Don't have a lot of money to invest in real estate? Take a look at our suggestions below.
10 Way to Invest in Real Estate with Little Money
You may be wondering how you can invest in real estate with little or no money down. While it's true that real estate investing is an asset class that generally takes money to make money, there are ways to get started without having a lot of cash at your disposal. In this article, I will show you 10 real estate investing strategies that you can do with little money.
1. “House Hacking”
While it's not for everyone, home hacks can be a great way to get started. With this strategy, you:
- Buy a multi-unit investment property and live in one of the units as your primary residence.
- You then rent out the other units and cover your mortgage and property costs with the rental income from the other tenants on the entire property.
- The money you don't spend on rent can be saved for a down payment on your next investment property.
Since you are buying the property and using it as your primary residence, you can likely qualify for an FHA loan and put down as little as 3.5% to finance your home equity strategy. Whether you qualify for an FHA loan depends on the number of units (most lenders limit residential financing to four units or less) and your income, credit score, and other factors specific to the property's features and location.
With very little out of pocket money, you can buy an investment property and make it your primary residence. Ideally, make sure your total rental income is high enough to cover all the costs of your property, including vacancy allowance, taxes and insurance.
2. Live-in, Then Rent
Another way to start is to put off buying your dream home and instead buy a less expensive property that is a great rental property. Live in your rental for a few years, then turn it into a cash flow property.
A big advantage of this strategy is that since the home is your primary residence, you can likely qualify for a very favorable FHA mortgage rate (rather than the higher lender rate). on investment properties).
While rental properties typically require a 20% down payment and conventional financing, an FHA loan typically only requires a 3.5% down payment. And if you're a veteran, you can buy a home with a no down payment VA loan.
Plus, when you move, you can keep the same FHA loan (find tenants to cover your mortgage, insurance, and maintenance costs) and be eligible for an FHA loan again on your next home if you make it your new primary residence.
3. Live-in House Flips
If you're the practical type and don't mind living in a construction zone, you can buy a fixer-upper. You move, renovate and improve and sell the house for the best price.
This strategy requires money. you will need advance payment and renewal funds. But since you live in the home, you “invest” what you would have spent on rent to build equity in the property. Your hard work may cause you to sweat a lot.
Of course, you also need the skills to do some repairs yourself (or you'll pay too much). You should also do some market research to make sure the upgrades and improvements you make will be worthwhile. The idea is to improve the home to sell it, not first class improvements that appeal to you personally. With this in mind, prepare to get the most equity out of your property when you sell it.
4. Real Estate Crowdfunding
Crowdfunding is another strategy that allows you to add real estate to your portfolio without investing a large amount of capital.
Through online crowdfunding platforms, he pools his money with many other small investors to invest in large commercial projects owned and managed by professional real estate developers. It is a very passive form of fractional real estate investing where you provide money to a real estate developer for a specific project for a set period of time.
For many platforms, the minimum investment is decreasing. In fact, you can get started with as little as $10 using a company like Fundrise. This crowdfunding platform invests in real estate that generates income and pays quarterly dividends.
Investors have historically earned 8-9% per year with Fundrise, and you pay 1% in annual management fees. Other companies like Arrived Homes and HappyNest also allow you to invest in real estate without a lot of money, like Fundrise.
If that crowdfunding model isn't for you, you still have options. For example, you can buy and finance an entire turnkey rental property yourself through Roofstock's crowdfunding platform, all online.
5. Real Estate Investment Trusts
Real estate investment trusts (REITs) are an alternative to buying real estate outright. The best part is that you don't need a lot of money to buy a REIT. Think of a REIT as a collection of real estate assets that is managed by a real estate professional and is freely traded on the stock exchange. REITs offer the same attractive features of stock investing. You can buy fractional shares often and invest with small minimums. For example, Fundrise offers a REIT with a minimum investment of $500.
REITs can be a low-risk option for passive real estate investors because they offer diversification across multiple property types and multiple geographies. There are REITs that pay dividends, so they can become part of your income portfolio. The idea behind REIT investing is to participate in the often higher returns of real estate assets without owning or managing any real estate.
6. Borrow Your Down Payment, But Be Cautious
Borrowing 100% of the money you need to buy a home is risky, as anyone who lived through the housing bubble a decade ago will remember. Lenders will say you can't take your down payment.
However, there are ways to do this. You can tap into your 401(k) and borrow against your own retirement savings. Because you're essentially acting as a creditor when you borrow money from yourself, most lenders don't count the payment toward your total debt load when they qualify you for a mortgage. Of course, borrowing from your 401(k) reduces your retirement savings, and if you leave your employer, you may have to pay back the loan in full and/or face tax penalties.
With some planning ahead, you can bypass the lender's requirements and take your down payment. You can, for example, take out a personal loan for emergency cash and deposit it into your checking account. Let it sit in your account for a few months and then apply for your mortgage. A lender will consider what's in your account “yours” if it's had time to “season.” Those borrowed funds can become your down payment.
7. Master Lease Option (MLO)
This is a complex strategy and is more common for larger investments such as an apartment building or commercial property. That's how Brandon Turner, founder of BiggerPockets.com, started investing in real estate with no money down.
Through networking, he met an apartment building owner who wanted to be more discreet. Brandon and the landlord have agreed to a Master Lease Option (MLO) where Brandon rents and manages the property, pays all property costs (taxes, maintenance, insurance, etc.) and sublets the property to tenants. The tenants pay the rent, and a part is given to the landlord. Brandon kept the rest, saving for a down payment to buy the property from owner to landlord.
With an MLO, you typically have the option to buy while leasing and managing the property on behalf of the owner. In Brandon's deal, the owner ended up selling him the property through a call option that was part of the original deal. This strategy is similar to seller financing, except that no title or ownership is transferred during the MLO.
8. Wholesale Properties to Investors
Think of those amateur-looking signs on the side of the road that say “we buy houses” or that card you get in the mail that says “30-day cash balloon payment on your home with no viewings or closing costs.” : As a wholesaler, you find motivated sellers and promise to buy your home for cash within 30 days, but you don't collect the cash.
Instead, you negotiate an “as is” cash price and provide them with an “assignment” agreement, which gives you time to buy the cash buyer the home for the price you promised the seller (plus your fee) and “assign” a contract with them. :
To be successful, you need to know what cash price will make the seller happy while allowing the restorer to make a profit after paying the purchase price, repairs and renovations, maintenance costs, and selling costs. To do this, you need to recognize renovation needs, know local markets, be able to estimate numbers accurately (eg renovation costs, market value of property before and after renovation, closing costs, etc.) and be a good negotiator; Wholesale fees of $5,000 to $15,000 are typical. Some wholesalers earn $25,000 to $30,000 per transaction.
You need a lot of hustle and bustle and an advertising budget to be successful. most wholesalers find motivated sellers through direct mail and cold calling.
9. Bird Dog (Sniff Out Deals for Others)
You don't actually need money to get a bird dog, and you don't take on any of the risks associated with buying an investment property.
This term comes from hunting. Hunters use dogs to help them spot and locate birds after they are shot. Like a bird dog, he looks for or discovers investment opportunities. This is sometimes called “driving the dollar.” He drives around a lot, looking for properties that seem vacant or in need of renovation.
You do an initial survey, take exterior photos of the property and neighborhood, and pitch the tanks to wholesalers or fix and trade investors for a prospecting fee. The fee is, of course, negotiable, and depending on where you live, how much research you do, and other factors, you could pocket around $1,000 every time an investor turns your opportunity into a deal. While you don't need money to get started, you will need to develop a network of investors to refer your leads to and negotiate your rate with each.
10. The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method
This is a real estate investment strategy that involves acquiring a property in need of significant renovation (at a discounted price) and renovating it to rental standards. It then provides tenants to cover acquisition and ownership costs and refinances you into an ARV loan so you can withdraw funds to buy another distressed property and do it again. You buy, rehab, rent, refinance and repeat the process until you have your desired size of rental property that provides passive rental income every month.
Sounds easy enough, right? There is a lot to learn before you start. what rehab and how much to pay, how much rent you can charge, what a good deal is, how to determine ARV, etc. The strategy also requires a significant amount of capital for the start-up. You'll need a down payment to buy your first distressed property, and you'll need money to do renovations. Since traditional lenders usually won't finance a home that needs a lot of work, you'll need to find alternative financing, such as hard money, which is more expensive and needs to be factored into your budget.
If done right, the BRRRR method can provide reliable, mostly passive income and a revolving method of acquiring endless additional rental properties. BRRRR is difficult to operate in Maryland because transfer and deed taxes are very high, and BRRRR requires you to pay them twice (when you purchase the distressed property and when you refinance).
Do your research before you jump in to confirm that this is the best strategy for where you live. It is best in areas with no price inflation and favorable tax laws.
Real estate is an asset class that every serious investor should have as part of their portfolio for proper diversification. While owning and managing a rental property is what most people think of when they hear the term “real estate investor,” there are more passive and less expensive ways to invest in real estate. It is important to research and choose an address that interests you. Dive into real estate investing using one of the 10 strategies covered in this article.