Novice Reply: How to Purchase Your First Rental With No (or Reduced) Cash Down

This week’s question comes from Rodney through Tony’s Instagram direct messages. Rodney, like many investors, has been told that you need twenty percent down to buy a rental property. Rodney wants to know the best way to fund a property without breaking the bank. He’s asking: Should I save for a down payment or is there a way to get a rental without the twenty percent down?

It’s not uncommon for real estate investors to get into deals with far less than 20% down. But, for a beginner, this type of task can seem a bit intimidating, especially if you’re looking at your first investment property. Thankfully, the world of real estate presents investors like us with many ways to creatively fund deals!

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley Kehr: This is Real Estate Rookie, episode 180. My name is Ashley Kehr, and I am here with my co-host Tony Robinson.

Tony Robinson: And welcome to the Real Estate Rookie podcast, where we focus on those investors at the beginning of their journey. Maybe you haven’t done a deal. Maybe you’ve done a deal or two, and you’re looking to scale. Either way, this is the podcast for you. Ashley Kehr, my co-host, what’s going on?

Ashley Kehr: Not much. I have my little assistant, Remington James, here next to me. If you’re watching on YouTube, you can see a little bit of his cute little face, but he’s patiently waiting until it’s time to go to the movies tonight to see Sonic 2.

Tony Robinson: Oh, okay. I love that. Sonic 2, I haven’t seen that. No. Is that with Jim Carrey is it? Isn’t he in Sonic?

Ashley Kehr: He’s in it. Yeah, he’s in the first one so he’s probably in the second one. Yeah.

Tony Robinson: Oh, okay. All right. Cool. Cool. I love that. Well, yeah. What else is going on, Ash? What you got? What’s going on in the business? What’s new?

Ashley Kehr: Yeah, I don’t know.

Tony Robinson: How’s the MCL? How’s the ACL?

Ashley Kehr: It’s doing good. I got it straightened out right now. Trying to get it straighter over time. Been going to physical therapy a lot. My physical therapist has become my best friend, is the only person I see every day. But yeah, it’s going slow, but going good. I have one more week left on crutches and then I can at least ditch the crutches and go on, just have my brace on. And I’ll have that on for about another four weeks.

Tony Robinson: All right. Well, there you go. Progress.

Ashley Kehr: Yeah. Yeah, yeah. And what about you? Are you doing well after getting over your competition? Are you splurging?

Tony Robinson: I am. I’ve been-

Ashley Kehr: What’s your diet look like these days?

Tony Robinson: My diet has literally been everything though, actually. I’m eating pizza, cereal. I’m rebounding real hard and heavy, but we got another show planned for August. I got a couple weeks off and I’ll start ramping up for that next show. If you guys want to follow along on that journey, be sure to follow me on Instagram, @tonyjrobinson. And if you want to follow Ashley along on her recovery, she’s @wealthfromrentals on Instagram as well. But speaking of Instagram, today’s question actually comes from our DMs. If you guys want to get your question featured on the show, you can get active in the Real Estate Rookie Facebook group, get active in the BiggerPockets forums, or you can slide into the DMs. Maybe Ash and I will pick your question. Today’s question comes from Rodney Hill. And Rodney’s question is, “There is one question that stumps me. People say you can do your first deal with no money down. Yet others say you need 20% down payment. I live in Tampa and a 20% down payment is between 30 to $60,000. But an investor gave me advice. Said just get $25,000 saved up and then I should be able to do my first deal. I don’t know if that makes sense or if it’s gibberish, but my question is, should I save 25 to 60K for a down payment on my first rental? Or is there a way I can get into a rental with less than 25% down?” What are your thoughts, Ash?

Ashley Kehr: Well, I think this is a great question for you just talking about the vacation loan. If he wants to do long distance investing. Or what is the rule on that, 10? Or not 10, two hours away from your primary?

Tony Robinson: Yeah, typically-

Ashley Kehr: I think go into that first, because I think that’s the first thing that pops into my head is that vacation loan mortgage and you know that better than I do.

Tony Robinson: Yeah, totally. It’s yeah, the second home or vacation home mortgage, it’s a 10% down payment. There are some restrictions. You have to be, or the property that you’re buying, the second home has to be, I think typically 60 ish miles at least away from your primary residence. You cannot have more than one in the same geographic area. If you buy one in Tampa, you can’t buy your second one in Tampa. And then you have to use the property for personal use typically for at least 14 days out of the year. As long as you’re able to check those boxes, you’re able to then rent that property out on sites like Airbnb and Vrbo when you’re not using it. Now, interest rates on those loans used to be almost in lockstep with primary residences. Now, we’re seeing them to be about a point higher. There’s been some changes in how the government is regulating those. But we’ve scaled a lot of our portfolio using the 10% down second home loans in different markets.

Ashley Kehr: Yeah. The second thing that would come to mind for this is seller financing. Talking with a seller where you don’t have to put down a huge down payment and you can put down a smaller down payment. And it’s not like they need to keep that mortgage for you or hold that mortgage for you for 30 years. You can make a balloon payment or make it callable in a year, a couple years. Enough time that you can add some value to the property and then go to a bank and refinance all of your money out, just doing the BRRRR strategy. But instead of bringing your own cash or money from a personal line of credit, you’re having the seller hold the mortgage for you. A couple ways to actually approach that with a seller is to say to them, “I know, have you talked to your CPA or accountant at all about seller financing and often they will say, “No, I haven’t.” And you can say, “Oh, okay. I just didn’t know because of all the tax advantages. If you wanted to maybe talk to them, I’d be interested in doing that too.” And that usually at least gets the wheels turning on the seller to have that conversation with their CPA because their CPA is going to be your best friend, because they are going to say, “Yes, it is an advantage. Because instead of taking this lump sum of $200,000 in one tax year, the amount of money you’re taxed on is going to be spread out over those payments that you’re getting over three years or however long they’re going to hold the seller financing.” If you look at the income tax brackets, as you increase your income each year, you’re taxed at a higher rate. If you’re taxed, if they’re only getting 50,000 of that in the first year, they may only be taxed 15%. If they get that whole 200,000, then maybe they’re going to be taxed, I don’t know. I don’t even know what the tax brackets are right now. 35% or whatever. I’m winging it. I actually was on a call the other day. I had someone look it up while I was talking about the same thing, but so you have their account or CPA sit down with them and talk to them about the tax advantages of doing seller financing. I think that’s a second great option too.

Tony Robinson: Yeah. I think a third option, I mean, there’s so many options. And I think that’s the beauty of real estate, but a third option is find a partner that does have the capital. And I know the initial rebuttal to find a partner is, “Well, I don’t know anybody.” And luckily for you, it costs nothing to go out and meet people. Rodney, if you go to your local real estate meetup, if you get active on the BiggerPockets forums, if you get active in the BiggerPockets Real Estate Rookie Facebook group, and you start networking with people and saying, “Hey, here are the kind of deals that I’m looking for.” And you start finding out if there is anyone that would be interested in those deals, but they don’t have the time, desire and ability to manage that property. Or maybe if it’s a rehab, to manage the rehab. Identify what value you can bring to that person and then maybe there’s a way that you guys can work together. We have interviewed guest after guest, after guest that has done something similar where there’s someone that has the capital, but they don’t have the time, desire and ability to find the deal, manage the rehab, manage the tenants, do all the things that come along with actually turning that property into a solid investment. Build your network, find good deals and see if you can provide value in that way.

Ashley Kehr: I think that’s how you’ve built a lot of your business is taking advantage of that, where you are the experience. You can manage the properties, you can get the properties, you know everything. And then your partners are the ones that are coming with the money and leaning on you for all of those qualities, all those traits, all that whole skillset. And for my first property, and even for the first several properties, I took on a money partner. And that was how I got started was just partnering with someone. And we actually did an LLC together where we were partners. And I think that scares a lot of people, is like, “Oh, I don’t want to be tied into a business with someone.” But Tony, you structure your partnerships with a joint venture agreement where there’s a lot less liability. I think that’s another option too, to look at is you’re not having to open a bank account with this person. And you’re not having to file a tax return together, all these different things. You can do the joint venture agreement, which keeps you a lot more separate. And you don’t have that, you’re not tied together so much, especially when it’s your first deal you’re doing together.

Tony Robinson: Yeah. Rodney, there are so many ways that you can go about getting that first investment without having to come up with the capital yourself. Hopefully, some of the things that Ash and I pointed out today is some actionable advice for you and for all the other rookies that are listening. But start taking action, man. Build that network, start networking and seeing who you can find that might be able to help you and you be able to help them.

Ashley Kehr: Well, thank you guys so much for listening. Don’t forget to leave us a review on your favorite podcast platform. I’m Ashley @wealthfromrentals, and he is Tony, @tonyjrobinson. And we’ll see you guys next time.