There is no such thing as a free lunch. But there are ways for you to invest in real estate without paying a dime.
While real estate isn’t likely to bring overnight success, there are ways to bring in big profits even if you are living paycheck to paycheck. How much money do you need to invest in real estate?
Check out this guide to getting started in real estate no matter your income level.
Investing with No Money
There is no shortage of real estate ‘seminars’ available that offer get-rich-quick schemes. Claims of ‘no money down’ might sound tempting but there are more feasible ways to get started in real estate if you have little to no money to invest.
If you have good credit, the options available to you expand. You can use leverage, or debt, to cover down payment and closing costs.
This leverage doesn’t always come cheap. Here are some examples of high cost and no-cost ways to fund your real estate investments.
Loans
Taking out a home equity line of credit or using a hard money lender are two common ways new investors use leverage to get started. But hard money loans come with high-interest rates that might not be worth the effort on your first deal.
These loans are designed for seasoned investors who know how to flip homes in a short period of time. Hard money loans are worth it for them because they know they’ll pay back the loan quickly.
Home equity lines of credit are risky because they have adjustable interest rates. This means that the payments you make today might not be the same amount as the payments you make tomorrow.
House Hacking
House hacking is the process of using your residence to pay off a real estate investment. With house hacking, you rent out units on your property to help you come up with additional cash each month.
For example, if you live in a three-bedroom home, you might rent out two of the rooms for $500 per month. If your mortgage is $700, you profit $300 each month in rental income.
This gives you extra income to save toward a down payment on an investment property. Some people buy an investment property as their first home and use house hacking to pay for the investment itself.
The benefit of living in the investment property is getting access to low down payment options to make the purchase. With an FHA loan, you can pay as little as 3.5 percent down on a home.
Partners
Another method of investing in real estate without money is to find partners. Visit your local real estate investors association to network with other investors with similar goals.
Experienced partners can provide capital for deals while you do research, repairs or other due diligence work. The more you bring to the table the easier it will be to find partners.
Make sure you can bring value with your expertise or work ethic to attract high-quality partners to your deals.
How Much Money Do You Need to Invest in Real Estate?
Having cash on hand gives you access to more deals. More deals can mean bigger profits.
It’s a good idea to have savings set aside specifically for your real estate investments when possible. Access to cash means being able to move quickly when you find the deal you want.
Here are two major expenses associated with real estate investing.
Down Payment
Conventional mortgage loans usually require a 20 percent down payment. There are special programs in place for homebuyers who can’t afford to put down 20 percent as collateral, but these programs apply to owner-occupants.
An owner-occupant owns the house and plans to live in it for at least one year. The amount you need to save for a down payment depends on the housing market where you want to invest.
Cities like Los Angeles where housing inventory is limited can mean saving as much as $200,000 to put a down payment on a house. Do your research on which markets make sense for your level of income.
Renovations and Repairs
The biggest variable cost with real estate investing is renovations and repairs. No investor can predict the cost of a major renovation down to the dollar.
There will be surprises along the way that increase or decrease the amount of money you need to invest. But you have control of the condition of the properties you invest in.
Choosing properties with only cosmetic renovation needs is a great place to start. These investments won’t ever be perfect, but they will have a shorter list of surprises than gutting a home and rebuilding from scratch.
Cash Transactions
One of the top reasons to save before buying your first real estate property is the ability to buy in cash. Cash real estate deals are a win-win for buyers and sellers because they allow you to close quickly.
When investors need mortgages, they are at the mercy of the lender for approval and contingencies. For example, a lender can choose not to issue a mortgage on a property with foundation or permitting issues.
If you buy a house with cash, you decide what makes sense for your investment strategy.
Sellers in distress need buyers who can close quickly. With cash on hand, you can help relieve a homeowner’s stress by buying the property before a foreclosure happens.
In cases where the homeowner owns a house free and clear, cash buyers bring financial relief and an opportunity to start fresh with a new home.
Building Wealth in Real Estate
Investing is never a sure bet. But when a good deal comes your way you want to be able to take the chance on a wealth-building opportunity.
How much money do you need to invest in real estate? The amount comes down to your level of emotional and financial comfort.
You can’t control the outcome of every investment, but you can make sure you have a financial safety net in place in case a deal goes bad.
