Many new investors want to grow their wealth and generate cash flow by investing in real estate but find themselves frustrated when they realize how much money they need to get started. Buying property outright can be too expensive to be in reach for most investors.
Whilst we would recommend having a basic emergency fund available before getting started, it is possible to invest in property without significant capital. In this article, we will look at some of the ways that you can get started in real estate without a large cash deposit or a high annual income.
Buy a Home
By buying your first home with a zero down VA or USDA mortgage, you can start your property investing journey by living in the property for a year and then moving out to turn it into a rental home. One of the advantages is that the credit score requirements and deposit required are usually much less strict than the requirements for investment properties.
Real Estate Investment Trusts
“One great way that you can get started in real estate is by investing in ‘real estate investment trusts’, or REITs,” suggests Nicholas Hardesty, real estate marketer at Gum Essays. “These are a collection of stocks and shares from real estate companies that are all bundled into a fund. With a low barrier to entry, these can get you started for as little as $100.”
Yes, you will not own the real estate in your own name, but it does start to diversify your portfolio and get you used to handling real estate investments. You can learn a lot from investing in REITs before buying property directly. If you are looking to get started in real estate without much cash and don’t want to take a lot of risks, then REITs may be the best option.
Buy a Duplex – Live In One, Rent One
With an FHA loan, you can fund a two-unit duplex, which means that you can live in one unit and rent the other out. From March 2015, the deposit for an owner-occupied duplex was as low as 3.5% of the purchase price. Whilst the low deposit is a real plus, the other benefit of this approach is that the rent obtained from the second unit in the duplex will contribute towards a good part of your mortgage.
This strategy is called House Hacking. Learn more: The Ultimate Guide to House Hacking.
HELOC on Main Residence
“If you have equity in your existing home, most lenders will grant you a HELOC, which you can then use to invest in real estate”, explains Kelly Tabor, content manager at Researchpapersuk. “Most HELOC loans will grant you up to 70-80% of the existing equity.”
HELOC loans are often used for flipping properties short term, as they have lower closing costs, fewer upfront fees, and lower interest rates than hard money loans. They can also be used as a zero-down mortgage to finance real estate investment. You can usually close quickly on a HELOC loan with a drive-by appraisal on the investment property.
If you decided to use a HELOC loan to purchase an investment property, you could then use the rent accumulated to pay the loan payments every month. A HELOC normally has a variable rate and is technically a second mortgage on your home, so you will want to make sure that you pay off a lot of the capital before the interest rates rise. If the prime rate remains stable, the amount of interest that you pay will reduce as you make payments every month.
Seller Pays Closing Costs
If you offer the full asking price, or close to it, many property sellers are willing to pay the buyer’s closing costs as an incentive. Ideally, your rent should be enough to cover all your expenses and leave a little excess as a small monthly cash flow. If the lender quotes you a total mortgage payment that is more than the rent you can charge, you should look for another deal or a different property with a lower asking price. You need a positive cash flow on rental properties to cover repairs, expenses, and any periods where the investment property is vacant.
Lender Pays Closing Costs or Rebate on Deposit
Some lenders are now advertising a low 1% down payment option for single-family homes. Within these programs, some lenders are offering to pay some or all of the closing costs for the buyer. Initially, the interest rate will be slightly higher to get this deal, but there are a few lenders advertising closing costs without an increased interest rate. Check with your local mortgage broker for the best offers on the market.
Recently, many have been turning to real estate crowdfunding as a way of investing in real estate projects, REITs, and other property-related assets with a low starting fund. Your money gets added to investment funds from other investors and you then receive profits in proportion to your investment. It is possible to get started this way with as low as $500, but you should make sure to read the fine print carefully so that you understand what you are getting into. Some sites only allow a direct investment to investors that have been accredited.
If you are low on capital but know someone that has a lot of cash and wants to invest, you may be able to partner with them. You will need to offer something to the investor, such as knowledge about property investment or a strong understanding of the local property market. It is advisable to consult with a lawyer before proceeding, as there are many ways that this partnership can be structured. You will need to find a fair way of dividing profits and get it in writing so that both of you understand what the other brings to the deal.
Whichever option you choose to get started, remember that real estate can be a great way to build your assets without having a lot of start-up money. Just be sure to do your research before getting started and chose an option that best suits your circumstances.
To learn more ways you can invest in real estate with little to no money, read: How to Invest in Real Estate with No Money: A Beginner’s Guide.
This article has been contributed by Ashley Halsey.