With how much you hear about investing on the news, it’s often surprising how much real estate is overlooked. This is especially odd considering that most millionaires agree that real estate is still the best investment for all types of investors.
One of the biggest advantages of real estate is that there are so many options to choose from, and nearly anyone can get started. All they need is the right funding. Let’s talk about how to become a real estate investor with limited cash!
Choose an Investment Strategy
To determine what type of funding will be best for our particular investment, we need to understand the different investing strategies available. Buying real estate for the sake of profit can come in many forms. Here are a few of the most common strategies.
Renting
Buying a turnkey rental property is arguably the most popular type of real estate investment available. The reason it’s called a “turnkey” property is that everything is already ready to rent, so all you have to do is “turn the key”.
Turnkey properties are more expensive to buy upfront, but you can start earning rental income right away, and there’s likely to be a limited need for maintenance or repair expenses early on. While it is more expensive to start, these investments tend to be the safest and last the longest before requiring any major repairs.
Also, for long-term profitability, this is arguably the best option. Not only could you receive a 100% return on your property in 5 to 10 years just from rent, but you’ll still have the property to resell whenever you choose!
Flipping
Flipping properties is very popular and the strategy comes with a potentially high-profit margin at the back end. Essentially, you buy a house that’s in need of renovations (not always), put in the work, and resell it for a profit. This requires some market research, a thorough inspection, and a wise choice of location to maximize profits.
Let’s say you buy a house for $100,000 that needs $75,000 worth of work. If the town where you’re buying sells similar houses for an average of $250,000 but the one you bought is near the highway or public transportation stop, you could potentially resell it for $300,000 or more. This would leave you with a $100,000 profit or more, after closing costs and everything else!
In some cases, a flipping investor may just buy a nice, up-to-date house in the middle of winter, wait until the spring, make some basic upgrades, and resell it in the summer. Sometimes, market fluctuations are enough to make a profit.
However, that can go in the other direction too, as there are plenty of potential risks involved in flipping houses. The market could shift, you may need an unexpected repair, or you may not find a buyer. Of course, there are ways to maximize your chances of profiting, but these are risks to keep in mind!
Selling (Condos)
Condos are a great way to make a large profit on the backend. In some cases, you could earn consistent income afterward. However, you would have to create a more involved business to achieve this.
For example, some condo developers will launch an HOA or maintenance program that people living in the condos can buy into for a monthly fee. With or without any ongoing fees, condos can be quite profitable.
It’s the same business concept as producing an item wholesale and selling it retail. Building a dozen (or three dozen) condo units is a lot less expensive per unit than building one. For that reason, the more units you build, the higher your potential profit margin.
Let’s say you spend an initial $1 million on building a dozen condos after all expenses are covered (selling fees, interest rates, etc.). That works out to $85,000 per unit. If you sell each for $170,000, you’ve doubled your investment.
You can see why that’s such a popular investment. Now, building that many units for so cheap may not be as feasible now with rising interest rates and construction costs, but you get the point. With the right financing, anyone can get started on a project like that!
The BRRRR Method
BRRRR is an acronym describing a 5-step process that’s supposed to maximize the profitability of a real estate investment, no matter how small. Ideally, the BRRRR method will allow nearly anyone to start and grow a real estate portfolio from scratch. The acronym is “buy, rehab, rent, refinance, repeat”.
In a nutshell, you buy a fixer-upper and put in the renovations as if you were going to flip it. Instead, you rent it out, do a cash-out refinance on your loan, and use that money as a down payment on another property.
If it works out, then this is a very affordable way to build a real estate business as a beginner investor. All you’ll need is 15% to 20% down on a fixer-upper and to secure funding for the renovations, which we’ll discuss shortly!
Crunch the Numbers
Take a look at the market in your area and see what homes are selling for. You may find more advantageous properties outside of your town, so do a little research and see what homes are selling and renting for in the areas you want to pursue.
Once you’ve decided what type of investment you want to pursue, you can use a rental property calculator and adjust it to your specific needs. This will help you determine the funding you’ll need to start, renovate, and pay for services (property management, closing costs, etc.). You can revisit this tool when you find specific homes within your budget and calculate the costs and income.
Remember, investments rarely work out the same way they do on paper. Always plan on the higher end of costs and make sure you’re still “in the green” just to be safe. For example, adding an extra $2000 for maintenance costs in your first year is a good idea just in case.
Always factor in the cost of insurance, property taxes (which are public records), mortgage, maintenance, and management services, if applicable. From there, don’t assume that all of your units will be occupied every month and determine your earning potential!
Find the Right Financing
Once you know what type of investment you want and how much you’ll need to get started, you’ll need to acquire funding. Whether you have enough for a down payment or not, here are some of the most popular options for real estate funding.
Investments
Private investments and crowdfunding are great ways to get the money you need to get started. However, they’re also expensive. You will have to give up some of the equity in the home, which will cut your profits substantially.
Also, if you’re crowdfunding, you may have to pay for platform fees, web design, and attorney fees. On top of that, you’ll need to learn about securities law and stay compliant with all investor rights laws. However, if you can’t obtain loans and you don’t have the cash on hand, this can be a decent way to acquire the funding you need.
Mortgage
Mortgages are the time-tested strategy for acquiring funding for real estate investments. You’ll need a certain amount down (often 20%), a stable income, and decent credit to land a mortgage. Once you have it, you’ll likely find the lowest interest rates possible, and you won’t need to share the profits like you would with an investor.
However, mortgages are not perfect. You will have to continue making payments even if your units are unoccupied. Also, depending on the lenders’ policies and your type of investment, there may be extra fees involved that could cut into your profits.
Moreover, these are also large commitments of 20 to 30 years. If you’re planning on doing a fix and flip or selling the property, then you may not want a mortgage hanging over your head.
Hard Money Loans
When it comes to the BRRRR method or securing funding for a construction project, a mortgage simply won’t cut it. You could be penalized for paying off the loan too early if you flip the property, which could seriously harm your investment and future investment prospects.
Instead, if you need cash for flipping, building condos, or anything else, we’d recommend 100% hard money financing. You’ll get the cash you need to spend with no questions asked.
Learn the Basics
Whether you’re flipping or renting out the property (or both), the more that you learn to do yourself, the better. A landlord has to know a wide variety of skills including basic home repairs, budget management, and tenant/property law. On the other hand, an investor trying to flip the house should be pretty handy.
If you’re investing in a rental property, then we suggest either taking a course or doing plenty of research.
Talk to and learn from other landlords and make sure that it’s right for you before going into it. There are property management companies that can do this work for you for only 8% of your rent, but if you want to make the most out of your investment, learning the basics can save you a lot.
For a flip, condo, or BRRRR investor, learning some construction could save you tens of thousands of dollars, if not more. The skilled labor costs required for renovations are high, so shaving any costs can make a world of difference. Even doing some basic landscaping, painting, and hardware replacements could save you thousands on costs!
Find the Right Agent
In today’s market, you can’t buy a house without a real estate agent. Without one, you’re not going to get very far, as homes are being sold at a record pace, often above the asking price.
However, you don’t just want any real estate agent. Find an agent that specializes in the type of investment property you want, and feel free to ask for references. Checking online reviews is helpful, but contacting other investment buyers will give you more specific information, and you can ask whatever questions you’d like!
Get a Thorough Inspection
Find an inspector that you trust. Read reviews, ask for references, and ask people you trust to refer an inspector to you. You want them to be as thorough as possible since this is one of the biggest financial decisions of your life.
After an inspector looks through the property, take a thorough look at the feedback before making your decision. Large repairs like a roof or anything structural could cost tens of thousands of dollars. If you’re willing to make repairs, try to stick to the basics to save money if possible!
After you’ve had an inspection, feel free to call a construction company for a quote if you intend to pay for renovations. The last thing you want is to take out a mortgage only to find out that you can’t cover the cost of construction. Remember, the more that you do yourself, the more you’ll save, but it’s still good to have a quote ahead of time!
Become a Real Estate Investor Today
Now that you know how to become a real estate investor and get the most out of your investment, why wait? The sooner you get started with your investment, the sooner you can start earning. Be as quick as you can, but always get a thorough inspection, talk to the experts, and make informed decisions!
Get started with your new investment today and stay up to date with our latest investment tips for more information!
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