Myth Debunked: You Need Money To Get Into Real Estate Investing
Every time we talk to people about real estate investing, we are amazed at how many people think that they need a lot of money to get started. I suppose the fact that so many people believe this means that there are more opportunities for the rest of us.
The reality is that you don’t need a lot of money to get into real estate.
To buy your first property using bank financing, you need 3.5% down, and you can even borrow that from your IRA or 401k. You can buy a $1 million four-plex with $35,000 down, as long as you live in one of the units.
If you are doing a rehab fix-n-flip, you can get a private money loan or hard money loan in which case you can get 100% financing or more for the project. By partnering with someone, you can have your partner put up all the money required allowing you to do the deal with no money out of your own pocket.
Then there is wholesaling properties and assigning your contract before you even have to close. There is buying “subject-to”, standard purchase “options”… there are actually a lot of strategies for getting into real estate investing when you have little or no money.
Affording The Mortgage
For this article, let's take a look at buying a $1 million property. How can you possibly afford the mortgage on this large of a deal? The bank will give you credit for the income that comes from the rent of the other three units.
We’ve purchased two four-plex properties and in both cases, just a little increase in the rent being paid by tenants ended up covering the rent. But there are better examples.
A friend of ours did her first real estate deal just last year. She is no “pro”, and has a full-time career.
She found a dumpy duplex in a really nice neighborhood where rents for 1 bedroom units exceeded $2,000 per month. She learned that there was an FHA program that would enable her to buy a property (single family, duplex, triplex or fourplex) and include money for renovations as well. This property needed $100,000 in work.
Yes, she had to hustle a bit to find a lender who understood the loan for this type of property. Then, through each phase, her friends and family badgered her to get out of the deal, give it up and go buy a condo. She landed a $660,000 duplex with less than $35,000 out of pocket.
She put $100,000 into the rehab and moved into one unit, and rented the other for $2,000 a month. After rehab, the property is worth over $1 million, and she pulled that off with very little cash. If she had used that same cash to buy a condo, she would have probably made a bit of gain, but no where near what she made buying a multiplex.
And, now she’s got a tenant paying half of her mortgage. When she wants to move into a larger place, she can rent the unit she’s living in, and the rent from both units will cover her mortgage. In fact, she can now borrow against that duplex to get more cash to go buy another duplex, and do it all over again.
Pause for a minute…she still only has the original $35,000 in the property. Yet, now that she has about $300,000 in equity, and her monthly cost is less than what she was paying to rent an apartment that she didn’t own.
Here’s another important feature: she gets a tax benefit called depreciation that’ll save her $5,000 per year in taxes. That goes directly into her pocket. When she wants to move, she can rent the unit she now lives in, and the rent will cover all of the expenses, and she’ll still be getting that tax savings.
What if you don’t have that $35,000 to get into your first deal as a buyer?
You can learn to wholesale property. That’s a method of finding a cool deal on real estate and then putting it under contract. We talk about this frequently on our podcast, and cover the basics in this interview with Alex Martinez.
It sounds crazy, but you can actually go into a real estate deal as the buyer and then find someone who is an investor who will pay you to assume the deal. They get to buy the property, which you found at a great price, and you get to make real money without the risk, and without the need for a big down payment. In one of Alex’s stories, this meant over $20,000 for just putting a deal together.
Once you’ve done that a couple of times, you’ve got the cash to do your own deal.