has no formalized underwriting process, no lender will lend without trust. In the case of private money lending, this trust is usually based not on underwriting but on the relationship between the borrower and the lender. To finance a deal at 100% LTV, this trust has to be very strong indeed — usually on the order of a family member or close friend.

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• Retirement Funds. Self-directed IRA and solo 401(k) funds are a major source of private money loans. While the fund owner can buy their own real estate, various restrictions and limitations make it unattractive to mortgage that property, as it triggers taxes and title problems. Retirement funds could easily be used to buy real estate “all cash” with no loan, but then the buyer loses the advantage of leverage. Passive lending is often a much more attractive use of IRA and 401(k) funds to a private investor.

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• If the Debt is Secondary, the Primary Lender Must Approve. Private money loans can also be secondary to primary debt to cover the down payment. However, not all lenders will approve of this arrangement, preferring that the down payment come from the buyer’s own funds to act as “skin in the game.” However, certain lenders will accept this arrangement. Munoz Ghezlan Capital keeps track of which lenders will discuss such a deal.

6. Equity Partnerships

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One way investors can avoid putting their own money into a down payment is to use someone else’s money — in this case, an equity partner.

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Equity partners include:

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• Joint Venture Partners – partnerships where one partner puts in the money for the down payment, and the other partner provides other services, with the equity split between them.

• Syndications – groups of passive investors who pool money to buy a large commercial property, with the investor acting as the “deal sponsor.”

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Important Considerations of Equity Partnerships

• Active Investor Duties. For a partner to justify an equity stake in the deal when all the up-front cash is coming from the other partner, the investor must usually take a very active role in finding the deal and managing its day-to-day operations as a rental property, with the other partner in a “passive investor” position. This role is usually suited for an investor with experience — after all, the passive investor is putting a lot of trust in their ability to run the deal.

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• Limited Equity. The partner investing capital is usually entitled to a larger share of the equity, putting a cap on how much of a stake the zero-capital investor can have in the deal.

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• SEC Rules. Syndications that pool the capital of multiple investors trigger US Securities Exchange Commission (SEC) guidelines, which must be strictly adhered to with the help of an attorney familiar with SEC regulations.

7. Business Credit and Working Capital Loans

A final, little-known source of 0% down rental property acquisition is to use business credit as a source of down payment funding. These could take the form of:

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• Business working capital loans — unsecured term loans available to established business owners.

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• Business lines of credit, secured or unsecured.

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• Business credit cards, preferably with 0%-interest introductory periods.

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Munoz Ghezlan Capital routinely helps business owners secure up to $500,000 in working capital loans, lines of credit, and business credit cards which can be used as down payment funding, creating a 0%-down rental asset.

Important Considerations for Business Credit and Working Capital Loans

• Mortgage Lender Must Approve. As mentioned above, many mortgage lenders do not allow borrowed funds to be used as down payment. Munoz Ghezlan Capital keeps careful track of DSCR mortgage lenders that will consider such a deal.

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• Shorter-Term, Higher-Interest Debt. All of the above forms of debt have shorter terms and higher interest rates than a mortgage. As such, they put pressure on cash flow and carry a high cost of borrowing. The buyer should only enter into such an arrangement with the intent of exiting in time to longer-term debt — possibly as the acquisition phase for a first foray into BRRRR investing.

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• Risk of Overleverage. Borrowing 100% of the money used to acquire real estate creates the risk of overleverage. If the property declines in value or underperforms, carrying that much debt creates serious financial liabilities for the investor — negative cash flow, deferred maintenance, even foreclosure and default. 

Bottom Line

Many will say that 0% down rentals are impossible, but investors do it every day thanks to real estate creative financing strategies. These strategies include:

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• BRRRR Financing
• Seller Financing
• Assumable Debt
• Subject-To Financing
• Private Money Lenders
• Equity Partnerships
• Business Credit and Working Capital Loans

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No strategy is one-size-fits-all. Knowing the right time to use each of these strategies is key to using them to build a portfolio quickly, especially when capital is tight.

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Munoz Ghezlan Capital specializes in creative real estate financing strategies for investors. If you have your sights set on a deal or just want to explore your options, contact Munoz Ghezlan Capital today for a complimentary strategy session and lay the groundwork to build an entire portfolio with no money down.

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