Investing in real estate requires a big wad of cash. Right? Well, this is not necessarily true.
You’ve probably heard that real estate is a great investment option. While it is true that it can give you multiple financial benefits, like generating ongoing passive income with increasing value over time, you still need to make sure that you are ready for this big step in your overall strategy to begin building wealth.
Is Investing in Real Estate the Right Choice?
Before you dive into deep waters, knowing that you will be investing a significant amount of money upfront, here are important considerations to know if investing in real estate is the right choice for you:
- When purchasing a real estate investment, you should either be able to pay in cash or afford the mortgage payments without collecting rent.
- Plan your purchase carefully, and be sure to account for taxes, repairs, utilities, and other mandatory expenses.
- Always research your purchase thoroughly, especially if you are buying land to develop, and start small before investing in large properties.
What to Expect When Investing in Real Estate
Before you considered investing in real estate, you’ve probably asked questions such as:
- How much cash will I need to invest in real estate?
- How do I select the best metros to invest in?
- How do I select the best team to help me achieve my investment goals?
- How do I evaluate whether a real estate investment deal is for me or not?
- What is the most important thing to look for in real estate?
The question most investors want to be answered is how much money do you need to invest in real estate? There is no one answer to this question.
The answer will depend on how you will be investing. But, know that there are several ways you can start investing in real estate without having to outlay an enormous amount of money.
The typical expected amount of cash, however, that is needed for a real estate investment is 20% of the purchase price.
This is the amount that lenders would generally require whether you take a loan from a bank, a finance company, or a mortgage broker.
An additional required payment is 3 months’ worth of payments. This amount should be available as a cash reserve. Other lenders would require 6 months’ worth of payments. It is important that you shop around so that you will get the best deal.
There are also closing costs, which are typically 3% of the purchase price. To get a clearer picture of the amount you will have to shell out on a real estate investment, take a look at this example:
Cost of rental property: $100,000
20% down: $20,000
3 months of payments in reserves: approximately $3,000
3% closing costs: $3,000
TOTAL CASH PAYMENT: $26,000
Because real estate investments pose a higher risk compared to an investment in your own primary residence, lenders would generally require this amount of money. The risk that is being considered in real estate investment is the chance that you will default.
The reason is simple: higher risk means higher requirements. But, this is conventional wisdom, which isn’t always right.
Now, the purpose of this post is to help you not worry about having to have that large amount of money when you invest in real estate. We will show you how you can get started in real estate investing with a little money.
How Can I Invest in Real Estate With Little Money?
It has become popular to invest in second homes converted to short-term rentals. But what holds people back in making these choices is cash. Like what was mentioned earlier, conventional wisdom tells people that getting started in real estate investment needs a lot of cash.
This may not be true. You can still get off the ground and start with real estate investing even without a big, fat paycheck or savings account.
Here are the best ways to invest in real estate with little money:
1. Lower Down Payment Loans
Think about the Special US Government Schemes like USDA Loans when you consider lower down payments. The USDA offices give mortgages with down payments as low as 0% for rural and suburban homebuyers.
Where 10,000 is the very sizable population of most towns in the U.S.97% of the country is secured with USDA loans. What’s good about this type of loan is it qualifies those who have a low or moderate-income.
They are mainly for those who can’t get a traditional mortgage because of a limited budget. So, cheers for investing in real estate with a USDA loan.
You can also look for lenders who do not require a large amount of capital if you have a good credit score. Depending on the purchase price and the real estate market condition, you can procure a loan that is $5,000 to $15,000 less.
However, expect that there will be additional charges like private mortgage insurance (PMI) which would result in less monthly cash flow
2. Real Estate Investment Trust
Real estate investment trust (REIT) is one of the cheapest and easiest options. You will need as little as $1,000 depending on the type of REIT. Since these are securities traded on major exchanges like stocks, you can invest in real estate directly.
The advantages of REIT include:
- A relatively high dividend as well as a highly liquid method of investing in real estate.
- Easy or quick to get out of.
- You can start small with a small amount of cash.
- For long-term real estate investments, you can choose a REIT that offers a dividend reinvestment plan (DRIP)
3. Pay Down Payment with a line of credit
You can choose to secure cash that you will borrow for real estate investment with a line of credit on a different property than the one you are buying. Use the loan to pay down payment, closing costs, and cash reserves.
Banks and other lending institutions offer different products for home equity loans, like the Home Equity Line of credit and Home Equity Installment Loan.
These loans will allow you as the buyer to capitalize on the equity that your other purchased property already has.
This will put your equity to work instead of just sitting unused in an appreciating market. They’re also readily available before closing on the property you are purchasing.
Just make sure that as you capitalize on the equity of your primary home to finance the real estate property you are investing in, the cash flow can sustain your dues.
4. Seller Financing
Some property sellers choose not to list and sell their houses the conventional way. They can allow you to give a 10% down payment and then make monthly payments.
This can save you from paying interest rates and bigger down payments on loans from a bank or from other traditional means.
It is a favorite way of investing in real estate with little money because the sellers “become the bank”. This can give you an opportunity to negotiate a lower down payment.
5. Real Estate Crowdfunding
Though this method is relatively new to the real estate investing world, it allows you to invest in real estate with little money. This is how it works:
- You will invest a small amount of money (like $1,000 to $5,000) along with a group of investors.
- You can keep your real estate investment to a relatively small percentage of your net worth and spread it around to other real estate investors.
6. Flipping Houses
If you do house flipping the right way, you will be able to turn your purchased property into a profit.
Here are two watts to do it:
- Repair and update by buying a property that will increase in value once you get the work done on repairing and improving the property. This will require that you get the work done as soon as possible, so you can resell the property in an amount that exceeds your total investment, including the costs for renovation.
- Hold and resell a property that you purchase. This works in a rapidly rising market where you hold the property you purchase for a few months and then sell it to earn income.
You can use the low-down payment loan programs to purchase a property that you can sell for a profit and pay no taxes.
House flipping can be a risky move, but with the right strategy, and waiting for the perfect time to sell, you can grow the nest egg that will allow you to retire early.
7. Buy in Less Expensive Areas
You can purchase property in areas where the market value of a real estate is relatively lower than the location of your own property. Remember that you don’t have to invest in real estate in the same place as where you live.
Now that almost all industries are going digital, you can work on a real estate investment online in locations where you don’t need a huge amount of cash to be able to purchase a house.
8. Buy, Remodel, Rent, Refinance, Repeat
This is similar to house flipping, but you do not sell the house. You will maintain the property, spend on repairs and upkeep while keeping the property as a rental.
the technique works through this process:
- B-Buy a property that has the potential to increase its value with repairs. You can purchase using short-term purchase financing.
- R-Remodel the property to increase its value and make it rentable
- R-Rent the property to a quality tenant or tenants
- R-Repeat (if desired)
9. House Hacking: Become a Landlord
A growing favorite of many real estate investors, house hacking is a good way to start on your real estate investment journey. It involves purchasing a primary residence and figuring out a way to generate rental income from your purchased property.
A classic example is purchasing a small multi-unit property like a duplex or triplex and then renting out the extra units, so you can generate income. Another example would be renting out extra bedrooms to roommates or even renting extra space on your lot.
There are many options for purchasing property with little money so that you can rent out.
A few loan programs that require small down payments that will help you start real estate investment with little money include:
- FHA loan (3.5% down)
- VA loan (0% down for veterans)
- USDA (0% down in rural areas)
- Conventional loans (3% to 10% down with mortgage insurance)
Key Takeaways
The recipe for being successful in real estate investing is simple: be financially prepared, get to know the local market, and keep your strategy simple.
Be actively involved in a lucrative investment in real estate with little money. It offers income and appreciation while letting you diversify your assets.
Almost anyone can invest in real estate as long as you have the guts to work on it, the patience, considerable time, and, of course, even a small amount of cash.
