It is probably one of the biggest myths in real estate investing that only investors with a lot of extra money can invest in real estate. Well, reality has proven this wrong. Many real estate investors have found innovative ways to start investing in property with little or no money at all. Such creative real estate investing methods include borrowing money from hard money lenders, forming real estate partnerships and real estate wholesaling. In this blog, we will set the differences between facts and myths on how to invest in property with little money.
How to Invest in Property with Little Money: Most Popular Methods
1- Real Estate Wholesaling
Real estate wholesaling is a popular alternative real estate investing method. What attracts real estate investors to wholesaling is that it can be done with no money required. So how does it work? You just have to find an investment property at a discounted price, put it under contract then sell the contract to another real estate investor for a higher price. The difference is the profit you make.
2- Owner Financing
Owner financing, also known as seller financing, is when a property owner offers the real estate investor the option to pay for the property in installments, which is basically a loan provided by the seller to the purchaser. In most cases, the investment property buyer puts down some sort of down payment to the owner and then makes monthly installment payments over an agreed-upon period of time and interest rate, until the loan is fully repaid. For the property owner, the advantage is a guaranteed return by the buyer’s good credit, worst case the property is repossessed by the previous owner exactly as would happen in foreclosures. As for the buyer, owner financing offers investment property financing without the need for an intermediary (bank).
3- Real Estate Partnerships
If you ask me how to invest in property with little money, my first answer would be to form a real estate partnership to buy income producing assets. Pooling in your money with other real estate investors has many advantages like sharing risk and financial commitments. With a sound real estate investment idea, you can partner up with a friend, family or even a colleague and share the profits from the investment. However, it is important to sign a partnership contract to avoid future disputes between the partners.
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4- Private/Hard Money Loans
Getting investment property loans from financial institutions is not always easy. Some real estate investors do not qualify for traditional mortgage loans due to bad credit or simply because the investment is too risky. So how to invest in property with little money and without the help of banks? The answer is hard money. Hard money loans and private money loans are short-term loans secured by the real estate property that can be used to finance risky real estate investments. Hard money loans have less stringent qualification requirements. However, they often come with high interest rates and fees.
How to Invest in Property with Little Money: Myth #1
- You need to already be rich to invest successfully in real estate
While it would be preferable if you already have extra cash to buy an investment property outright without the need for investment property financing, you certainly do not have to be rich to invest successfully in real estate. With the real estate investing methods mentioned above, you can build your real estate wealth starting from almost nothing.
How to Invest in Property with Little Money: Myth #2
- Hard money is only for investors with bad credit
While hard money loans are easier to get if you have bad credit, that doesn’t necessarily mean that real estate investors with good credit don’t use hard money. When it comes to buying distressed rental properties, for example, conventional property financers typically refuse to approve loans even with a good credit score. In this case, an investor would likely have to turn to hard money lenders.
How to Invest in Property with Little Money: Myth #3
- Hard money loans are expensive
While hard money loans have higher interest rates than a traditional bank loan and additional fees, getting them can often lead to increased return on investment for the borrower. Moreover, when you need to act quickly on a property investment deal, hard money loans offer you accelerated financing for investment properties that banks do not finance.
How to Invest in Property with Little Money: Myth #4
- Wholesaling is illegal
You probably hear this myth a lot. As there is always a legal and illegal way to do things, this also applies to real estate wholesaling. It is completely legal to do wholesaling as long as you are doing it the right way. While you do not need a real estate license to wholesale investment properties, you need to set up a bilateral contract between the property seller and you that states that you have an equitable interest in the property.
How to Invest in Property with Little Money: Myth #5
- Wholesaling is for beginner investors
People often think that real estate wholesaling is for novice investors because you don’t need to put a lot of money into it. Real estate wholesaling is an advanced technique that requires experience in locating good deals. There is another world surrounding wholesaling that makes it difficult for beginner investors.
How to Invest in Property with Little Money: Myth #6
- The owner must own the property free and clear to offer owner financing
Sellers who did not yet pay off their mortgage loans can offer seller financing when selling a real estate property. The buyer pays monthly installments to the seller. Meanwhile, the seller pays off his/her debt to the lender.
Want to read more myths about real estate investing? Check out this blog.
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