Low Cash Options for Investing in Real Estate
Traditional real estate investments typically require a considerable upfront investment. Mortgages for rental properties require a 20 percent down payment. When you don't have the cash on hand, breaking into real estate investment might take a more creative approach to financing. Consider these options to avoid the cash requirements or obtain the financing through different avenues.
Avoid the Down Payment
One of the easiest, though not the fastest, ways to get into real estate investment without a large cash down payment involves buying a house for occupation. Owner-occupied mortgages have options that include a zero down payment. In addition to the low cash requirements for this type of loan, you also avoid the added cost of mortgage insurance. Mortgages on personal properties rarely require the owner to carry mortgage insurance. When choosing this method, keep in mind there are some restrictions, including:
- Property must remain owner occupied for a set amount of time.
- Longer terms may lead to slower equity.
- Zero down loans may not be available after the first home purchase.
In most cases, loan agreements require the homeowner to live in the property for at least a year before renting out the residence. Some require three years or more, so be sure to check on the residency requirements before selecting a lender. Also, be aware that first-time home-buyer programs are not available on a second property. You might still be able to find a zero down loan, but you need to be prepared to pay closing costs.
Cut Down on Closing Costs
Becoming a real estate agent is one way to significantly reduce the amount of cash you need to invest in real estate. As an agent, you can handle the property sale and avoid paying the commission to a third party. By removing the cost of commission to an agent, you can drop the cost of closing the sale.
Private Money Is Always an Option
If you are asset-rich and cash-poor, you might look into private lending sources. Soft money, funds obtained from friends and family, might help you get started if you can guarantee a reasonable rate of return. After all, a guaranteed 6 percent on a loan is often better than what someone might be earning in a CD.
Hard money, or asset-based lending, for real estate is another option. These relatively expensive loans work in the short term by offering a 65-80 percent after-renovation value limit. For example, if you used a hard-money loan to buy a house at $60,000 and the expected value after renovations is $120,000, you could secure financing of up to $96,000. That loan amount will likely come with a term of a year or less, several points and a higher interest rate, but it allows you to close the deal. Then, after the renovations, you might qualify for a refinance loan at the same loan-to-value ratio, allowing you to switch to more traditional financing without the upfront cash investment. This is a relatively expensive way to get the money you need, but it works well when you come across a severely undervalued property, or you have the experience to do the renovation yourself.
Investing Without Assets
When you don't have the money to invest directly, you need to either be prepared to invest time or cut into your profit margins. There are many ways to find the funds, but these are some of the most direct. If you have the time, consider buying as a personal buyer and renting after meeting the residency requirement. If you want to jump right in, work with private lenders to get the financing ready and dive into repairs. Either method can help jump-start your life as a landlord with little to no out-of-pocket cash.
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