100% financing for investment property refers to borrowing 100% of the purchase price of an investment property. This strategy allows real estate investors to acquire properties without any down payment. While attractive in theory, 100% financing comes with higher risks. Investors should carefully evaluate their financing options when considering an investment property purchase. This article will examine the feasibility of 100% financing for investment properties, including the types of loans available, pros and cons, and risks involved.
Niche lenders provide 100% financing options
While most conventional lenders require a 20-25% down payment on investment properties, niche or specialty lenders may offer 100% financing options. These include portfolio lenders, hard money lenders, private lenders, and crowdfunding platforms. Portfolio lenders focus on the overall creditworthiness of the borrower rather than the specific property. Hard money and private lenders may offer 100% financing but charge higher interest rates and fees. Real estate crowdfunding platforms pool funds from multiple investors to provide 100% financing for fix-and-flip or new construction projects.
100% financing eliminates cash needed for down payment
The main advantage of 100% financing is not needing any cash for a down payment. This allows investors to acquire properties even if they don’t have 20-25% in liquid assets saved up. For new real estate investors on a budget, 100% financing can be an attractive option to break into the market. However, investors should have a plan to build equity over time through appreciation, principal paydown, or forced savings from cash flow.
Higher monthly costs and interest rates
The tradeoff for zero down is higher monthly costs. Without a down payment, mortgage payments will be higher to cover the full loan amount. Interest rates may also run 0.5 – 1% higher compared to 80% loan-to-value financing. 100% financing eliminates the equity cushion that protects lenders, and they price this additional risk into the loan terms. Investors should run the numbers to see if the higher costs of 100% financing still pencil out.
Heightened risk if property values decline
With no equity cushion from a down payment, 100% financing leaves investors exposed if property values decline. Negative equity can put investors at risk of foreclosure if they can’t afford payments. Declining property values also limit refinance options and make it difficult to sell. This can trap investors in underperforming properties. Most lenders will require refinancing to a lower LTV after a certain period to reduce their risk.
While 100% financing allows investing with no down payment, the higher monthly costs and loss of equity cushion add risks. Investors should carefully underwrite deals and have a backup plan before choosing 100% financing.