Real estate investing appeals to many investors due to its benefits and low risk compared to other investments. But when it comes to financing an investment property, a lot back down thinking they need large amounts of money to start a real estate investing business. Well, this is not true. Investing in real estate with little or no money down is possible.
In this blog, we will show you 7 proven ways of how to invest in real estate with little money. Traditional investment property loans are left out as they usually require at least 20% down payment in order to finance a real estate investment.
How to Invest in Real Estate with Little Money: Alternative Financing
FHA Loans
The Federal Housing Administration (FHA) offers loans with low down payment requirements to promote home ownership. Normally speaking, an FHA loan cannot be used to finance a rental investment property but there is an exception to the general rule. Real estate investors are given an FHA loan on the condition that they make the property their primary residence. This would consequently limit the types of real estate properties you can invest in to multi family rentals such as a duplex investment property.
Investing in real estate using FHA loans has many benefits especially for beginner real estate investors with little capital. With an FHA loan, a down payment can be as low as 3.5%. A savvy real estate investor can rent the units for positive cash flow and live in another for free.
Related: Can You Use FHA Loan for Investment Property Financing?
Sound like the investment strategy for you? Then start looking for a small multi family home right now with Mashvisor’s tools.
Home Equity Loans
If you own a real estate property that has built up equity, then many banks are ready to offer you a HELOC (Home Equity Line of Credit). Home equity loans are one the best ways to invest in real estate since you use the equity you already own. A typical HELOC creates a credit of about 70-80% of the current equity in your real estate property. For example, if your own property is worth $400,000 and you still owe $70,000 on the mortgage, then the bank will give you a credit of 70-80% of $330,000 of property equity. Check out how to calculate equity in your real estate property to learn more.
Home equity loans are typically used for short term real estate investment strategies such as fixing and flipping, where a distressed property is purchased below market value then renovated and sold for profit. They can also be used as down payment on a rental property.
Related: All You Need to Know About a Mortgage for Rental Property
Hard Money Loans
The previous ways on how to invest in real estate with little money are rather low risk when compared to hard money loans. So what are hard money loans exactly? Such loans are a type of short-term loan that is secured by the market value of the real estate property. Private investors fund hard money loans that can cover most of the investment property’s price.
The main advantage of using private money to get started investing in real estate is the ability to obtain funding at a faster rate than traditional bank loans. So, if you want to close quickly on a deal, a hard money loan will give you the upper hand. However, the interest rates and loan fees are very high. So, you need to make sure that the investment property can generate high cash flow to be able to repay the loan. Check out our guide on how to use hard money loans.
Real Estate Partnerships
You have found the perfect rental property with high cash flow potential, but you can’t afford the down payment. Then it is time to turn to your friends, family, or colleagues. You can find another real estate investor who is willing to give you 5k or 10k to purchase the rental property.
Starting a real estate partnership is one of the best ways to invest in real estate because the risk is divided between the different parties and partners can share their experience to grow the real estate business. When starting a real estate partnership, it is important to draft a written agreement that outlines the rights and responsibilities of each party.
Seller Financing
Seller financing or owner financing is a method of buying an investment property when you can’t use a traditional mortgage. Special arrangements are made with the property owner to pay installments of principal and interest until you have paid the price of the investment property.
Related: Everything You Need to Know About Selling and Buying a Home with Owner Financing
How to Invest in Real Estate with Little Money: Alternative Investment Strategies
REITs
Real estate investment trusts offer the opportunity to make money from real estate investing without owning property. How? REITs are real estate companies that own and manage residential and commercial real estate properties. As a real estate investor, you can buy shares of REITs and enjoy the high dividends ratio (4-10%) thanks to their tax-exempt nature. REITs provide the opportunity to make money in real estate with little money. However, the more shares you buy, the more money you can make.
Real Estate Wholesaling
Real estate wholesaling is an investment strategy where you find a real estate property for sale, put it under contract, then transfer the contract to another buyer for a higher price than you agreed to with the property owner. In fact, real estate wholesaling requires no money at all. But the strategy itself is risky and requires experience and a real estate network to find potential buyers.
The Bottom Line
When it comes to how to invest in real estate with little money, one should consider all the options and weigh the pros and cons of financing or investment strategies. The main challenge is to find a real estate property with promising investment opportunities. Just be sure that whatever you go with, you will be making positive cash flow.