How to Buy an Investment Home Without a Mortgage
Buying an investment home without a mortgage is easy: just be rich enough to pay cash!
No, seriously — not everyone can afford an investment home with a mortgage, much less without one…but you might be surprised at what assets you can tap to get in on the rental-investment game. Here’s a not-at-all-comprehensive but good-for-the-basics list of places you might already have the money you need:
Your Life Insurance Policy
If you’ve had a whole-life insurance policy for a respectable amount of time, it has most certainly accumulated a decent amount of cash value. You can take a loan out against that cash value without needing to pass a credit check or any other kind of screening — or, with some pretty nasty penalties, you can even withdraw it (though that’s usually a much worse idea.)
The insurance company will set the interest rate — and all of the other terms — of the loan. Such a loan may reduce your dividend or not, it may affect the policy’s death benefit or not, and it might even cause your policy to lapse if it’s not repaid properly.
Carefully examine the opportunity cost of such a loan versus the worst-case scenario (which, in the rental market, is something like “you buy the house and it turns out to be the burned-out husk of a former meth lab currently inhabited by both termites and squatters that have been living there long enough to have common-law rights to stay as long as they want.”) If it seems like a reasonable risk, go for it, but keep in mind why you paid so much into the policy in the first place.
Your Self-Directed IRA
An SDIRA is an excellent tool for investing in ways that a standard or Roth IRA disallow, and one of those includes investing in real estate — but there are details. You cannot own the investment home in this instance; the home is owned by the IRA itself. You cannot take money from the IRA of a relative or business partner for your mortgage, but there are many investors out there willing to use their IRA to help your IRA buy a home — they’ll just give you a short-term, high-interest loan for it. As long as you’re willing to deal with the consequences of such a loan, your IRA and their IRA can make great business partners.
Your Rent
Yep — you can use money from your rent towards the mortgage of your home…if you can find a rent-to-own home that you like enough to turn into an investment property, and you don’t mind living there for a year or three while you build toward ownership. Monthly rent is higher under this kind of setup, because the extra goes toward the purchase (or the down payment on a future loan). If you back out, the owner keeps the extra rent — that’s the penalty you pay for changing your mind.
Renting to own is a good option if you have a long-term plan — for example, you declared bankruptcy four years ago and you will have clean credit and good loan qualifications once the seventh year has come and gone. Live for three years with slightly increased rent, and once that mortgage comes available, the usually-punitive 20% down payment is already taken care of! Then you can move into a less expensive place and set up your former home as a rental property, knowing more-or-less exactly what needs to be done to make it perfect for its next tenant.
The Seller
You can sometimes get financing straight from the seller themselves. A Promissory Note — essentially, a loan contract between individuals — will define the amount borrowed, the interest rate, the repayment terms, the consequences of default, and all of the other details. It’s not many sellers that are interested in financing a sale themselves, but if they’re having a particularly hard time selling the property, or they’re willing to sacrifice their immediate return in order to get a better RoI, it can certainly happen.
A seller can’t offer financing if the home already has a mortgage that needs to be paid off, which excludes many properties off the bat. But the real question from the seller’s point of view is simple: If a bank wouldn’t give you a mortgage, why should they? Be prepared to answer that question before you attempt to go this route.
The real estate investment market is still going strong — if you’re ever going to get in on it, this is the right time. Marshall your resources, get creative, and build yourself an income stream that will last!