For many people, real estate investing brings to mind a tycoon in a three-piece suit surveying a skyscraper empire from an office high up in the sky. Or maybe a professional looking couple who buy old homes with cash, masterfully recraft the interior, and put them back on the market. Whatever you think of when you think of real estate investing, you probably think it takes a lot of money to get in the game…or does it?
How to Invest in Real Estate with No Money
- Seller Financing
- USDA Loans
- Real Estate Crowdfunding
- Lease to Own
- Tax Liens
- Private Money Lenders
You might be surprised that many successful real estate investors get started with little or no money. They become successful because they are educated, resourceful, and driven to learn as they go.
Of course, if you don’t have a sizable amount of disposable cash, the idea of investing in real estate seems unlikely. The truth is, there are dozens of ways to go about financing your entry into real estate investing, and most of them are totally accessible to everyday people, even if they have no experience in real estate.
The barriers that most potential investors meet are often self-imposed because the balance of risk and reward can be intimidating to act on. But if you can get past these barriers and embrace the possibility of flipping homes or building a portfolio or rental properties, getting started is really as easy as making a choice to do so—even if you have no money.
How to Invest in Real Estate with No Money
1. Seller Financing
If you can’t get a mortgage from a traditional lender, you don’t have to give up on the idea of financing an investment. Sometimes you can explore the idea of seller financing.
Seller financing is easiest when the seller owns the property free and clear. Essentially, the seller will sign over the property to you, and provide the loan for purchasing it as well.
Let’s say, for example, you have been eyeing a $200,000 investment property, but only have $5,000 saved up. Instead of going to the bank for a 30 or 15-year mortgage loan, you can go to the seller and strike a deal. You will pay the seller $2,000 every month until the principal $200,000 is paid off, along with $15,000 in interest. You could have the home paid off in nine years, or perhaps work out a balloon financing arrangement where you pay $2,000 a month for three years and then pay off the remaining balance in one payment. Whatever the case may be, the deal can be arranged so that the investor gets the property without having to secure a loan, and the seller gets more because they’ll receive interest that a lender would typically collect.
2. USDA Loans
The aforementioned seller financing option does require a little bit of money to get started (in most cases, anyway). But what if you really, really don’t have any money? Then, you might consider something like a USDA loan.
A USDA loan is specifically created for buyers with poor credit and low income. USDA loans have no down payment, and the monthly mortgage payments are restricted to 29 percent of your monthly income or less. Interest rates on these loans can be as low as one percent.
If you’re wondering what that catch is, it’s that USDA loans can only be used to buy property in specific areas—most of which are rura. And you have to use a USDA loan for a primary residence.
But here’s the thing: a primary residence can be a home that’s a duplex, triplex, or quadplex. You can live in one unit and rent out the other units, making yourself the owner of a multifamily property with multiple income streams. This is a common way for many real estate investors to get started.
If a USDA loan won’t work, there are also FHA loans, but these loans do require a down payment. However, if your credit score is at least 580, you can likely get an FHA loan that only requires a 3.5 percent down payment. One other thing to consider is that USDA and FHA loans are not serviced by the government—they are backed by the government. As such, the borrower needs to pay for additional mortgage insurance that protects the lender in the event of a default. You can plan on paying an additional one to two percent of the initial loan amount. This charge isn’t technically an insurance premium, since USDA loans do not require mortgage insurance. Rather, it’s called a guarantee fee, and its annual amount is (usually) split into monthly payments that accompany the mortgage.
3. Real Estate Crowdfunding
Another option is to engage in real estate crowdfunding. Crowdfunding involves collecting donations from a diverse stream of sources, often using a fundraising platform like Kickstarter or GoFundMe. However, when it comes to real estate crowdfunding, you will have to use a different platform. This is because you are not collecting donations—you are collecting investments from backers.
WeFunder, Seedinvest, and StartEngine are just a few of the most popular real estate crowdfunding platforms. If you decide to go the crowdfunding route, it’s important to have a real estate attorney help you set up the framework for collecting investments, because there are legal considerations you must take into account when creating a limited partnership with other investors.
4. Lease to Own
A lease to own arrangement is similar to owner financing. In this scenario, though, you rent a property from the owner, and your rent money (or a portion thereof) goes toward its eventual purchase.
There are different ways to set this contract up. For example, it could be set up as a lease to own until you finally own the property. It could also be set up to allow the renter to exit the arrangement at any time, but forfeit the money they have so far put into its purchase. Another popular setup is for the renter to lease the property until enough money has been put towards a sizable down payment, whereupon the investor will either need to finance the remainder or exit the arrangement.
A Real Estate Investment Trust is sort of like a mutual fund, but with real estate instead of stocks and bonds. Investors buy shares of the REIT and acquire ownership of a portfolio of properties, whether it’s commercial real estate or residential real estate.
In return, the value of the shares will grow, and they will get dividends from the rental income. Fundrise, CrowdStreet, and YieldStreet are just a few of the most popular REITs out there, although there are plenty of others. Many of these REITs do have a minimum investment of $500, but if you only have a few hundred dollars and want to put it in real estate, a REIT can be a great passive income investing decision.
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Have you ever seen a sign while driving around that says something to the extent of, “We Buy Homes for Cash?” You won’t see these types of signs in every neighborhood, but if there is the potential to buy distressed housing in the area, investors will put these signs up and try to collect leads.
It’s true that these investors will pay for the homes in full (assuming of course that the property has passed a building inspection satisfactorily), but many times the money is not theirs. What they are often doing is wholesaling real estate.
Wholesaling real estate is not like wholesale in retail. Rather, wholesaling real estate involves finding a property with a motivated seller and locking them into a unilateral contract where you (and only you) have the right to buy their home—but not the obligation.
In return for locking this right down, the potential buyer will often need to put down earnest money, which could be a few hundred or a few thousand dollars. If they decide not to purchase the home, the owner keeps the money. If they do decide to purchase the home, it will almost always be with someone else actually buying the house—usually by assigning the contract to them.
So, as an example, let’s say a real estate wholesaler finds a motivated seller who agrees to sell a home for $180,000. The wholesaler will then find someone who wants to buy the home for $200,000 and assign the contract to them. The sale is completed, and the wholesaler pockets $20,000—all without having to put any money down.
Birdogging and wholesaling are in the same basket. As mentioned, many wholesalers rely on motivated buyers calling because they saw a sign offering cash for homes, and they happen to be looking to get rid of their property for whatever reason.
But sometimes a wholesaler relies on motivated people who go around looking for properties, and then they refer these properties to the wholesaler. These people are called bird dogs, named after hunting dogs who could help their master locate a bird downed by a hunting rifle.
Birddogging doesn’t require any money to get started, just a lot of time and motivation. You might drive around the local real estate market and look for FSBO signs (for sale by owner), since an FSBO without a realtor or real estate agent involved can typically be bought at a lower price since no commissions are involved.
You might put ads out on craigslist or a public message board expressing an interest in buying homes where the mortgage payment has become a burden. If you do decide to go into birddogging, you will refer these properties to a wholesaler or investor, and flipping the information (instead of a property) will become your real estate business.
OPM stands for “other people’s money”, and it’s a commonly used term in real estate investor parlance. This is because many real estate investors actually get their funding from private investors, not institutional lenders.
There have been a number of creative strategies we’ve explored, many of which involve structuring deals directly with a seller. But this one only involves securing the money you need from someone who has it. Of course, there is a bit of an art to that. You really need to know what you’re doing, and real estate has to be more than just a side hustle.
Learning the ropes of OPM can actually be of great use beyond funding a real estate deal. That’s because pretty much every startup relies on accredited investors to get started. An accredited investor is someone with an annual income beyond $200,000 and/or who owns personal assets valued beyond seven figures, excluding real estate property used as a personal residence. If you can actually take people’s money and turn it into more money—whether you do that with physical real estate or an actively managed stock portfolio—you will find out there are a lot of prospective investors who would love to become your equity partner.
9. Tax Liens
Sometimes people can no longer afford to pay their taxes. If these taxes go unpaid long enough, the local, state, or even federal government can put a lien on the property. This means that if your taxes continue to go unpaid, Uncle Sam can take your house.
As it turns out, though, Uncle Sam is not very interested in real estate investing. So, the government auctions off the right to collect this debt to a third party. As payment for this right, the government collects cash from the highest bidder at a tax lien sale. The buyer who purchased the lien on the home will now be able to collect the owed taxes, plus a little extra in interest. If the homeowner doesn’t pay up, the tax lien investor can collect the property.
It sounds like a great deal, right? But working with tax liens as a real estate business requires more hands-on involvement than you might think. This is because distressed properties often involve complications, most usually in the form of additional liens (perhaps from a lender, perhaps from a contractor whose work went unpaid).
Then, of course, there is also the person living in the house, who was once owner but then becomes your tenant. Unfortunately, you can’t just kick them out without going through the proper legal channels, which can take months or even years.
Tax liens can be a great way to build up a real estate portfolio or generate some cash flow, but you need to know what you are doing, otherwise you could enmesh yourself in some complicated situations.
10. Private Money Lenders
This last option bears some risk because it involves going to a hard money lender. One of the issues that people with little money run into when it comes to purchasing real estate is that they cannot get financing for the remainder of the purchase. Many traditional lenders find it risky to lend money when you don’t have as much skin in the game as they do. A hard money lender will have fewer qualms about giving you a loan, despite your lack of equity in the investment. That’s because they charge higher interest rates, and will also take the property as collateral.
You might be wondering how this differs from a commercial lender. After all, won’t a bank also take your home if you don’t make your monthly mortgage payment? While it’s true that you will lose your house if you don’t pay your mortgage, banks are less interested in the value of the real estate itself as an investment. They just want to recoup their loss on the loan.
By contrast, a hard money lender in the real estate business will be very interested in the landed collateral you can offer them. A private money loan makes it much easier to use the real estate itself as leverage to secure a loan—even if you don’t have as much money as you would need for a typical commercial mortgage.
Should I Invest in Real Estate with No Money?
As you can see, it takes some pluck and luck to successfully leverage the methods above. Some of these strategies will involve going out of your comfort zone. You’ll need to contact potential sellers and approach them with confidence. You’ll need to approach potential investors who can fund a project and exude competence. And you’ll often have to think quickly on your feet.
If you’re not feeling like a go-getter right now, you can always keep learning and circle back to the possibility of real estate investing when you feel ready. In the meantime, if you don’t have large pools of capital to invest, there are other things you can do to build up your wealth, like micro investing or some other sort of side hustle.
No Money? No problem! You Can Still Invest in Real Estate
Many people think you have to have money to invest in real estate. And while it certainly helps, there are other resources you can leverage when first starting out, including your time and knowledge. Even big-time investors in the world of commercial real estate use some of these same strategies to strike deals and get things done.
If you want to learn more about all the creative possibilities of real estate investing, join Infinity Investing today. It’s free to get started, and our real estate experts will teach you the real-life tips and strategies to start building a real estate portfolio that generates cash flow!
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