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In This Article
- Typical Cash Needed for Real Estate Investment
- Idea #1: Lower Money-Down Loans
- Idea #2: Local Banks & Credit Unions
- Idea #3: Use a Line of Credit for a Down Payment
- Idea #4: Seller Financing
- Idea #5: Seller Financed Closing Costs
- Idea #6: Buy & Refinance
- Idea #7: Buy in Less Expensive Areas
- Idea #8: Use Property as Primary Residence to Jump Start Your Investment
- Idea #9: Consider House Hacking Your Primary Residence
- Idea #10: Form an Equity Partnership
- Idea #11: Own Shares of Real Estate Investment Trusts
- Tip #12: Real Estate Crowdfunding
- The Bottom Line: How to Invest in Real Estate with Little Money
How can you invest in real estate with little money?
It’s a good question.
Are you priced out of the market? Or can you afford to reap the benefits of real estate investing?
Those of us looking to buy property want to put as little cash into the deal as possible, so we can get in the game sooner, earn higher returns, and buy more properties.
In this article, we’ll answer the question “how can you invest in real estate with little money” by looking at 12 practical and proven methods.
Typical Cash Needed for Real Estate Investment
Lenders will typically require 20% of the purchase price as a down payment. This is the same whether you go to a bank, big-name finance company, or a mortgage broker for a loan.
In addition to the down payment, they generally want you to have 3 months’ worth of payments available in cash reserves, or 6 months’ worth if they are more conservative (which is why you should always shop around).
But, they’ll require less if you’re buying your second and third house.
Lastly, there will be closing costs to cover, which are generally 3% of the purchase price.
So for a quick example, let’s say you want to buy a $100,000 rental property. You’re going to need:
- 20% down ($20,000)
- 3 months of payments in reserves (which can vary wildly, but let’s say $3,000)
- 3% closing costs ($3,000)
That means you’ll need $26,000 in cash (which is probably more than you thought).
The reason lenders require this is because you’re more likely to default on an investment property than you are on your primary residence.
This is why you can’t do it with 3% down like you can with your own home. Higher risk means higher requirements.
But that $26,000 isn’t a hard rule.
You can invest in real estate with far less cash — if you know how.
Here’s 12 ways to invest in real estate with little money.
Idea #1: Lower Money-Down Loans
Some lenders are different and have programs that don’t require tying up so much capital. One option through Fannie Mae only requires 15% down with a good credit score.
This alone could mean $5,000-$15,000 less, depending on the purchase price and the conditions in your market.
BUT, if you do this, you’ll have to pay for private mortgage insurance (PMI), which means less cash flow every month. When the house has appreciated some and the loan balance has become less than 80% of the new property value, you can apply to get rid of this fee.
Idea #2: Local Banks & Credit Unions
Some investors swear by credit unions and local banks, but I haven’t found their loan products to be that different, with one exception . . . the commercial side.
If you have an existing business, such as a property management company or an LLC that you flip houses in, then your business might be able to get a loan with more favorable terms or even a line of credit to finance purchases with.
Idea #3: Use a Line of Credit for a Down Payment
You can borrow the cash needed for your down payment, closing costs, and reserves as long as it’s secured by a different property than the one you’re purchasing (such as a home equity line of credit, or HELOC).
Of course, this requires that you already own property. But in an appreciating market, many homeowners are finding themselves with equity that’s sitting unused instead of being put to work.
And, unlike with other types of purchases, this cash doesn’t need to be “seasoned” and sit in your account for months in advance. You can borrow it right before closing.
If you do this, however, make sure that the property’s cash flow can sustain the payment on the line of credit. If not, keep looking!
Idea #4: Seller Financing
You might have heard about seller financing, land contracts, subject-to deals, etc. These are not easily found on the MLS or with off-market properties unless you’re actively advertising to find motivated sellers, which is a business in and of itself.
But, if you come across a seller who for whatever reason doesn’t want to list and sell their house the usual way, it’s possible to put 10% down and then make payments to the seller every month instead of qualifying for a loan and meeting the down payment requirements of a traditional lender.
Idea #5: Seller Financed Closing Costs
Unfortunately, lenders won’t let you borrow any of the closing costs. But, the seller can pay for some of them—up to 2% of the purchase price.
So, this is something you can propose to the seller when making your offer. If the market is not super hot, or if there is something less desirable about the property, they might take you up on it. It usually doesn’t hurt to ask!
If that fails, try raising your offer by 2%. Then they’ll net the same amount, and as long as the appraisal can justify the higher price you should be good to go!
Idea #6: Buy & Refinance
If you buy low enough, you’ve got options. This means more work up front, of course, looking at more properties until you find one where the buyer is willing to negotiate and sell for less than it’s worth.
But, if you’re willing to do some work, you can buy low, fix it up, and then refinance and get your money out so it’s not all tied up for years to come.
One way to do this is by paying cash, and refinance within 6 months with a new loan balance equal to or less than the acquisition cost (but not to exceed 75% of the new appraisal value).
This can help you get some of your purchase costs back, but not your renovation costs. They will still be tied up.
An easier way is to use a hard money lender to borrow purchase money and rehab costs, then pay it off when you refinance (borrowing up to 80% of the new property value).
Just make sure you confirm how quickly you can refinance. Some lenders will make you wait 1-2 years and hard money usually has a 6-month term. And if you borrow from a hard money lender more than 6 months, the interest you pay during that time might destroy the equity in the deal.
Idea #7: Buy in Less Expensive Areas
Having trouble finding properties below market value? If you’re in a hot market, then you might want to expand your search to less pricey areas.
They are often less expensive and offer higher cash flow anyway.
Keep in mind that where you invest does not have to be the same as where you live personally.
Idea #8: Use Property as Primary Residence to Jump Start Your Investment
There are many loan options available that require little to no money down on a primary residence.
Because of this, there are many ways you can use a primary residence to jump-start your real estate investment.
You can purchase an owner-occupied multiple-unit property. The rental income generated from the other units can not only pay the mortgage; it can be put towards buying another investment property.
You can also purchase a single-family home with a conventional mortgage and, after occupying it for a specified amount of time, you can use it as an investment property.
Another great option for using a primary residence to begin your real estate investment journey is to utilize a FHA 203k loan.
This loan allows you to buy a property that needs updating and use the loan proceeds to do the renovations.
You can then live in the property for the amount of time determined by the loan requirements and later sell the property to make a profit.
Those profits can be used as a way to purchase more investment properties down the line.
While using a primary residence property to generate cash for real estate investing does take time — it’s certainly a longer-term strategy compared to other ways to invest with little money — it can be worthwhile and profitable.
Idea #9: Consider House Hacking Your Primary Residence
A growing trend, house hacking involves purchasing a primary residence and renting out portions of the home to help cover some of their housing expenses, whether that’s a studio, bedroom, or an entirely separate dwelling.
When house hacking, you can choose between offering short-term or long-term rentals.
House hacking can open many opportunities for you.
For example, rental income generated when house hacking can be:
- put towards the current mortgage, helping you live rent-free
- put towards a different additional investment property
If you’re wondering how to invest in real estate with little money, house hacking is a great option.
Idea #10: Form an Equity Partnership
Partnership forming is a viable option for those looking to invest in real estate with little or no money.
While the price tag on a certain property might be out of range for you, it may not be out of range for someone else.
Forming a partnership with this individual can help you finance a property, also referred to as an “equity partnership”.
Partnerships can be formed in different ways, so it is up to the two parties to agree to their terms before a real estate transaction is carried out.
Idea #11: Own Shares of Real Estate Investment Trusts
A real estate investment trust, or REIT, allows investors with little money to gain profile exposure without having to utilize traditional real estate transaction avenues.
A REIT is when a group or trust uses funds from investors to facilitate the purchase of real estate properties.
REITs can be bought and sold just like any other stock, making them easy to obtain.
REITs provide unique real estate investment opportunities that would otherwise be unobtainable to the typical investor. You could have access to invest in properties such as office buildings, large commercial warehouses, and even mall properties.
One of the best benefits of REITs?
They are considered to be highly liquid.
REITs are exchange-traded funds and you won't have to worry about all the documentation that comes with a typical real estate transaction.
No real estate agent or title transfer is needed to complete the transaction and to cash out your funds.
Tip #12: Real Estate Crowdfunding
Real estate crowdfunding is a great way to diversify your real estate investment profile with very little money.
It is a growing trend among investors of all ages and experience levels, as it provides unique property investment opportunities.
A real estate crowdfunding campaign, just like any other crowdfunding campaign, will combine your money with other people who are involved in that campaign.
This pooled money will then be used to obtain real estate property or a share of that property.
Everyone that has contributed to the campaign will have some level of ownership.
There are many different crowdfunding platforms available to investors. This means there are many properties to choose from that you may not otherwise have had access to due to a lack of funds.
The Bottom Line: How to Invest in Real Estate with Little Money
The smartest investors know that if you do what everyone else is doing, you’ll get what everyone else is getting. Don’t just go with the first lender you find, or look at a couple of properties before making an offer.
Instead, exercise your creativity and find ways to get more of a return for every dollar invested.
These 9 ideas will help you to minimize the cash needed to get into the real estate game, and also help you to buy more properties and retire with more.
If you’re willing to work at it, you can reach your investment goals much faster.