How To Buy Your First Rental Property With No Money Down
A study of asset returns over 145 years in 16 developed countries found rental properties outperformed stocks.
But how can rental properties perform better than stocks, with lower volatility and risk? Dont higher returns mean higher risk?
The answer is simple: theres a higher barrier to entry to invest in rental properties.
Purchase Money Mortgage/seller Financing
The first proven way to invest in real estate with no money is through seller financing. When buyers are unable to secure a loan from financial institutions, they may opt to seek real estate financing from the sellers. With conventional real estate transactions, the buyers will provide the sellers with the cash, to gain ownership of the property. However, with a purchase money mortgage, the seller extends finances to the buyer. The buyers will then repay the sellers, for the agreed terms.
Real Estate Mutual Funds
Real estate mutual funds invest primarily in REITs and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved through buying individual REITs.
Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund. This can include details on acquired assets and managements perspective on the viability and performance of specific real estate investments and as an asset class. More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain property types or regions to maximize return.
Also Check: Where To Invest In S& p 500
Assess Your Financial Situation
First, it’s important to evaluate your financial situation before investing in real estate. It’s a good idea to have little-to-no debt and have liquid savings to use for a down payment. It’s important to have a good credit score, which helps you qualify for reasonable loan rates and gives you real estate leverage.
One of the most important things you can do before investing in real estate is to build a financial cushion because unknown expenses can pop up, such as a two-month gap without a tenant or a roof on a rental property that must be rebuilt.
Get a mortgage preapproval as well. It can help you understand how much you’ll qualify for in terms of a mortgage for a rental property, for example.
Airbnb And Short Term Rentals
Another way to turn your house into a cash machine is to rent out individual rooms. This is an especially useful option for younger people or families without children.
Buy a house with more bedrooms than you really need. You can even convert an attic or basement into a bedroom.
Then, get some roommates and rent out each room. Their rent will most likely cover all of your mortgage and utilities.
Another option is to use Airbnb. If youre in a good area that people need to visit, you can earn a lot more per month than having a normal roommate.
You May Like: Best Investment Tools For Retirement
Rent Out Residential Property
If house flipping sounds like too much work, you could rent out residential property instead. In fact, as more and more Canadians are renting for longer periods of time, becoming a landlord isnt such a bad idea. As a property investor, you could rent out single-family homes, condos, apartments, duplexes, or even townhouses. Rent from your tenants will produce extra cash flow, and you could also benefit from long-term appreciation of your property.
Of course, youll want to buy rental property in a desirable area, preferably one near major employers, schools, and hospitals.
Keep in mind, youll be in charge of the maintenance and upkeep on the property. The mortgage rates on residential property are typically higher than those on your primary residence. So, before you take out a mortgage with just anyone, make sure you compare rates among different mortgage lenders.
Issue A Private Mortgage
Instead of buying property or investing money in a REIT, you could take another approach to real estate investing. You could become a private mortgage lender. As a private mortgage lender, you play the role of the bank. You lend money to homebuyers, charge an interest rate on what they borrow, then slowly take back in what you lent out.
Why would homebuyers come to you for money? Well, they may have no choice. They could have poor credit, or their income threshold or job status may disqualify them from getting a traditional mortgage. Either way a demand for private mortgages does exist. And if you have a lump sum growing by a meagre interest rate, lending it out as a private mortgage could help you earn more.
Recommended Reading: Best Investment Apps For Small Investors
What Does It Mean To Invest In Real Estate
Real estate investing is a financial strategy for investors to buy an investment property. The route to investing in real estate can look different for many people. Ultimately, it means real estate investors purchase, manage, rent out and/or sell real estate property to make a profit.
However, investing in real estate doesn’t always mean that you buy a house or duplex. You can also adopt a more hands-off strategy, such as investing in real estate mutual funds instead.
Use An Online Real Estate Investing Platform
If youre familiar with companies such as Prosper and LendingClub which connect borrowers to investors willing to lend them money for various personal needs, such as a wedding or home renovation youll understand online real estate investing.
These platforms connect real estate developers to investors who want to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform. Like many real estate investments, these are speculative and illiquid you cant easily unload them the way you can trade a stock.
The rub is that you may need money to make money. Many of these platforms are open only to accredited investors, defined by the Securities and Exchange Commission as people who’ve earned income of more than $200,000 in each of the last two years or have a net worth of $1 million or more, not including a primary residence. Alternatives for those who can’t meet that requirement include Fundrise and RealtyMogul.
» Ready to start investing?Best real estate crowdfunding platforms
Also Check: Easiest Way To Invest In Stocks
By Owning Shares Of Real Estate Investment Trusts
A REIT is a real estate investment trust. REITs have several advantages, the foremost being liquidity. If you own 20% of an apartment building, you cannot get your money out unless someone else buys your share or the property is sold. When you own shares in a real estate trust, it is generally as easily sold like shares of stock. You can buy targeted real estate investment trusts such as those in firms that build medical buildings, nursing homes, malls, and industrial parks. It is easier to diversify your holdings by owning a variety of REITs, and you never have to manage anything.
The modest downside is that they take a chunk of the profits in administrative overhead before distributing the remainder to shareholders. A related financial product is the real estate mutual fund. These mutual funds are more liquid than REIT shares. They are more diversified, too. They may invest in REITs, the publicly traded shares of homebuilders, and companies that sell building supplies. Real estate ETFs are simply ETFs that invest in the same sorts of businesses. A REIT ETF is an E TF that invests in REITs. You’ll have lower returns, but there is less risk than investing in a REIT. In every case, you don’t have to invest in real estate directly, much less manage it.
What Is Investment Capital
Investment capital is the money used to fund a given investment deal. This can include the costs of acquiring a property, initial renovations, and upfront costs. There are generally two types of investment capital: debt and equity. Debt refers to investment capital from hard money lenders, such as banks, and often requires interest payments. An advantage of using debt investment capital is that hard money lenders will not have a say in the company. However, many investors may find it difficult to secure capital with hard money lenders. This is where equity .
Equity refers to money secured by selling ownership of a property or business. Private money lenders may invest in a company if they see the investment as potentially profitable. Using equity as a form of investment capital has different pros and cons to utilizing debts, so investors must consider both options. For entrepreneurs ready to put the work in, raising private money can offer the chance to pursue various investment opportunities and expand their portfolios.
Recommended Reading: Is Austin Real Estate A Good Investment
Special Us Govt Schemes Like Usda Loans
With an end goal to fill underpopulated zones of the U.S., the U.S. Department of Agriculture’s Rural Development office gives mortgages with down payments as low as 0%. These loans are offered only in towns with populations of 10,000 or less. All things considered, 10,000 is very sizable for most towns, so 97% of the U.S. is secured.
USDA loans are zero-down-payment mortgages for rural and suburban homebuyers. These loans go to those who qualify as having a low or moderate-income. Theyre mainly for borrowers who aren’t wealthy and cant get a traditional mortgage. To check whether your area qualifies for this loan, you can visit USDA.gov and read their terms and conditions.
Hire A Property Manager
While you dont have to buy physical property to invest in real estate, theres at least one strategy that can help you have your cake and eat it, too. Many investors who want exposure to rental real estate they can see and touch go ahead and buy rentals but then hire a property manager to do all the heavy lifting.
Lee Huffman, a travel and lifestyle writer forBaldThoughts.com, once told me he owns rental property in North Carolina but actually lives in California. While he tried to manage his properties from a distance at first, he ultimately chose to work with a property manager to save his sanity and his profits.
While he forks over 8-10% of gross rent to his manager, it was still one of the best decisions hes ever made as a real estate investor, he says. They take care of the rental property basics – minor repairs, vetting prospective tenants, collecting rents – so that I can focus on my career, family, and locating the next profitable rental property investment, notes Huffman.
In that sense, he gets the benefits of being a landlord without all the hard work. One of the most important roles that a property manager plays is that they act as a buffer between the tenant and me, says Huffman. I don’t receive random calls, texts, or emails from tenants at all hours of the day or night.
The key to making sure this strategy works is ensuring you only invest in properties with enough cash flow to pay for a property manager and still score a sizeable rate of return.
Recommended Reading: How To Start An Investment Newsletter
Sba Loans For Investing In Commercial Real Estate
The SBA works with lenders to provide loans to small businesses. If youre looking to purchase commercial real estate, the SBA 504 loan is the best choice. An SBA 504 loan is commercial real estate financing for owner-occupied properties. Business Administration or SBA loans require only a 10 percent down payment by the small business owner and funding amounts range from $125,000 to $20 million. With an SBA 504 loan, money can be used to buy a building, finance ground-up construction, or building improvements.
Why You Should Invest In Real Estate
Real estate has been the greatest wealth builder for centuries, and its one of the most reliable investments available today. Perhaps the greatest thing about investing in real estate, is that there are now more options available than ever. While this asset class used to be reserved for the select few, virtually anyone can invest in real estate with little money today.
While the benefits to real estate investing are countless, below are some of the main reasons you should consider this asset class.
You May Like: Is Now A Good Time To Buy Investment Property
Real Estate Market Is Unpredictable
Similar to the stock market, the real estate market isnt easy to predict. Many real estate investors make a deadly assumption and believe if the market is hot today, it must be hot tomorrow. But thats simply not true.
While real estate prices do tend to rise over time, the market could change drastically . Supply and demand, interest rates, and changing demographics all play a role in which way the market will swing. And, though you could buy property in a hot market today, nothing guarantees it will remain hot in the future.
Should You Invest In Real Estate
Adding real estate to your portfolio could be a smart choice. You can diversify your investments, take advantage of certain tax breaks, and create a solid stream of income that could carry over into retirement.
But, as with any investment, you want to know what youre doing. The gains on real estate investing can be immense. But so can the losses. And while you may feel motivated in the beginning to flip homes and manage rental property, the maintenance and upkeep, especially in storm prone areas, can get old fast.
If youre new to investing, you could learn the ropes with a more passive approach, such as a real estate ETF or a REIF. Both of these can expose you to the real estate market without requiring you to buy property. That might be more suitable for Canadian investors, especially as buying residential and commercial property has never felt more out of reach.
Also Check: Chartered Alternative Investment Analyst Caia
Invest In Home Construction
If you look at real estate market growth over the last decade or longer, its easy to see that much of it is the result of limited housing inventory. For this reason, many predict that construction of new homes will continue to boom over the next few decades or more.
In that sense, its easy to see why investing in the construction side of the industry could also be smart. An entire industry of homebuilders will need to develop new neighborhoods and rehabilitate old ones, after all, so now may be a good time to buy in.
Large homebuilders to watch include LGI Homes , Lennar , D.R. Horton , and Pulte Homes , but there are plenty of others to discover on your own.
Consider House Hacking First
House hacking is the easiest way to buy your first rental property. And in the bargain, you score free housing!
The traditional house hacking concept is simple: you buy a small multifamily , move into one of the units, and rent out the other. Your neighboring tenants rent covers your mortgage and other housing costs, for effectively free housing.
And when you move out, you keep it as a traditional rental property, and the cash flow only improves from there.
How does this help your down payment? Traditional lenders require far lower down payments on owner-occupied properties than investment properties. Its a simple risk calculation for them: borrowers are far less likely to default on their home mortgage than a rental property loan.
One popular low-down-payment loan program is FHA, which allows a 3.5% down payment as long as your credit score is over 580.
But FHA isnt the only option there are conventional mortgage programs out there that require even less money down, sometimes no money down at all.
Down payments aside, conventional loan options also come with lower interest rates, for lower monthly mortgage payments. Compare interest rates and loans on Credible and Loan Depot, and talk to at least three traditional mortgage lenders or brokers before settling on a lender and loan program.
As a final thought, keep in mind that multi-unit properties arent your only option for house hacking. Try these other house hacking ideas as well to score free housing!
Recommended Reading: Invest In Online Real Estate
Real Estate Investment Vs Real Estate Trading
Real estate investment companies do two basic things: invest in real estate and trade in real estate. Essentially, real estate investment is a long-term investment wherein you purchase real estate with the intent of keeping properties to rent out, while real estate trading is a short-term investment, wherein you buy a property that needs fixing up and flip it for a higher price soon after. Real estate investment requires a higher initial investment and takes longer to draw more than a residual profit. Real estate trading requires a lower initial investment and offers faster profit, but can be risky if the property doesnt move as expected.
Whether real estate investment vs. real estate trading is better really depends on your market, expertise, and overall investment strategy. Both flipping houses and renting properties can be lucrative options, and both can create major losses, depending on how well you do. Ultimately, both strategies are common in real estate investment companies. You just will have to decide which strategy better suits your companys needs.
How To Invest In Real Estate With Little Money
Did you know real estate investing is possible with little or no money invested? It sounds crazy, but there are many ways to jump into the real estate market without a large amount of capital. You don’t have to be an accredited investor or have a lot of money to say that you, too, own real estate.
From investing in real estate mutual funds to buying physical real estate, real estate values continually increase, making real estate investing a great way to diversify your portfolio and potentially make money.
Recommended Reading: Best Way To Finance Real Estate Investment