It’s easy to assume that you need a lot of money to get started in real estate. Maybe you worked for years to save up a down payment for your own home and you don’t want to have to do that again for an investment property. Or, maybe you have one rental property and are wondering how you can scale up your real estate investments without having to save tens of thousands of dollars to do it.
The good news is that you don’t need an enormous budget to begin real estate investing. There are many ways to get started or ramp up your current investing even if you don’t have a substantial saving account to draw from.
If you’re thinking about investing in real estate, you probably already know that it has the potential to deliver a substantial return on investment… if you do it right. Before you get started, though, there are some things you should do to prepare.
Get as much information as you can. If you already own a rental property or two, you probably already have a good grasp of the basics. If you’re just getting started, though, take the time to learn as much as you can about every aspect of real estate investing.
There are plenty of sources out there. If you enjoy formal learning, distance learning classes and seminars are available. You can also find plenty of resources online as well as books, newsletters, podcasts, and other free and accessible sources of information.
You should have some idea of the type of real estate you want to invest in and learn as much about it as possible. There are more options than you might think, including single or multiple-family homes, commercial property, mobile homes, and vacant lots. Each type of real estate has its nuances and it helps to know as much as you can before investing a penny.
Make time to learn the ins and outs of the market you’re interested in and what makes something a good investment. This includes understanding how to assess neighborhoods that you might not be familiar with so you know you’re making a good decision when you choose to buy a property.
Decide what you want before you get started.
Once you spend some time doing research and thinking about what you want, you may have a few investment opportunities in front of you. Don’t just jump into the first thing that looks and sounds good. How much risk are you willing to take on as an investor? If you invest a small amount, say, less than $1,000, will you get a satisfying return? Or should you try to find a few thousand more dollars first? (More on this later.)
Be realistic. If you don’t have a lot of money to invest, you’re not going to become a millionaire in a matter of months. But with a series of good investments over a long period, you’re more likely to reach your goal.
That said, a good approach is to start with your end goal and work backward. Do you want to make a certain amount of money or own a specific type of property? How are you going to get there?
Come up with the cash.
While you don’t necessarily need thousands of dollars to get started, you do need some money. How are you going to get it? Figure out a budget that allows you to put aside some money. Pick up a side hustle or save all of your disposable income to put toward your dream. If you don’t have much to spare, keep reading for alternative ways to secure funding.
Now that you’ve done your research and set goals, here are five things you can do to get started in real estate with little money.
1. Repurpose your primary residence.
If you already own a home, you’re ahead of the game. If you don’t, buying one is a great way to get started in real estate investing. Look for a mortgage with little to no down payment, such as a VA, USDA, or FHA loan. Credit score and down payment requirements are usually a little more stringent for investment properties so, if this is your first home and you are planning to use it as your residence, you’re likely to get approved if you have decent credit.
That said, if you’re buying a home using one of these types of loans, you have to follow the stipulations of the loan agreement. These are generally not considered loans for investment opportunities, they’re for people purchasing a home for themselves.; Usually, there are requirements for how long you have to use the property as a primary residence. So, you may need to live in the home for a year before you’re allowed to rent it out or sell it.
One way that a lot of people get into real estate investing is by upgrading to a bigger home and holding onto their starter home to use as a rental property. There are many perks to doing this. First, you’re already familiar with the neighborhood since you lived there yourself. You know the type of tenants you can attract and what fair rent is for the area.
Second, you know everything about the house, including how old the furnace is, when the roof was last repaired, and whether or not the water heater will need replacing in the next year or two. Chances are you purchased the appliances yourself and you likely already know how to fix any minor problems a tenant might have. Renting out a property that you know intimately eliminates a bit of the learning curve and is a great way to get started.
2. Consider a duplex or triplex.
Whether you’re buying your first home or thinking about moving, buying a duplex is another smart and easy way to get into real estate investing. Down payments vary depending on the loan you qualify for but they’re usually on par with a single-family home as long as you plan to occupy one of the residences.
This arrangement has some of the same benefits as renting out a single-family home you used to occupy. If the duplex is in an area where you know you want to live, you’re probably already familiar with the neighborhood, schools, amenities, and anything else potential tenants would want to know. Also, since you bought the home and presumably spent some time looking at other properties in the area, you should have a good idea of how much you can expect to ask for rent.
If you manage this arrangement in the right way, the rent you collect from the tenant ends up paying a majority of your monthly mortgage payment. This is great because it means you can either cut back on your full-time job or save the extra income and build up more savings to invest in your next property.
3. Find a seller willing to pay closing costs.
There is a long list of closing costs to be paid before a home sale is complete. These include but are not limited to application fees, appraisals, home inspection, mortgage insurance, origination fees, pest inspections, and underwriting fees.
To lower the amount of money you need upfront when buying a piece of real estate, ask the seller to pay the closing costs. While not all sellers are willing to do this, some will be. This is often used as a way to incentivize the sale so it’s an especially useful negotiating tool if the seller is having a hard time getting rid of the property.
The downside to this is that you are often unable to negotiate on the asking price. This means that, while you don’t have to have as much money to put down at the time of the initial transaction, the overall loan is larger with the payments spread out over the life of the mortgage.
Is it worth it? That depends. Since you’re buying this as an investment property, it’s essential to make sure that any monthly rent you get from tenants living in the property is enough to cover the mortgage payment, ideally with a little bit to spare. If you can cover all costs with rental income, it’s a great way to get started in real estate investing.
4. Use a lender that is willing to work with you on closing costs.
Again, finding a way to work around having to pay upfront closing costs is an effective way to invest in real estate while saving thousands of dollars. If you can, find a lender that is willing to pay closing costs or work them into your down payment.
One thing to note about this option is that you probably won’t qualify unless you have a credit score of around 700 and a low debt-to-income ratio. Lenders need to see that you have a record of paying your bills on time even though you don’t have enough cash to cover closing costs at the time of the sale.
5. Dip into your home equity.
If you’re lucky enough to already own a home, taking out a home equity line of credit or loan is a great way to get a large chunk of money for investing in real estate. Depending on the lender, you can access between 70 to 80 percent of your home’s current equity.
Let’s say you paid $200,000 for your home and currently owe $150,000 on your mortgage. Your home equity is $50,000 which means you may be eligible to borrow between $35,000 and $40,000. If you’ve managed to pay off half of your mortgage, your equity in the home would be $100,000 and you may be able to borrow between $70,000 and $80,000.
As you can see, this is a great way to get your hands on a nice amount of money to invest in a rental property. That said, this is something you really need to think about, particularly if you share your home with someone else as they should have some input into a decision like this.
A home equity line of credit is not free money – you have to pay it back in addition to continuing your regular monthly mortgage payments and any mortgage payments on the new real estate. You should think of it as a second mortgage on your home. The interest rates on home equity lines of credit are usually a little higher than the prime rate but they’re much easier to get and don’t require closing costs or any type of cash upfront.
Presumably, you took out the home equity line of credit to buy a rental property. So, when figuring out what to charge tenants for rent, remember to factor in the new mortgage payment as well as any repayments on your new line of credit. Depending on how much you borrow, this could be easily manageable or a bit of stretch. If you get a good deal on a nice property or put a little of the money into fixing it up, you can likely get enough from rental income to cover the monthly expenses for the new mortgage and the home equity loan.
An Opportunity Worth Taking
Whichever method you choose, remember, investing in real estate is a great way to build wealth, and, contrary to what you might think, you don’t actually need a lot of money to get started. There are ways to take advantage of your current home that can get you where you need to be. If you don’t yet own your own home, consider investing in a duplex and using your rental income to help you pay down the mortgage even faster so you can buy another property.
Before you get started, take some time to do your research about the real estate market in your area and look into all the details about the type of property you’re interested in. And remember, it’s always helpful to have a plan. What’s your endgame? Do you want to own a rental property or two that pays for itself and your mortgage or to make enough on your investments to quit your day job? Are you planning to retire early? How many properties do you want to own? You can always change these plans, of course, but it helps to know where you’re heading so you can make the right choices to get there.