If you’d like to start investing in real estate, you don’t necessarily have to be a multimillionaire. It’s possible to get started with as little as $5,000 or less. In this post, we’ll look at five ways you can start your real estate investing career even if you can’t afford to pay all cash for a property.
First things first: Ask yourself whether you have the characteristics that will help you achieve your real estate investing goals. Are you passionate about real estate? Have you read books, taken classes, and done your research? Do you persevere, even in the face of setbacks? Are you disciplined? If you answered yes, you can probably overcome a lack of funds.
So let’s look at some low-cost investment strategies, beginning with the simplest, and ending with the most complicated.
1. Borrow money
One of the simplest ways to get the funds you need to buy a home is to borrow money from family or friends. Be sure to treat the loan like any financial transaction: Write up a promissory note—you can find templates online—specifying the interest rate, payment due dates, and what interest your lender has in the property, if any. It’s critical to ask yourself whether your relationship with your relative or friend could be harmed if you couldn’t repay the loan.
Another option is peer-to-peer lending through an online micro-lender like Lending Club, RealtyShares or GROUNDFLOOR.
Finally, if you already own a home, you could consider a home equity line of credit (HELOC). Just be sure you can repay it, or you could lose your home. Consult your accountant about tax implications, too.
2. Partner with someone
If borrowing money from friends or family seems emotionally risky, consider finding a business partner. Use your network (you have been joining real estate investing clubs in your area, right?) to link up with someone else who’s interested in real estate investing. A building contractor, for example, could help with the down payment—and with fixing up the property. Be sure to write up a contract that specifies responsibilities and the division of any profits.
3. Seller Financing
Seller financing is just what it sounds like: The person who owns the property loans you the money to buy it, and you make your mortgage payments to them rather than a bank. You’ll execute a promissory note that describes the interest rate, repayment schedule, and what happens if you default. Do your research into the pros and cons of this approach. These loans are usually short, like five years, with a balloon payment at the end.
3. Private money
Private money comes from an individual or a group of individuals who pool their funds to finance real estate transactions. Sometimes referred to as “hard money,” this type of financing may be available for properties that don’t fit the traditional lending model; in order words, homes that the banks won’t touch because of their condition.
Private money loans are called hard money loans for a reason: They usually have very high interest rates (10–15%) and fees, as well as short terms. For that reason, they’re most suitable for “fix and flip” properties.
4. Wholesaling
With wholesaling, you’re essentially acting as the middleman in a real estate investment. You find a property with great potential and enter into a contract with the seller for the purchase price, then sell the contract to the buyer for a fee. While wholesaling is similar to flipping, but it happens much more quickly, and you don’t make repairs to the home before selling it. Usually, you only need the funds for an earnest money deposit, typically 5%.
5. Lease options
With a lease option—known formally as a Lease with the Option to Purchase and informally as “rent to own”—you rent a home and have the option to buy it at a set price after a set amount of time. No one else can buy the home during that period of time.
More complicated is a sandwich lease option. Here, you sign a lease option with the seller, but find another tenant with whom you arrange a lease option at a slightly higher rent and purchase rate. Similar to wholesaling, you’re the middleman, but the timeline is much longer and the property is a rental rather than a flip.
So there you have it: five strategies for investing in real estate with $5,000 or less. Just be sure to research each option carefully so you understand its advantages and disadvantages. Then, with some hard work and luck, you could be on your way to a having lucrative career in real estate investing.
About the Author:
Cynthia Badiey
Cynthia Badiey is a writer and author who has written about everything from real estate to cloud computing, private aviation and educational technology. She has written blog posts for Ten-X, Auction.com, XOJET, NetSuite and Sun Microsystems. An experienced marketing professional, Badiey is the principal of Comma Writer, LLC, which specializes in content creation and strategy, marketing communications and writing. You can reach her on Twitter at @cynthiabadiey.
