Are you eager to try something new but barriers to entry are getting in your way? It’s natural to question how you can invest without cash upfront or collateral. A common misconception with real estate investing is about how much money is needed to get started. Another thing you might not realize is that you can invest in real estate without even stepping foot on the property, let alone owning it.
Let’s start with some basic principles:
Determine your needs and wants. You need to figure out how much you want to invest and what you hope to gain from your investment.
Do some research. The best way to find out what your options are is to know where to look. As a new investor, you can do a quick search on Google for real estate investing. However, you may be better off doing more extensive research to find the best options for yourself.
Look for the right investment type. Real estate isn’t just residential. You can invest in commercial properties, land or REITs. We’ll get into more of that later.
Investing in real estate isn’t black and white. There are a number of ways you can invest whether it be owning property outright or by owning shares of real estate investment trusts. Let’s get into the ways you can invest in real estate.
Most states offer a grant incentive for people who have never owned a home before. These grants work by reducing the amount of money you need to spend on your initial down payment. For example, a first-time home buyer in the state of New Jersey could receive up to $6,000 toward the down payment on their house. This means that if you are looking to buy a $200,000 house and are required to put $40,000 down, you’d need $34,000 instead. That makes the monthly payments more manageable for first-time home buyers.
Seek out the programs available in your state. There are other incentives and loans available. Another example is MSHDA, which requires just 1% down of the purchase price, up to $7,500. The good news is, once you pay off the mortgage you can keep your property and turn it into a rental to generate passive income.
Real Estate Crowdfunding
Real estate crowdfunding is a relatively new concept that is quickly taking the world by storm. It’s about giving more people access to real estate investment opportunities and breaking down those barriers that we mentioned before. Real estate crowdfunding is a way for investors of all types to take advantage of pools of real estate deals. Instead of having to jump through hoops, answer lots of questions, and endure long waits just so you can invest in one or two deals, with crowdfunding you get to make as many investments as you would like. The result is that more people are able to participate in lucrative real estate opportunities.
A crowdfunding platform like RealtyMogul is a great way to make investments in real estate, but it does require some money. The general rule is that you need $7,500 to start investing (but there are many exceptions).
With RealtyMogul crowdfunding, it’s not the amount of money you invest in your project that determines how successful the project will be — it’s the number of people who invest in your campaign. If only one person funds your project, you might never receive your investment back. If, on the other hand, 10 individuals fund you, you will probably get your money back.
Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is a type of company in which shares are publicly traded. The company invests in properties, such as office buildings, shopping malls, and hotels. These properties are typically rented out for a period of time to an operating partner with expertise in the industry – like office space to a law firm or a hotel room to guests.
As a shareholder, the investors benefit when the business generates gains from its property assets and recognizes that income through dividends. When you invest in REITs, you do not have to worry about finding and maintaining the properties, since the company takes this on as its job. The company does not collect rent from tenants but instead collects a share of the income generated by the property it owns. When a REIT has an agreement with the individual investors, they oversee and manage their portfolio of investments for which they are rewarded with dividends for their contributions to that management project.
REITs are a great investment if you want to diversify your portfolio with income-producing assets without having any risk involved directly in owning properties or collecting rents and managing them yourself.
Buy, Remodel, Rent, Refinance, Repeat
The BRRR strategy is pretty straightforward and works if you’re trying to stretch your cash flow. There is one caveat to this strategy: you have to buy low. Purchase the property as your primary residence when you find a deal. Take your time remodeling if you need to. Once it’s ready, rent it out and refinance as often as you can and when it makes sense to lower your payments. Make sure your tenant is covering the mortgage, insurance, utilities and a little extra on top so you can save for further investments.
Once you pay off your first mortgage you can repeat this process with more and more rental properties until you’re satisfied with your portfolio.
If you have ever wanted to buy a property and may be having trouble getting that loan from a bank, or if you want to make a real estate investment but can’t come up with all of the money upfront, then here’s some good news: microloans for real estate investing may be the solution. But before we get into what they are and how they work, here’s a quick definition first.
A microloan is a small loan (under $10,000) that is specifically geared toward small business owners who traditionally have not been able to access traditional loans due to their lack of assets such as collateral or personal credit history. The reason why this process works so well is because the lender offers money to individuals who have a proven business idea, as long as they can demonstrate that they are capable of providing regular monthly repayments. So even if you don’t have a lot to put down, you can still get a loan for real estate investing if you have sufficient income coming in. However, there is one small catch: microloans are really only available to those who qualify for them; although not the severe requirements of traditional lenders, some requirements must be met before applying.
Microloans don’t require any collateral or down payment because the lender takes your ability to repay the loan into account and not your credit history. You could take this microloan and put it into your real estate idea – maybe a BnB or fixer-upper.
Find an Investment Partner
If you’re looking to buy your first commercial property or invest in real estate but don’t have the capital, then a partnership with a private lender or funding partner might be an ideal solution for you. Partnerships are also excellent ways of diversifying risk and lowering your overall investment costs as well. As long as both parties are willing to commit to the agreement, there is no limit as to what could be accomplished.
To get started, know how and where to find a private lender or funding partner. This can be accomplished by calling the bank that you are setting up your account with (or a real estate agent), asking around or doing some online research. Alternatively, if you know someone personally who is willing to partner on an investment with you, this is a great way to start as well. All of the information needed for setting up your account with a private lender or funding partner should be available on their website or on the internet in general.
After finding your private lender or funding partner, contact them for more information about their rates as well as the terms of their investment program.
Multi-Family Units aka “House Hacking”
House hacking refers to a method of buying real estate that many people are taking advantage of in order to buy their first rental property. It’s not unlike the process you may use when you’re hunting for your first job, only instead of looking online for a company, house hackers start with searching for multi-unit homes, or duplexes.
When you own a multi-unit home you can charge your tenants what you’d like. One way is to take your mortgage payment and divide it by the number of units in your property minus one (the one you’ll live in). In order to pull this off with little or no money down, it’ll have to be your primary residence. Once you pay off the mortgage you can list it as an investment property and sit back and collect passive income.
This one works if you already own property. A HELOC (Home Equity Line of Credit) is a loan issued by a bank to an individual or family to provide funds to improve or maintain their home. It can be taken out in the form of a mortgage, HELOC, or other commercial loans.
This line of credit requires an application from either the mortgage holder, head-of-household, or as a co-applicant with any number of people. It provides borrowing about $200,000 on any single property you own back at better interest rates than those offered on credit cards. And unlike credit cards which charge interest rates as high as 30%, your APR with this type of loan generally stays below 3%.
A HELOC is much like a credit card in your ability to spend money, it is one of the most accessible forms of borrowing available to homeowners. What draws people to this type of loan is that they are able to spend all the money on whatever they want, such as a REIT or investment property, and the interest rates are relatively low compared to other types of loans.
Best Online Real Estate Investing Platforms
There are a number of different real estate investing platforms that you can work with to get started. We’ve gone through quite a few of them and have found a handful of favorites that we’d like to share with you below.
Roofstock is an online real estate marketplace that lets you fund a purchase and become an owner of a rental property without any money down or upfront costs. This is an investment opportunity designed to help first-time real estate investors with no previous experience or cash to get started.
You can earn 8% annualized performance, potential tax savings, and a portfolio of properties in your account. This is a unique property investment option that will work well for people who are new to the game but are still eager to start investing in real estate.
Fundrise allows investors to invest their money in real estate with no minimum investment and no risk.
Known as crowdfunding, this is an alternative financial system where the crowd invests their money from many people to achieve good returns. If you have always been fascinated by this type of investing but felt that it was too risky or too difficult to get started, then Fundrise might be the solution for you! The Fundrise platform uses blockchain technology and smart contracts to allow investors to put their money into real estate without requiring a financial history or any institutional credit. They also allow individual investors and accredited investors to invest in real estate with no minimum investment, trust score management, and no due diligence.
RealtyMogul is a real estate crowdfunding platform that allows users to invest in real estate projects without having to go through lengthy processes. This platform makes it possible for people with small amounts of money to access lucrative investment opportunities by allowing them to pool their money together and get better returns. They offer investments in the range of $2,000 to $50,000 and are open to both accredited investors and non-accredited investors. This platform has been in operation since 2013 and has successfully distributed $100 million in returns.
Types of Real Estate
Before you start investing, determine what type of real estate you want to put stake in.
Land real estate is normally vacant land that you can buy directly from the owner. As leverage for securing a home mortgage, most banks will require that you have a certain amount of money saved up before they’ll give you a loan. If there isn’t enough money in your savings account to cover your down payment and closing costs for the land real estate, then it’s tough to secure a loan. There are many ways to get the funds legally to build on vacant land (the best way is through an FHA home mortgage).
Commercial property is usually owned by a landlord who manages the building for the tenant. It can be an office space or a store and can include multiple tenants under one roof (as is the case with a retail center). The rent usually goes to the landlord, but that doesn’t mean you’re not responsible for your portion of the rent as well. Plus, in the case of commercial properties, you also have to pay taxes on the income (such as sales tax, property tax, and business tax). You may be able to rent a commercial property and run a business out of it or sub-lease it.
Residential property is exactly what you think it is: the house you live in. Many people have an HOA fee, but not all. And taxes are often cheaper than commercial real estate taxes. Residential properties vary from condos to townhomes or single-family homes and even mobile homes.
Passive vs Active Real Estate Investing
Active real estate investing is where you buy properties, improve them through your own efforts, and then gain income from the property. This includes renovating, renting out units, collecting rent payments from tenants or buyers, or even leasing the property out on Airbnb for extra revenue.
Passive real estate investing only involves buying a rental home in a specific location with investment in mind but not personal ownership. This means you don’t do any maintenance or upkeep on the property yourself. Instead, you can hire a property manager who will go take care of that for you.
The ideal investment strategy often depends on your personal situation and potential for risk tolerance. For many people, buying a passive rental home without doing any work at all might be an unrealistic goal. It’s just easier and more convenient to buy an active rental property that requires renovations or attention from time to time and also includes direct marketing efforts.
The two strategies are often used by the same person. In rare cases, an investor will have one or both properties at different stages – an active property that needs renovation or a passive property that’s a rental without any maintenance and upkeep. Crowdfunding is a type of passive real estate investing.
More Tips for Investing in Real Estate
When investing in real estate, the most important thing is to know your market and know what you’re doing. This sounds complicated but it isn’t. If you just want some extra cash flow then buying a house from someone that is thinking about selling or cash-flowing properties could work for you. Here are some more tips and scenarios you should be aware of:
Cash in on the Hot Spot – Invest in the area that you want to live in. If it is a metropolis or a city, then you can make some money investing in the property there. It’s possible to make money on rental properties no matter where you are.
Cash Flowing Properties – Buying good cash flowing properties can lead to huge profits. Choose the right area and don’t be afraid to put up money for remodeling or large down payments. Go out and spend on quality items instead of cheap items but, avoid purchasing high-end expensive goods that could lead you to bankruptcy and foreclosure later down the line.
Get a Mortgage – A fixed-rate mortgage means that the interest rate remains the same for the entire length of your loan. Most fixed-rate loans are for 10 or 15 years, but there are also some for as long as 30 years. The lower the interest rate, the more you save over time. However, a lower interest rate also means that your monthly payments will be higher than with a higher rate because they have to account for all of those additional savings throughout your loan.
A variable-rate mortgage means that your interest rates and monthly payments can change periodically throughout your loan period. These are usually set to coincide with current interest rates and, as a general rule, will rise and fall when interest rates naturally increase or decrease. The fluctuation in the rate of this loan will allow you to save money over time because your interest rate will be below the nationwide average. There is also no guarantee that interest rates won’t go up in the future which could put you at a higher rate and cause you to have higher monthly payments throughout your loan.
Ready to Invest?
We’ve covered a lot in this article and we hope it helps generate ideas and figure out what the best approach is for your investment style. There is one fundamental approach you should take with any investment: do your research. With little to no money down, you can still break down those barriers and enter the market you’ve always wanted.
Frequently Asked Questions
Q: How do beginners invest in real estate?
A: Beginners can start in one of the hottest real estate markets today by purchasing commercial real estate. Commercial real estate is usually owned by a company and can be leased to tenants. These properties can grow quickly if the demand of a specific market increases. As a beginner, you could also consider crowdfunding.
Q: What are different types of real estate investments?
A: Real estate investments can be as small or large as you want them to be. You can choose to buy many properties to build your portfolio and begin earning rental income or you could purchase one or two residential properties to get started in investing property. You should always research the type of property you are interested in buying before deciding which type you want to invest in.
Q: Are places that allow the purchase of homes with bad credit safe?
A: Yes, places that allow the purchase of homes with bad credit are safe. Many investors have bought homes with no money down and even paid for closing costs, which saved them thousands of dollars. You don’t want to buy anything you cannot afford or cannot afford to lose because if you do, you won’t make any more money than if you had simply financed it.
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