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How to Buy a Rental Property with $0 (Clickbait title)
How can you buy a rental property with $0?
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How can you buy a rental property with $0? You can’t really. But I did something close with a cash out refinance last year.
I signed the purchase agreement for my first house. I was stoked. Finally, a true Phoenix local. I work the late shift, so I had never seen the house during the day.
My family came out to help me move in. We drove to the house, and it became apparent the night hid some imperfections. Most likely I didn’t pay much attention to the neighborhood. Half the houses on the street were falling apart. Yards were unkempt with sky high weeds. I felt a little buyer’s remorse, but the purchase ended up being a great decision.
These are the numbers:
- Program: Conventional 30 yr fixed
- Purchase price: $235,000
- Rate: 3.125% fixed
- Monthly payment: $1082 (with taxes and insurance)
In the next year, house prices in Phoenix skyrocketed. I didn’t think too much about doing a cash out refinance initially. I was already at a low rate, and didn’t want my mortgage payment to jump up. Then my lender brought back the adjustable rate mortgage. The 7/6 ARM to be exact. With the 7/6 ARM, the interest rate is fixed for 7 yrs. After the 7 yr period, the rate can adjust every 6 months. ARMs carry a negative connotation, but they can be a very useful tool. The main pro is rates are lower than a 30 yr fixed. The downside is rates can be much higher after the 7-year fixed period ends. I wasn’t too concerned about that, because I can always refinance or pay off the house at that point.
These are the numbers on the cash out refinance:
- Program: 7/6 ARM
- Appraised value: $323,000
- Rate: 1.99%
- Monthly payment: $1079 (with taxes and insurance)
- Cash out: $32,558
I got $32k cash tax free and my payment went down $3. I then used the $32k to put a down payment on a multi-family investment property. Of course, the cash was not free. It was added to my mortgage, along with closing costs. Still cheap money. And it increased my cash flow.
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