How to Buy a Rental Property with 5% Down or Less (5 Ways)

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21:02Ashley Kehr:Okay, welcome back. Maybe you don't want to house hack or live in the property you're renovating, in which case the next strategy might be more your speed. And that one is get a partner. And luckily, Tony and I wrote the book on real estate partnerships, and you can find that in the BiggerPockets bookstore or on Amazon or Barnes and Noble. but basically what you're going to do is find a partner that can bring something to the table something that you are missing and that's why you can't we call it the puzzle pieces often it's something that they can help you to get to your next deal whether that is capital the time the experience or maybe you were like me you were just afraid to get started alone and you needed a partner who had some kind of sense of security whether that's financial knowledge things like that.

21:51Ashley Kehr:But there are multiple ways to actually structure a partnership. And two of the main ones are first, a debt partnership. And this is where other investors provide the financing. So this could be a private money lender. This could be like my first partner. What we did was he put up the capital for the property. He was paid five and a half percent interest and it was his capital investment was amortized over 15 years. So he was actually basically getting a mortgage payment every single month. He was getting his money returned to him. He was also getting an interest on that money that he had lent our LLC.

22:33Ashley Kehr:Then there's also an equity partner where both sides have an ownership in the property. So my first partner also had that. So they were a debt partner and an equity partner where I gave him 50 % equity. So he got his capital back. He got interest on his capital. He had invested into the deal and he also got 50 % equity in the deal. So he's getting 50 % of the cashflow. He was sharing 50 % of any capital we had to continue to contribute into the property. He was also going to get 50 % of the equity when we sold the property. So I combine those two strategies with my first partner to actually help me get into that first deal.

23:16Ashley Kehr:Tony, what structures or partnerships have you used?

23:20Tony J. Robinson:A little bit of everything as well. You touched on the debt partnerships. We've done a lot of private money partnerships in that way. But also just like equity partnerships would be the other side of that where you're sharing in the ownership and each person brings different things to that partnership and you guys split ownership and equity and profits together. So we have a lot of deals where we came in and we did the majority of the work, sourcing it, putting it together, building all the furniture, managing the property. And our other partners brought the capital and obviously they're for strategic decisions.

23:54Tony J. Robinson:And we just split the profits 50-50, ownership and profits. We split 50-50. So just straight equity based, like, hey, you do this for this amount of ownership. We're going to do this for this amount of ownership. And again, we've leveraged all of them in different scenarios. There's some definite pros. There's some definite cons as well. In terms of the benefits of partnerships is that you get to have someone fill in the gaps that you have as an investor. And sometimes those gaps could be financial, right? Where they're bringing capital to the deal. Sometimes those gaps could be skillset or expertise, right?

24:29Tony J. Robinson:Where it's like, okay, I'm not really good at doing X. So I'm going to bring in a partner who's really good at doing that piece. Someone could say, hey, I'm really, really good at swinging a hammer and doing all the work, but I'm really, really bad at talking to sellers and hunting for deals or analyzing the properties. Like I'm not a numbers person. Okay. So we're going to make a great, great team because I can go talk to people. I can go run all the numbers. You go knock out all the renovation once it's done. Right. So even from a skillset perspective. So that's the benefit. and especially for you know in the context of this episode where we're talking about low down payment options if you are able to find a really really good deal and you can bring in a partner well maybe now you've just gotten access to a property that otherwise you wouldn't have been able to without much or sometimes any of your own capital into the deal either and it's still a win win because they get access to this asset they wouldn't have had otherwise but i think the cons on this side are that you're you're getting a smaller slice of the pie right which means there's less cash flow for you personally coming off of that deal.

25:30Tony J. Robinson:So I think you've got to be really strategic about how you leverage it. And I remember early in my investing career, I met these investors who were also based here in Southern California, and it was four of them. And they were doing BRRRRs out in Huntsville, Alabama. And they'd done like, I don't know, six or seven BRRRRs, like a small handful of BRRRRs out there in Huntsville, Alabama. And I remember one of the partners coming to me and saying, yeah, it's been great. But with four of us doing long-term rentals, there's just not a ton of cash flow coming from the portfolio yet. And they end up kind of pivoting into kind of larger deals from there.

26:03Tony J. Robinson:But just know, like if the goal is to eventually scale up the cash flow to a meaningful perspective, either you get a lot of these kind of lower cash flow deals you stack on top of each other, or at some point you end up scaling up into bigger deals that produce more cash flow.

26:17Ashley Kehr:Now let's go into option number four, seller financing. So this is one of my favorite strategies. And I just remember my mind being blown when I found out about this, that this was actually an option. I went from the limited mindset that you could only buy an investment property with cash. And that's why I took a partner in my first couple of deals, because I thought you just had to buy in cash. You couldn't get a mortgage because it wasn't a property you were living in. Then I realized that was not true. Then I bought properties with mortgages. And then I found BiggerPockets in 2017 and my mind was open to seller financing and what that was.

26:55Ashley Kehr:And after I learned that, I had a portfolio I was buying from another investor and negotiated seller financing on a six unit property that he was selling. So it was like a huge change for me. And so I am always asking and looking for seller financing. And so seller financing is when the owner of the property, so the seller, is actually acting as the bank. So just like you would go to a bank, you'd get a mortgage, they would give the lump sum of cash to the seller to pay them off. Here you go, you're paid, you're done with the property. Then you make payments to the bank. In this scenario, there is no lump sum payment except if you're giving a down payment to the seller.

27:39Ashley Kehr:Instead, you are going to make monthly payments to them. The benefit of this is that you don't have to go through all of the bank's hoops that they make you jump through to get a mortgage. You also can negotiate the terms. You're not set on what the bank is offering you. So I've done it where you negotiate the interest rate. You negotiate the down payment. You negotiate any balloon payment. So a balloon payment is where you're going to have a lump sum due at a period of time. So maybe it's amortized over 30 years, but in five years, you will have to pay the balance due that's due in five years.

28:20Ashley Kehr:It's also negotiated. Let's see, we got interest rate, we got the amortization period, we got balloon payment. So those are all things that you usually can't negotiate with a bank. You can't go to the bank and say, you know what, I don't want to put 20 % down. I think I'm just going to do like 17%. But with a seller, you're not into the bank's restrictions. You can actually sit and negotiate with the seller. So it's always a good idea to see what their motivation is. Like, do they care about the amount the property sells for? Can you actually pay more if you are having to make a lower monthly payment to them than you would the bank?

28:58Ashley Kehr:Or maybe it's a smaller down payment. So I'm going to give you a real life example. I bought a five unit property and four residential units and one commercial space in it. And it was, I think, listed at$250 ,000. I offered$225 ,000 with a$19 ,000 down payment. And then the rest was seller finance. And it was seller finance at 3 % interest and amortized over 30 years with a balloon payment in four years. so I am making monthly payments I think it ends up coming out to like 800 something a month or whatever it ended up being but it might be a little bit more than that but make those payments over those four years and then whatever the balance that's still left after those four years of paying down a little bit of mortgage but mostly paying interest I will owe him that full amount so my plan here is to slowly renovate the property over those four years so I can refinance with a bank and then pay him off the balloon payment at the end of those by going and refinancing with another bank.

30:07Ashley Kehr:So that's just like an example. This could be short-term solution. This could be a long-term solution for you of having seller financing. And that's where the negotiation comes into play. Like there actually could be somebody who wants to hold the mortgage for 30 years. You don't need a balloon payment baked into there. Or maybe they need, like the first time I ever did seller financing, it was interest only payments. For one year, it was 7 % interest only. So I didn't pay any principal down. And then in one year, the balance was due on the property. So I had one year to go and do the renovations and to refinance and get that money to repay the seller.

30:45Ashley Kehr:And then actually ended up being down to the exact day that the payment was due, which I don't recommend doing it that close. It was a little too close for comfort getting exactly on the day that it was due, getting the refinance done. But those are just some examples of seller financing and the benefits of them.

31:01Tony J. Robinson:And there's, you know, obviously there's pros and cons to each approach, but it feels like there's more pros to seller financing than there are cons. I think the biggest con is just that they're a little bit harder to find. You know, like there's tons and tons of deals in the MLS that you can just go search across the country. And while some will advertise seller financing, a lot of times it's between you and the seller. And I do find that counterintuitively, a lot of times it's easier to get seller financing on bigger deals than it is to get it on single family homes. I don't know if you've seen the same, Ash, but I've only done seller financing once and it was on our hotel that we bought, our 13 room hotel that we bought in Utah.

31:41Tony J. Robinson:And similar terms, I think we have a 10 year balloon, 30 year amortization period. First two years were interest only at 7 % and we put down 20%. And we went back and forth with them even on the down payment. But the reason they needed 20 % was because they had a line of credit against the property that they had to pay off in order to sell it. So like, hey, we just need you to cover paying off this line of credit and then we're happy with everything else. And that's kind of how we negotiate it. But the pros are that everything you said, like you get to control all those different elements, right?

32:07Tony J. Robinson:And it's really up to whatever you and the seller feel is a win-win for both of you. So I would encourage more rookies to explore seller financing as an option, especially if it's a situation where the seller owns a property free and clear or almost free and clear where a small down payment could pay off whatever balance they owe because it could be a benefit for both of you guys.

32:27Ashley Kehr:I'll give you guys two tips on actually negotiating seller financing. The first one is anytime I walk a property with a seller or talk to the seller, I always ask, are you open to doing seller financing? More often than not, the answer is no. And then I just follow up with, oh, okay, I didn't know if you had talked to your CPA or account about the tax benefits and needed those. And that usually gets the wheels spinning. And like sometimes people say, oh, well, I haven't yet, but maybe I should. And, you know, sometimes that ends up working out. But I think it's coming from somebody that they kind of respect to handle their finances and to do their bookkeeping or to file their tax return.

33:07Ashley Kehr:As to the tax advantages, somebody that's actually licensed to talk about taxes, carries a lot more weight than you as a buyer trying to tell them, here's why you should do seller financing. So I always word it that way. Sometimes it works out. Sometimes it doesn't. Sometimes they'll look into it. Sometimes they're already offering seller financing. And the second tip that I have is besides just doing that is to find out what their motivation is. And I usually like to know what they want for a down payment. And then also, what do they need monthly? And I say need. So how much do you need monthly?

33:46Ashley Kehr:Like, especially if this is someone that's like retiring. There's a deal I'm working on right now. This person's retiring. I asked, what do you need monthly? He said, probably$2 ,500 a month. OK, so I know I need to get to a$2 ,500 payment a month. So I could amortize this over X amount of years, do 3 % interest, and give him his$2 ,500. I'm paying a low, really low interest rate. Um, I've got it amortized over to, you know, a good period of time that it makes it to the$2 ,500 a month. And that makes it a better deal for me. So I can kind of work backwards based off of numbers that they give me as to what they need.

34:26Ashley Kehr:Um, and I have had, like, when I've done this on the MLS and talk to agents, like I've had the agents say to me, well, that interest rate is way lower than what you would pay at a bank. And that's not like what you would have to give as a down payment. And my response is exactly like, this is why I am, I, if I would just go to the bank, if those terms would work for the price point that the seller wants, but to make this price point work, this is why I would want to do seller financing. So there's always going to be pushback from different people when trying to do seller financing. But I think there's always different things that you can say or recommend for them to look into and find out the information on their own to make it worth their while.

35:10Tony J. Robinson:Yeah, I love that, Ash. And I love your point too, always about like the tax side, because to your point, I think maybe a lot of sellers aren't aware of the tax implications of selling this property they've owned for 30 years and depreciated a ton. And, you know, what happens when you go sell that? So like maybe even a good question is like, hey, you know, Mr. and Mrs. Seller, you know, just like kind of like and almost assuming like, hey, so you're going to 1031 these funds into a new property. Oh, no, no, no. You know, I'm done with real estate investing. I'm just trying to liquidate the portfolio right now.

35:42Tony J. Robinson:Gotcha. Okay. So what did your CPA say is like the best tax mitigation strategy for you here? Like, how are you going to avoid paying taxes on this? I'm just going to eat the taxes. Oh, man. Okay. so if I buy this from you for, you know, whatever, a million bucks and you got to pay tax, like, what do you think that tax bill will be? I don't know. Probably about like$300 ,000, something like that. Man. Okay. 300 K has your CPA talked to you about the benefits of seller financing. Right. And like, you, you can just like get them to admit that they've got like no strategy and then it hopefully almost sells itself at that point.

36:11Tony J. Robinson:But I love that you always plant that question for them. All right, guys, we've got one more strategy coming up for you. And this is one that rookies have most likely never even heard of, but it's super powerful. And we'll cover that right after a quick word from today's show sponsors. What is Toyota affordability? It all starts with buying smart and your Toyota dealer has great deals available to qualified customers on reliable cars and SUVs, including the redesigned RAV4, spacious Grand Highlander, sporty Camrys, and Corollas. It means driving for less with efficient hybrid and plug-in hybrid options available throughout the lineup, extending your overall driving range, and delivering great MPGs, saving you money at the pump.

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41:00Tony J. Robinson:All right, guys, welcome back. and we're on to our next strategy. Strategy number five is assumable mortgages. And we honestly haven't talked a ton about assumable mortgages, but we did interview Alex Reed a few episodes ago. So if you guys go back and look for Alex Reed, where she took, she actually assumed a VA loan, which I didn't even know was possible. It's a great episode. Go back and listen to that one.

41:23Ashley Kehr:She, and to be clear, she is not a veteran, not military, neither is her husband, that anybody can assume a VA loan as long as they meet the qualifications criteria, but you don't have to have the same qualifications to assume a VA loan as you would if you were going to purchase with a VA loan.

41:44Tony J. Robinson:And just to define what an assumable mortgage is and why it might be one of the absolute best strategies as of this recording is that it's totally by the book. you're buying the property you get the deed so it's not like a like a sub to where there's a little bit of fuzziness and kind of like a gray area on like the the technicalities of this deal an assumable mortgage is totally signed off on by the lender um but basically what happens that you buy the property but instead of getting new debt you assume the debt you basically take over the debt it transfers over to you from the existing owner so think about what that means think about all the people who bought deals at 4 % interest rates, 3.5 % interest rates, 3 % interest rate, the 2.99s and 2.65s and 2.5s.

42:33Tony J. Robinson:If you can assume that mortgage, you're saving tons and tons of tons and tons of money and interest over the life of that loan. And your payments typically going to be a lot smaller today than it would be if you bought it, you know, today's 6%, 7 % interest rates that we're seeing. So that is the assumable mortgage is that the lender is blessing the transfer of that debt from the current owner over to you as a new buyer.

42:58Ashley Kehr:So there's actually a couple websites. I pulled them up here where you can actually go and find assumable loans. So they've done all the legwork for you. One is withrome.com and the other one is assumelist.com. So they actually have properties that are listed on the MLS that have these loans or there's people that are selling for sale by owner that have listed their properties for sale on here that they do have an assumable loan. One thing that I think of is like how many people bought like second homes in like when interest rates were really really low so like if you wanted to go and purchase a short-term rental or maybe a short second home for yourself like going after people who maybe had failed the vacation homes because they didn't realize exactly what they were getting into when running a short-term rental business or maybe they just need to sell for some other reason but where I have a lake house we've seen tons of people put their property up for sale in the last year that actually did buy during the the hype of COVID and maybe overpaid for their property and it's not worth as much now.

44:11Ashley Kehr:But you can look up, you know, use PropStream, things like that to look up people's interest rates of what they actually have on the property. And sometimes it will tell to what their loan product was that they actually use. So then you can kind of gauge like, okay, they, you know, only put 10 % down. They don't have a ton of equity in this property. Maybe I can make an offer to actually assume the loan with giving them a little bit of cash and then just take over their 2.9 % interest rate on this property. So I think this is a great way. You just have to actually do the work to find the properties that actually meet this criteria.

44:53Ashley Kehr:And I know that Alex did say when we interviewed her that it was a long process of actually getting the bank to make sure they meet the criteria that their debt to income is good, their financials are good, to actually assume the loan. And she said that this isn't new business to them. So it wasn't as much of a priority to the bank to actually transfer this loan to them. So just take that into consideration that it may delay closing on the property.

45:23Tony J. Robinson:And they also, Alex, had to bring a second bank into the picture to cover the difference between the current loan balance and what the actual contract price was. So I don't remember the exact numbers, but the loan balance, say it was 300K, the agreed upon purchase price was 500K, where there's a gap there of 200K, she actually had to bring on a second lender to help bridge that gap. So they had the assumable mortgage taking up the majority, but they still had a smaller, newer mortgage to help bridge that gap. So there's some complexity here, and that's probably the biggest con. And Alex actually hired a company to help navigate that whole process for her.

46:00Tony J. Robinson:So it might be good if you are doing some assumable mortgages to follow along with that same service, at least the first time that you're doing it. So that's just a big note to remember for this type of debt is that it's not just the purchase price. I'm sorry, it's not just the loan that you're assuming, but it's also the purchase price you have to consider as well.

46:15Ashley Kehr:So unlike seller financing, where you want to find properties with a lot of equity so that the seller doesn't have a mortgage they need to pay off, where you can just make them payments, where they have that equity sitting in there, this assumable loans, you'd want to look at the reverse. You'd want to look at properties where they don't have a lot of equity, so they don't need as much money from you to put down. And then you can just assume their home mortgage so the mortgage is wiped out. And this is, I think, a great solution for people who maybe are over leveraged on their property. And it doesn't make sense for someone to come and pay what they need to actually pay off their loan.

46:58Ashley Kehr:And then, you know, me as the buyer, I, it doesn't make sense with a 7 % interest rate. So my payment would be too high. It wouldn't work for me. But if I can come in and pay them what they need by assuming their loan, wiping out their debt, and now it's a 3 % interest rate. So it's a lower payment. And that works for me. that can be a win-win for both the seller and the buyer to be able to get offload the property. And now I have a new property. Okay, rookies, we want to know which of these strategies would you actually use for your next deal? Comment below and let us know if you're watching on YouTube.

47:34Ashley Kehr:Thank you so much for joining us for this episode of Real Estate Rookie. I'm Ashley. He's Tony. And we'll see you guys on the next episode.