How to Buy a Home Without Being an Active Investor

Purchasing a property for yourself is a life-changing investment.

Most of you reading this are thinking about or have already purchased a personal property. This article is to help show you this can be done as an investor, too, and likely sooner and for less money than if you were to try to simply save money for a home.

The idea behind this article is to break through the barrier of believing that you can’t buy desirable properties on terms without banks from the get-go. Maybe it’s not a common strategy utilized by the general population, but it’s been done since the late 1800s.

Real-Life Example of Buying on Terms

My daughter and son-in-law bought their own property, which we’ll call 11 Lady, in a neighborhood where they already wanted to live. It even has amazing water views! Did I mention there’s a private beach at the end of the road?

This isn’t to brag. This is to clear your mind from any hang-ups with regard to buying creatively on terms. Hopefully it will inspire you. If you can use any of these ideas to buy your own property, then you’ve got a huge win!

They purchased 11 Lady for $520,000 with monthly payments of $2,200 under a lease-purchase agreement. Their payment amounts to less per month than they were paying in rent.

The mortgage was roughly $150,000, and they also have an equity line of credit. This was left out of the agreement though, because they will pay the previous owners a set monthly amount so they can pay off their equity line.

In any and all of your agreements, if there is an equity line, make sure that there’s a cap to how much they can pull from it. Or better yet, include terms that they can no longer pull from the property’s equity since you are taking control of it.

As part of the lease-purchase agreement, about $1,000 of the $2,200 monthly payment goes to principal, because that is what is allocated on the remaining underlying mortgage. It’s a 15-year mortgage, so with such large principal paydowns, it’s almost like an owner-financing deal.

We tied this up for 36 months on a lease purchase, with a down payment of $2,500 before move-in and another $2,500 within six months. That’s $5,000 directly off the principal.

The 36 payments of $1,000 toward principal shaves another $36,000 off the price and will count as a down payment for the mortgage they’ll get in (or before) 36 months to cash out the sellers. These scheduled down payments add up to $41,000 and bring the balance owed down to $479,000.

In Rhode Island, anything over $430,000 is considered a jumbo loan, which requires at least 10 percent down. To get to that 10 percent, my daughter and son-in-law need to accrue another $11,000.

Preferably, they could get under the $430,000 principal and maybe avoid the jumbo loan and just get a more favorable rate. So the real goal, since they are in Rhode Island, is to accumulate another $49,000 over the next year. Depending on the lender they go with, they may get away with just another $11,000 for a better rate at closing.

If they were to go put money down on a $520,000 property today, they would have to put down 20 percent (or at least 10 percent, meaning $52,000, out of pocket. To accumulate that same 10 percent through this method, they only need to come up with $16,000 because of the 36 monthly payments toward principal.

By creating these terms, it’s essentially a down payment scheduled over time toward the purchase price—all thanks to buying on a lease-purchase. If we decided not to buy the property and just to rent, that would have been $2,300 a month going to a landlord with no principal paydown or other benefits.

This example is to get you thinking creatively about terms instead of automatically thinking that you have to go to a bank to get a loan right away. There is potential to create a more favorable deal that will save you money on a down payment, or if not, at least give you enough time to save up more cash flow while you pay on a property.

In fact, the property you are paying for while saving doesn’t have to be the one you eventually own. You could sell the one you have been paying off (because with a lease purchase, you have equitable interest so you could sell), and use that capital and savings to purchase an entirely different personal property for you and your family.

The Specifics of This Deal Structure

Property: 11 Lady
Lease purchase price: $520,000
Monthly payments: $2,200
Principal reduction: $1,000/mo. ($36,000 during the term)
Due before move-in: $2,500
Due within 6 months: $2,500
$520K price – $41K down payments = $479K loan needed on or before the term ends

What do you think of this deal structure? Would you ever buy or sell a home on terms? Why or why not?

Let’s talk in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.