As children, some of us had our eyes set on a profession in teaching, medicine, or technology. Others have always been drawn to the idea of real estate. But one big barrier remains. It takes money to get into real estate investing. And that money has to come from somewhere. Most of us aren’t born with money in the bank. This piece will outline eight ways to invest in real estate even if you don’t have a giant bank account.
While you certainly have to spend money to make money, it’s hard to tackle this hurdle so that you can put that money to work. When faced with this dilemma, there are some practical strategies you can apply to invest more with less.
1. Real Estate Syndication
What is real estate syndication? This is not likely a term you’re familiar with, even if you’re already investing in real estate.
In a nutshell, it’s when you pool your money with several other real estate investors to buy one property that none of you could probably afford to buy on your own. You then each own shares of that property and take an interest in its upkeep and development to increase its value.
There are many benefits to syndication beyond not having to buy a whole property yourself. You get to learn the ropes while working with others. The risks are shared. And you can choose the size of the project you want to invest in.
Need to start small by going in on a neighborhood flip? That’s doable. As you start to see the returns, you’ll have more to invest in larger projects. And you’re well on your way to your dream of real estate investing.
2. Traditional Mortgage
With historically low rates, getting a mortgage is a viable option that you shouldn’t overlook. Right now, the rise in real estate prices well outpace interest rates, so if you’re worried about paying interest to invest in real estate, it’s not a mathematically viable concern.
Many lenders will have special rules for traditional mortgages used for investment property. For example, they may require a little more money down and prohibit a gifted down payment. They may also limit your ability to buy a fixer-upper with a lot of work to be done.
These precautions exist to protect the mortgage company, of course. But the company also realizes that you’re a new real estate investor, so they’re trying to keep you from jumping into the deep end of real estate without some experience. Just be smart about how you choose your mortgage lender.
3. Seller Financing
Let’s say you wouldn’t qualify for a traditional mortgage. A property seller may take a closer look at your situation and realize you’re well worth the risk.
In seller financing, you provide some cash to the seller (after signing a contract you understand).
That contract provides you with terms for paying back that loan.
For example, they may require you to pay the loan within 5 years. During that time, you’re making money thanks to your newly acquired real estate by becoming an awesome landlord.
You’re building your credit, assets, and cash flow.
So you now qualify for a mortgage and can easily get one. You pay the seller back on time and do it again if you like.
But always make sure that the contract states that you have full rights to sell the property to pay back the loan and keep the difference. That should be your right anyway, but predatory sellers can sneak clauses in there that take this option away from you.
There is obviously some risk here, as with all real estate investing, but be smart, read your contract, and it can be a great option.
4. Lease Option
This is sometimes known as a rent-to-own. In a typical lease option, you pay the seller a monthly or annual price as if you were renting it. But you pay more than normal rent. The difference is going toward buying the home at some point. As you make money on the property using real estate Investment tips like these, build up the funds to get financing and buy out the remaining balance.
This is an option, so you also have the option to walk away, but typically any money you paid over the rent stays with the seller.
5. Hard Money Lending
Hard money lenders are real estate investors who extend loans to people like you, so you don’t have to go through a bank. Make sure you’re comfortable with the terms of the contract and will be able to pay the loan back. As with anyone lending you money, the real estate will become collateral that reverts to the lender if you default.
Microloans tend to be smaller loans with shorter terms, so they don’t require the hoop-jumping a mortgage does. But you can use them to cover a portion of real estate buys.
If you’re otherwise financially stable and just short of cash to invest, you might be able to combine this with syndication.
7. Trading Houses
This is one of the ways to invest in real estate that might make sense in some rare instances. For example, maybe you own a single-family home and want to downsize now that the kids are in college. Or you’re willing to downsize temporarily to build real estate wealth. You could trade your home for a duplex or triplex of equal value. Live in a part of it and rent the other parts out.
This eliminates many of the financing costs both of you would otherwise pay and can avoid capital gains tax. But be sure to check the regulations in your area.
8. USDA Loans
The U.S. Department of Agriculture’s Rural Development (USDA) has a program in place to encourage development in underpopulated areas in the US, which actually covers more of the US than you might think. Imagine all of the small to middle-sized towns in-between cities. Many of these would make good investments. These loans often come with 0% down and favorable interest rates.
There you have it! Depending on the type of real estate investment you’re doing, these could be ways to invest in real estate. But you must be below a certain income level to qualify. Once you do, however, you can begin building real estate wealth that carries you into your next investment.