I get asked this question a lot: “So how much money do I need to begin investing in real estate?”
The answer is, of course, it depends.
It depends on the kinds of properties you’re looking at. It depends on the market that you’re investing in. It depends on your goals as an investor. It depends on whether or not you have a partnership, whether or not you’re using other people’s money (OPM) and what kinds of returns are acceptable to you as an investor.
Allow me to elaborate:
If you’re in San Francisco, you’re going to need more money to get started investing than you would in a small town in Texas. You’ll need more money if you’re looking to invest in multi-family properties than you would in condos or townhomes. Condos in some areas are so cheap that they can be purchased with just a few thousand dollars down. Meanwhile, multi-family properties, even duplexes, and triplexes can go for upwards of a million dollars in some areas.
What I’m trying to say is that you can begin investing in real estate for just a few thousand dollars. In some markets, $10,000 will easily cover the down payment, closing costs, and title fees.
You also don’t need to invest 20% on a property. You can put as little as 3.5% down with an FHA loan. The catch is that you will have to pay mortgage insurance. The cost of which ranges based on the market, the amount you’re putting down, and your credentials as a borrower.
On my first home, I put only 14% down. This meant PMI (mortgage insurance) of about $40 a month. This was a fine tradeoff for me. PMI is not ideal, but if you can’t afford to put more down on a property, especially a property that will begin to produce cashflow (see my article on house-hacking), and if the PMI doesn’t kill the deal, then you should disregard it and close on the deal anyway.
PMI is removed once you have reached 20% equity in the home. Also, you can refinance your mortgage once the seasoning period (6 months for some lenders, 12 months for others) and remove the PMI altogether.
There are differences in this rule when you’re purchasing a property to be your primary residence and when you’re purchasing a rental property or a second home. An FHA loan can only be used once at a time and can only be used for your primary residence. Some investors move every year for this reason. They purchase a home using an FHA loan, then after the seasoning period is over they refinance the FHA into a conventional mortgage. They use this home as a rental property while they FHA into a new primary residence.
It is common for first-time investors and house-hackers to do this in order to be able to purchase more rental properties with little to no money down.
Another route is to use other people’s money. The point here is that even though you do not have the money, doesn’t mean that someone else isn’t willing to lend it to you. This can be difficult for a new investor. However, it doesn’t hurt to ask friends and family to trust in you. And usually with very favorable terms on the loan. You can include them as co-owners of the property, you could split the profit and/or cashflow 50/50 with you as the deal maker and them as the cash provider, or you could pay them back the money in the form of a loan. There are many ways to structure these kinds of deals.
Friends and family will be much more understanding of mishaps than would a hot-shot seasoned investor with years of real estate experience and millions of dollars under his belt.
In this case, you wont need any of your own money. You only need access to someone else’s money.
Seller financing is also an option, as is rent-to-own. Seller financing is when the seller of the property acts as the bank. Instead of paying the entire value of the sale price of the home to own it, you will guarantee the seller that you will pay a set amount per month in order to pay the home in full. Some sellers like this because it avoids the taxes that come with selling the home and getting a lump sum of cash. Rent-to-own is exactly as it sounds, the rent payments that you make to the homeowner go towards the downpayment of the home. Instead of paying rent and never seeing that money again, your rent payments go towards you eventually owning the home that you are renting.
Both of these options require some form of down payment. However, the interesting thing about either option is that the terms are totally agreed upon between the seller and you, the buyer. How much you will put down, how long the term will be, how much rent payments will be, and how long it will take you to own the home is totally up to you and the seller to negotiate.
Never get into any sort of agreement without first getting the contract in writing and running it by an attorney before signing.
As you can see, there are several options for you when investing in real estate. Not all of them require millions of dollars or even 20% down.
I think a good place to begin is to get into an FHA loan for a property (you can FHA into a duplex or a triplex), live in one unit, and rent out the other units or bedrooms for cash flow, and this way you can live for free while you save up money for your next property. Then refinance the property, pull the cash out, and continue investing.
This is a great place to begin for first-time investors, as it requires very little money down and also saves you a ton of money while you live for free and it may even provide some cash flow.
