The average home in the U.S. now costs $219,200.
With a conventional 20% down payment, that's an initial investment of just under $40,000. For some people, that down payment alone is an unattainable savings goal - especially if you already have a primary residence with a mortgage.
But getting into real estate investing doesn't necessarily require you to have that kind of capital. You just have to know where to look and what's available to people in the same situation.
In this guide, we'll tell you all that and more. Keep reading to learn how to get started in real estate investing with little to no money.
The Benefits of Real Estate Investing for Beginners
There are many benefits to investing in real estate with little to none of your own money. If you're a real estate beginner, here are some of the reasons you want to get involved in real estate investing.
First, it gives you an opportunity to test the waters. Whether you're flipping the home or using it as a rental property, you can get an idea of the work involved and what your return will be. And you can do all that with very little to none of your own money invested.
Second, investing in real estate with little to none of your own money leaves your funds available to you for other uses. When you don't have to use your own cash for your real estate investments, it's free for other investment opportunities.
And finally, investing in real estate with no money allows you to get involved in the real estate game without risking your credit or cash flow.
But how do you get started in real estate with no money?
Well, there's no such thing as investing in real estate with absolutely no money. To purchase real estate, there has to be a financial transaction. But if you don't have your own money to invest, the trick is to learn how to use other people's money.
How to Get Started in Real Estate with No Money
Using other people's money to get started in real estate investing means finding a partner, finding a lender, or using one of the many methods we've listed in more detail below. But they all have one thing in common, you need very little to none of your own money to start investing. Keep reading to learn how.
Find an Equity Partner
Entering into a real estate partnership is an excellent way to get into real estate with little to no money. In this arrangement, you find an equity party who helps finance the property you're looking at. Typically, the person with little to no money would find the property, and the equity partner uses their credit score and capital to finance the purchase.
This type of partnership can be structured in many different ways. But whatever way you go about it, make sure that both the buyer and the partner have the terms agreed upon and written down. This will help avoid any complications after the deal is done.
Buy a Primary Residence
With VA or USDA loans, you don't have to put any money down. Check this USDA loan zones to know if you are eligible. Better yet, the credit score requirements to purchase a primary residence with one of these loans are less strict than they are for an investment property. So these loans are easier to secure than one for an investment property, and you can use them to purchase a primary residence.
The trick with this method is that you have to live in the residence for at least one year. Following that year, you move out and turn the property into a rental property. This allows you to get around strict lending rules and get into real estate with little to money.
Enter Into a Lease Option
Renting a home with a lease option is a great way to purchase a property with little to no money. This agreement gives the tenant the choice to purchase the property when the lease is up.
In this arrangement, you pay higher rental payments to the property owner. The excess of your rental payments is then pooled and used to purchase the property at the end of the lease.
One of the benefits of this option is that you're not locked into buying the property. Most lease option agreements stipulate that the property owner has to sell if the buyer exercised their option to buy. But the buyer is not required to purchase the home at the end of the lease if they change their minds.
Buy a Duplex
You can use an FHA loan to purchase a duplex with a downpayment as low as 3.5%. However, to qualify, you'll have to live in that duplex as well. The 3.5% downpayment option is only extended to owner-occupied duplexes.
But having to live in the duplex still works as an investment from the get-go. You can live in one of the two duplex units while renting out the other. You can use the rental payments to pay your mortgage, and eventually, they'll become another source of income.
Look Into Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) is an alternative to hard money loans. If you have enough equity on either your primary residence or another rental property, you might be able to secure a HELOC from the bank. That line of credit can be used to purchase real estate without worrying about closing costs, upfront fees, and high interest rates.
In most cases, you can get a line of credit equivalent to 70% or 80% of the equity on your residence or other rental property. Then, you use the rental payments to pay down that loan. In this way, a HELOC functions like a zero down mortgage in which you get to choose the terms of payback.
Ask for Seller Financing
In some cases, the seller of a property may be willing to provide the buyer with the financing to purchase the property. This is what's called a purchase money mortgage. It involves the seller giving financing to the buyer to entice the sale, and the buyer then repays the seller according to agreed-upon terms.
Alternatively, instead of asking the seller to finance the whole deal, you may ask the seller just to cover the closing costs. Sellers are usually willing to do this in order to sell the home quickly.
With this method, there's a bit of a trade-off. It's likely that if you ask the seller to finance part or all of your purchase, you'll give up your right to ask for a lower selling price. As long as the rental income you'll receive from the property is higher than your expenses (including some cash flow), this usually isn't a problem.
Consider a Microloan
A microloan may not be enough to cover an entire home purchase, but it can definitely help you cover the down payment. These loans are much smaller than a conventional loan from a bank or hard money lender. But that also means you the qualifying criteria are less stringent than traditional loans (i.e. you don't need as high a credit score).
Pick the Right Lender
You no longer have to go to a bank to secure a loan for a large sum. You can also look into hard money lenders. These are groups or private individuals that pool their money to invest in various ventures.
The qualification requirements of these types of loans are usually less strict than that of a bank or other traditional lenders. They're also usually more willing to invest in risky projects.
In turn, that usually means that their interest rates are quite a bit higher and the terms are normally less than 12 months. You'll also be expected to cover closing costs, appraisal fees, and other such costs.
But there are other lending programs wherein you don't have to cover all or most of the closing costs. Some lenders offer you a rebate on your down payment or will cover the closing costs for you. Of course, these also come with higher interest rates.
You may also consider investing in real estate through an investing platform. With a real estate investing platform, you make money through land value increases or through rental payments made by farmers.
More on Real Estate and Investing
Knowing how to get started in real estate with no money is really about knowing how to use other people's money. You can use loans, partnerships, and arrangements such as lease options to start investing in real estate when you don't have the funds yourself. You might also consider buying a duplex or primary residence and starting your real estate investment career that way.
Whatever way you go about it, there's a lot to know about real estate investments. Check out our blog for all the property investing advice and tips you'll need along the way to make more money.
