5 Ways to Finance a Rental Property That Nobody Talks About

0:00Brandon Turner:Financing real estate deals can be one of the biggest barriers to entry when investing. It's also one of the reasons investors stop scaling before they ever get to financial freedom. And you've probably already heard of all the big ones. We all know conventional loans, FHA loans, lines of credit. But what we're going to share today are five loans you've probably never heard of. In fact, these have flown under the radar so well that we didn't even learn about them until we were years into real estate investing. We're talking about things like zero down payment loans with no closing costs, 5 % interest rates, and no credit check.

0:33Brandon Turner:Or a loan you don't even need to go to a bank to get. If you've heard of all five of these, you're probably an expert investor. But if you're struggling to scale or you need a hand buying your first property, you cannot miss this episode. We're breaking down all five options so you can decide what makes the most sense for your financial situation.

0:55Brandon Turner:What's going on, everybody? I am Henry Washington, co-host of the BiggerPockets podcast, and I've got my other co-host, Dave Meyer, here with me. Today, we're talking about financing options you might not know about. This isn't FHA loans and HELOCs. We have five ways to finance deals that often go under the radar. So let's jump into the first one, NACA loans. I got to be honest, man. I didn't know what this is when we were creating this show. And honestly, there's like a whole chapter in one of my books where I just list out every kind of loan. And I didn't know about this one. This is like genuinely a cool, under the radar, really awesome, powerful type of loan that everyone should know about now that I know what it is.

1:38Brandon Turner:Absolutely. So I did know about this one. And it is a phenomenal loan option for people. So NACA Loan stands for the Neighborhood Assistance Corporation of America. And it's a nonprofit. and they specialize in helping people who are either in underserved communities or who may not traditionally qualify in terms of credit score or financial situation to purchase a home. And this program provides them the opportunity to do that. And with this loan, you can typically get financed. You can get a lower interest rate, so lower than the prime rate, sometimes substantially lower than the prime interest rate.

2:18Yeah, the rates for this right now are 4.75 to 5.25. 4.75 outside of COVID. That's the best mortgage rate you can get, basically.

2:28Brandon Turner:It's a cheat code with the terms because, yes, the interest rates are great, but you also don't have to bring a down payment and you don't have to pay the closing costs. It's kind of insane. It's crazy because there are other programs out there for lower income Americans, like FHA is the most common one. But FHA has PMI, if you've heard of this, is private mortgage insurance. Basically, if you bring less than 20 % down on an FHA loan, they hit you with a fee. So your mortgage payment, even if you get a slightly lower mortgage rate, is usually higher than it would be. So it does have benefits. FHA loan is a good product.

3:04And we talk about a lot on the show, But this doesn't have PMI. So you're like truly getting that 4.75 or 5 % mortgage rate that you wouldn't be able to get pretty much anywhere else in the market right now. And this is designed to help people who come from a lower or moderate income background. So this isn't just, you know, there are ways for rich people to get lower mortgage rates, but this is actually a way for people who are just starting their journey for wealth and financial freedom to get that lower mortgage rate.

3:35Brandon Turner:And I know everybody's listening like, man, this sounds too good to be true. Why doesn't everyone do it? And there is some caveats. One of the caveats is it takes a long time to get financed. On average, you should assume it's going to take you anywhere between six months to a year to close your property. But you know what will take longer? Saving up for a down payment and repairing your credit. Like that's going to take a lot longer. And you still won't get four and a half percent. Exactly. Yeah. You're still going to get paid seven percent. So, yeah, I love that. There's a lot of hurdles to go through with this loan, obviously.

4:08Brandon Turner:One of the main things is you have to sign up to take a workshop to start your process. And they only do the workshops at certain times and in certain places. And so you're kind of at their behest when you get started. And then it is going to require a lot of paperwork, a lot of your financials you're going to have to provide. And I know you have to do this with normal loans, but it can seem or be a little excessive. But if you can get past all of the red tape, you truly can get an amazing loan product. And one of the best parts about this is you can buy multifamily with it up to four units. Matter of fact, they encourage you to buy multifamily with it.

4:47I am hesitant to say like there is one loan product that's right for everyone. But if you qualify folks who have more than 100 % of the median income for their area, face different requirements. But like, if you fall below the median income in your area, like you should absolutely go check this out. And I know like people like, I don't want to go do training, but like, it's probably a good thing, right? You know, like they're probably going to teach you how to be a good landlord, how to make sure that you service this loan, how to make sure you meet all the requirements and get through the underwriting as quick as possible.

5:17Because I'm guessing if you don't really pay attention, it's more like one year rather than six months. And that can make a big difference as well. I love this idea of this loan. And I was about to ask you, like, who should apply for this? But I'm kind of like, anyone who meets the qualifications should apply for it.

5:30Brandon Turner:Goodness, I'd do it. I'd do it if I could to get a loan. Same. Totally. One question. Do you know, can you move out and keep the loan or do you have to refinance it if you move out? I believe you have to refinance it if you move out. It's meant for owner-occupants. But man, what an amazing opportunity to get into a property, especially if you get into a property and you get yourself a little bit of discount. Now you're walking into a little bit of equity. You got a 4 % interest rate. They'll allow you to qualify for more home if you're going to buy multifamily because they consider the income the other units produce as more income for you.

6:06Brandon Turner:Oh, that's great. So you can buy a more expensive property and then house hack that property. And then they're going to train you, like you said, to help you make sure that you have all of the tools necessary to maintain this loan. It's a phenomenal product. It seems like they've created a really good loan for folks who are in the lower to moderate end of the income spectrum and allow them to get into home ownership. I love it. It's a NACA loan. Do you know where people go to apply for this? Yeah, you just go to their website. I believe it's NACA.com, N-A-C-A.com. And that's where you can register and get more information.

6:37Brandon Turner:I also believe they have NACA sponsors or counselors all over the country. So you could potentially reach out to one of them and chat with them first about what all the requirements are going to be so that you can be better prepared for the process. But this is a no-brainer to me if you are looking to buy a home anytime soon. All right. Well, let's move on to our second under-the-radar financing strategy, which is USDA loans. That's right. The U.S. Department of Agriculture helps people get mortgages. These are the same people who grade your stakes as either prime or whatever else they grade your stakes as.

7:17These people are also giving out mortgages. Now, USDA, as you might imagine, U.S. Department of Agriculture, these are mortgages that have to be located in a designated, quote unquote, rural area. So these are not in cities. But if you're thinking, oh, that means that I'm not going to be able to use this, 97 % of the U.S. landmass is designated as one of these areas. So this is like most of the country, not by population, but by landmass. And there are a lot of suburban type areas that are within 15, 30, 45 minutes of major cities that actually qualify for this. The other requirements are income related.

8:03So similar to the NACA loans, most of these income restricted types of loans are based on the median income. And for USDA loans, you have to have 115 % or less of the median income. So you can make 15 % essentially higher than the median income in your area, but no more than that to qualify for this. And this too, like your NACA loan, does have to be your primary residence. You have to live in it. It can't be your lake house. It can't be your hunting cabin. That sounds nice. You have to actually live in this property. But if you do, the benefits are that you get 100 % financing. You could have zero money down to go out and buy a primary residence or a house hack, just like the NACA loan, and you can get below market rates.

8:55Right now, it's not as low as the NACA loans, but it's about 5.6%, which in my mind, fantastic interest rate. Like if you could get a 5.6%, that's the difference between some deals cash flowing and not cash flowing. And honestly, if you're doing a house hack, you don't need a cash flow, but it's just going to keep more money in your pocket every single month. So you have that benefit. The other benefit and why if you can use this over an FHA loan, I usually recommend it is that there is PMI, that private mortgage insurance we were talking about, but it's lower. So you don't have to pay as much as an FHA loan.

9:32And the underwriting is pretty flexible. So it's not going to be, I mean, all underwriting is annoying. Let's be honest. You're applying for a mortgage and it's not a DSCR loan. Like you're probably going to be a little bit annoyed by it, but this is slightly less annoying than other types of mortgages. So even though there are requirements, again, this is one that's just absolutely worth it.

9:53Brandon Turner:I feel like this one's under the radar along with R &D loans, so the Rural Development loans. because most people don't take the time to just figure out if the property they're considering buying could fit as a rule development or a USDA loan. Just do a little bit of research. There are so many more homes in your market that would probably qualify this than you would ever think of. 100%. So A, if you're looking into buying a home and it's not in a direct giant metropolis, you should look into it and see if it qualifies. And B, if you are a flipper or you're selling a property, make sure that you go figure this out so that you can advertise to your buyers that it will qualify for a USDA or a rural development loan so that you can get more buyers that want to buy your property.

10:39Brandon Turner:Very smart. And what I like about this one is you don't need like the highest credit score to qualify like 620 to 640, I think is the minimum that they're looking for. And that's pretty good to get a zero down payment loan. I love it. Do the research. It doesn't take long for you to go figure out if this will qualify. You can literally ask a question and find out if your property you're looking for qualifies for this. Some of the people who have been most successful in this era of real estate that we're in right now have been small town investors. And I'm not talking about how I make fun of Henry for being in Arkansas.

11:09That's not a small town. That's like a major city. I'm talking about like 20 ,000, 50 ,000 people. Like those places have cash flowing deals. Like they just do. And they qualify for these kinds of loans. So this could be like a really good strategy for people who live in those areas. I wouldn't recommend just going out and picking a random small town. But like if you're from a small town, if you're from a place where you can qualify for these kinds of loans, it's such a good way to start your career. And unlike the one benefit this has over the NACA loan is that you can keep the loan after 12 months.

11:42It's like an FHA loan where you can actually move out and go buy something else and keep that mortgage. This is such a good way to start a real estate investing portfolio.

11:51Brandon Turner:Yeah, I think this is great Right, because if you use a USDA loan to buy a property, you live in it for a year, you can then go and use an FHA loan for the next property. You do have to live in it, but it's a great way to slowly build a real estate portfolio by living in it without having to spend a ton of money. 0 % down on your first loan, 3.5 % down on the second FHA loan. I mean, that's pretty incredible. It's a great, great product that I think most people are missing. How do people do this? I just don't even know how you contact the USDA. So if you go to the USDA website, I believe they have an eligibility map.

12:28Brandon Turner:So that will help you be able to at least spot check and see if your property is in an area that would qualify. Or you can just search for USDA approved lenders. So search like USDA approved lenders, you know, in XYZ city and state, and you should get a list or just call your local credit unions or local regional banks and see if they have somebody in house who can help you with a USDA loan. That's where I would start. So these are two incredible programs that you should be checking out. But maybe you're feeling nostalgic for the COVID era interest rates, two, three, 4%, like everyone really misses right now.

13:02After this quick break, we're gonna share two different strategies for you where you can get those mortgages back. Stick with us.

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17:05Brandon Turner:All right, we are back on the BiggerPockets podcast talking about lesser known financing strategies. And as promised, we are going to tell you about a couple of strategies that can help you take advantage of those COVID era interest rates. And the first strategy we're going to talk about is seller financing. Now, I know most of you have probably heard about seller financing already, but we thought we should talk about it on this show because seller financing is kind of a broad term and there is a lot of ways to apply seller financing. But on its surface, seller financing is where you don't go to a bank to get a loan.

17:41Brandon Turner:You actually get the loan from the seller. The seller becomes the bank. So this works in situations where you're buying a property from a seller and that seller owns the property free and clear. And since the seller doesn't have a loan against the property, technically you can make your loan payments to the seller. So it's like buying a property in installments directly from the seller. Why is this important? There are a lot of sellers, especially as we get more and more into the silver tsunami where the baby boomers are looking to exit the market, sell off some of their real estate. Well, they have a lot of paid off real estate.

18:21Brandon Turner:And if they're an existing landlord, they already understand the value of getting monthly income. And so a lot of them would like to continue to get monthly income. What they're tired of is dealing with tenants and toilets. Another reason why sellers would do this is because it allows them to defer taxes. They don't have to pay a big capital gains hit because they didn't sell their property outright. They only have to pay taxes on the income they're making each month. So it slows down the tax burden and kind of spreads it out over time for them. I just love the flexibility of seller financing.

18:56It's just basically like you two people talk to each other, you figure out what works for you. Absolutely. You just kind of can discuss with the person what should your down payment be? What should your interest rate be? What is the term of the loan? What's the amortization of the loan? It's just up to you. If you like negotiating or problem solving, if you have the idea of finding mutual benefit, like this can be a great option for you. And you could really cater it to your specific needs because some people will use it when they're like, I have a great credit score, but I don't have a down payment.

19:31Or some people like I have a down payment, but this deal doesn't work at conventional mortgage rates. So I need a lower mortgage rate. And you can sort of work with the seller to figure out what makes the deal pencil.

19:42Brandon Turner:What I love about this is you can absolutely get a low interest rate if that's what you and the seller negotiate. You can get no interest rate if that's what you and the seller negotiate. So as an investor, you can specifically target this. So even if you're buying homes on the market, you can have your agent help you filter out homes that they think the mortgage is free and clear based on the history. That is something your agent can actually look up on the MLS and then help filter that out for you so that you're targeting homes that would make sense for an owner finance offer. And if you're buying off market, you can specifically pull lists and just filter out everybody that doesn't have 100 % equity in their home.

20:23Brandon Turner:So now you've got a targeted list of deals that may have owner financing potential. What I think about with seller financing is what's it called? It's called seller financing. And that means to me when I'm going to negotiate seller financing, I need to figure out what are the needs of the seller. And then I can turn the levers that the seller wants in their favor. And then I can turn the other levers in my favor. And so if I have a seller who's selling a property and that seller says, Hey, I got to get my price. I'm not selling this thing for anything less than $300 ,000 and I need$1 ,500 a month.

21:00Brandon Turner:Well, then I can go put$300 ,000 and$1 ,500 a month in an amortization schedule, and then I can turn the other levers in my favor. And so I can maybe buy a property with no down payment and I can buy a property on a 10 year mortgage in order to help him heat his sell price of$300 ,000 and a$1 ,500 monthly payment. And so it's mutually beneficial. But I think a lot of people look at seller financing in the wrong way because they want to approach it as a, what do I need? But if you approach it and figure out what, because the seller's only going to care about a couple of things. Some sellers are like, I need a chunk of money.