Investing in Real Estate with Limited Funds
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How much money does it take to invest in real estate?
Ten thousand dollars? Fifty thousand dollars? One million dollars? Or can it be done for significantly less?
You’ve probably seen the late night cheesy TV gurus advocating “zero down real estate investing” and while yes, it is definitely a possibility, it’s not as easy as those gurus make it sound. So let’s look at the true story of little-down real estate investing and learn a few strategies that you can use to start building your own real estate empire.
Is Investing With Limited Funds a Smart Thing?
Before diving into the actual strategies you can use, let’s first clear the air about the wisdom of investing in real estate before being wealthy. First – you do not need to be rich in order to invest in real estate. However, you also do not want to be broke, because real estate carries a degree of risk that you must have the ability to handle.
For example, if you own a rental house and your tenants end up being demons from hell, forcing you to evict – can you handle the $1500 for an eviction and several months of lost rent? If not – think twice about investing. That said, those cases are rare and by screening tenants carefully and managing effectively, most of those horror stories will never come true.
So what kind of financial position should you be in before investing? The choice is up to you, but I recommend a place of security. If you are wavering between jobs, up to your ears in credit card debt, or losing your mind from having too many projects going at once: hold off. Have a solid foundation (physically, mentally, and financially) before getting started and you’ll be able to grow your investments at a much more stable and fast pace.
3 Strategies for Investing with Limited Funds
Following are three strategies you can use to start building up your real estate investments without having a lot of money. If you have any questions about these at all, I encourage you to jump into the comment section on this blog and ask away! I’m happy to help!
The FHA, also known as the Federal Housing Administration, is a federal institution that helps banks and other lenders provide low-down loans for homeowners. While the FHA doesn’t actually issue the loan, they insure the loan against loss so the banks are more loose with their checkbooks. The benefit of the FHA loan is that you can purchase a home for a mere 3.5% down payment – which means on a $100,000 home, you can put just $3,500 down (plus closing costs.)
While FHA loans are ONLY for homeowners, you can use these loans to invest in real estate by purchasing a property that has multiple units, such as a duplex, triplex, or 4-plex. These properties exist in every location and can be a terrific way to get your feet wet in the landlording business space without needing the typical 20% down. Additionally, when it comes time for you to move on to a bigger and better primary residence for yourself, you can keep the loan and hold on to the property as long as you’d like (though you are only allowed one FHA loan at a time.)
The biggest piece of advice I can offer for going this route is to ensure you get a great deal. Buying a duplex is not such a great thing if you’ll be losing money each and every month – so shop around, do your homework, look at ALL the costs associated with owning the rental, and be conservative in your estimates!
Most of the successful investors I know do not invest alone, but work with others to make deals happen. You see – no one comes to a deal with everything they need to succeed. We all have strengths and weaknesses and working with a partner who has the strengths that you lack (like, money) can help you get started earlier than would normally be possible.
A partner can be anyone at all, but ideally, look for a partner who:
- You get along well with
- Is not controlling or bossy
- Has good credit and income
- Trusts and respects you
- You trust and respect
If you are looking to be one half of the partnership and don’t have the “money” side of things figured out, you’ll need to define what you are bringing to the relationship. Ideally, you will be bringing the education needed to make the deal happen, which you can get by reading books, interacting on real estate investing forums, listening to real estate investing podcasts, and talking with actual investors.
To help illustrate the point, let me tell a brief story of a recent investment I was a part of. The property was a triplex located in a good neighborhood with a terrible paint job but amazing cash flow potential. I knew I had discovered a diamond in the rough so I quickly went to work putting together the deal. I called up a friend of mine with a great job, great credit, and who I knew wanted to diversify his portfolio. We agreed that he would supply the down payment and repair costs needed and get the bank loan in his name, while I would make sure the work was completed and would manage the property. We are currently splitting over $600 per month in cash flow – and I don’t have a single penny of my own money in the deal.
A final note about partnerships: even if you are partnering with your best friend or your own mother, get everything in writing and clearly define the roles of the partnership as well as who gets what profit. Set up the partnership agreement with a qualified attorney to help ensure a long lasting business relationship.
The Hybrid Flip
Finally, a third way to invest in real estate with limited funds is something I like to call “The Hybrid Flip.” No doubt you’ve seen the television shows where investors go into an ugly house, make it beautiful, and then sell it for a huge (or not-so-huge) profit. This technique is known as “flipping” and is one of the more popular “real estate investing jobs” out there. Hybrid flipping is similar, but instead of selling for a large profit, the home is refinanced with a long term loan. Let me explain exactly how this would work with an example:
You find a property for $50,000 (that should sell for $100,000) that is in a good neighborhood but smells like dirty animals and has ugly wallpaper. You purchase the home using a short term loan, like a hard money loan, and use your own two hands and $6,000 of cash (or credit if you are risky) to clean the property up and make it shine. Then, you rent the property out to a nice couple for $1,100 per month and after six months (the minimum time required for this strategy by many banks) you head to the local bank and refinance the property – paying off the original loan and the money you spent on repairs. Bada bing, bada boom – you now own a nice cash flow positive rental in a great neighborhood and have no money out of pocket after the refinance.
This strategy is definitely a little more complicated than your normal investments, so be sure to do your homework before embarking on such a journey and make sure your repair projections are correct (I recommend doubling your repair budget, just in case!) Get pre-qualified from a bank ahead of time and make sure you’ll have the ability to refinance in the future. Also – be sure to have multiple exit strategies in place in case plan A doesn’t work out.
One of my favorite things about real estate is the creativity an investor can use to make money. There are few other areas of life where creativity can take the place of money – but real estate is one of them. Hopefully these three suggestions give you a springboard into the world of creative investing and you can start implementing some of these strategies in your own life.
Do you have any other ideas for starting your real estate investing with limited funds? Share your comments or questions below!
Brandon Turner is an active real estate investor and Senior Editor at BiggerPockets.com, the real estate investing social network. He enjoys writing epic posts about real estate, like the Ultimate Beginner’s Guide to Real Estate Investing or the Ultimate Guide to Tenant Screening.
Photo courtesy of: James Thompson