Traditionally, most investments in real estate involve having a decent chunk of cash. Although you can sometimes purchase a property with zero money down, it’s not easy. Not to mention that it leads to a higher monthly mortgage payment, which can make it more difficult to achieve positive cash flow.
Fortunately there are a few ways to invest in real estate without ponying up a lot of money upfront. Even though these don’t offer as much control as you may like, it’s a good way to get into the market to build up capital.
Investment in Real Estate #1: Crowdfunding Sites like Groundfloor
Groundfloor is pretty cool. Here’s how the process works:
- Someone decides to either purchase a residential property or fix one up to flip.
- They go to Groundfloor with a business plan, seeking funding.
- Investors who are members of Groundfloor invest money to fund the project. They can donate anything as low as $100.
- Once all of the funds are raised, the business owner uses the money to buy or fix up the property.
- The entrepreneur repays the money to Groundfloor, who takes a cut and gives the rest back to the original investors.
It’s a win-win-win. The investors are able to invest money in a property without too much risk. The business owner gets the financing required to buy or flip the property. And Groundfloor makes money by handling the process.
You can partake on either side of the coin. You can either use the site to raise money for your investment in real estate, or simply add funds to help pay for someone else’s new venture.
Robert Allen once said “You can actually borrow your way to wealth.” Sites like Groundfloor make that possible for all levels of investors, even if they have trouble getting money at the bank. But being on the other side- the lender of money charging interest- isn’t a bad thing either.
Investment in Real Estate #2: Real Estate Investment Trust
An REIT is a chance to invest in a company that owns and manages a portfolio of real estate investments. According to reit.com, they are usually sold on the stock exchange.
There are certain regulations an REIT must follow to be considered an REIT. These are to protect the investors, as these are usually people that are considering REITs to diversify their portfolio.
Investors also love REITs for the dividends. People who are on a fixed income and not looking for fast growth will often use REITs so the dividends could provide regular cash flow. Regular cash flow without all of the risk associated with owning and managing a property yourself? Not a bad deal at all.
The biggest downside is the lack of control. But if you are new in the world of real estate and have never managed a property before, this is a good way to get some money into the market without excessive risk.
Investments in Real Estate #3: Get a Partner(s)
“Finding good partners is the key to success in anything: in business, in marriage and, especially, in investing.” -Robert Kiyosaki
My uncle Jason didn’t have enough money when he was younger to buy a beach condo as a vacation home. He was just getting started in his career and had a young family.
But when he got a few other families involved (his in-laws,) he found he would easily be able to afford his portion. This was great because he didn’t have to worry about renting it out all summer long to help pay for expenses. Instead, his biggest concern was scheduling it ahead of time and making sure he wasn’t trying to use it the same week as his in-laws.
It’s obviously a little different when you’re talking about investing in real estate as a business, but the idea is similar. Being responsible for all of the costs by yourself is tough. But if you can share the burden with someone else, it will be easier to come up with the money you need to buy a rental property.
There are a few ways to find real estate investing partners:
Friends and family – do you know anyone who is financially savvy? They may be interested in going in on an investment with you. Especially if you make a strong case that your venture would be profitable.
Investing clubs – the power of the internet makes it easy to find other people nearby who invest in real estate. Just searching on Google is a start, but the best place to check out is Meetup.com. Every large city will have some kind of group that meets to discuss real estate investing. And if you find that your town doesn’t – go ahead and make one!
Property managers and real estate agents – do you know anyone that works in the real estate industry? Chances are good that they know a number of people interested in investments in real estate. Just know what kind of value you bring to the table when you talk to the investor. Have you already found a great property? Are you great with your hands, meaning you can do all of the labor to flip the property yourself? The investor will want to know how you can help the partnership.
Investment #4: Use What You Already Have
We put an article together on how to rent out your house. That’s how a lot of new landlords get started, because they don’t have to worry about getting another mortgage. Instead they can just go rent a different home for a while, and find tenants for the home they already own.
If you aren’t willing to scale down for a while to rent out your home, another option is to just rent out part of your house. Do you have a finished basement? How about a big back yard where you can put a tiny house? What about that room above the garage? Can you make it a small apartment?
Depending on what you already own, you may need to invest a chunk of change to finish the basement or build that tiny house. But the cost would be a fraction of what it takes to purchase another house, and you may be able to get a loan from your existing mortgage lender to cover the upgrade.
Once you have a place to rent out, you can either try to rent it on a longterm contract or use sites like Airbnb. Even though sites like Airbnb may not provide the same kind of consistent cash flow as renting it long term, the benefit is you can choose when to rent out the space and you’ll get paid more per night.
Perhaps the best part about using this method to get started in real estate investing is that if you rent the unit out long term, you get practice being a landlord without having to learn the hard way with a bigger, more expensive property.
Real Estate Investment #5: Tax Liens
Last but not least, you can choose to purchase tax liens from your local government. The basic idea is that you’re buying the right to collect taxes from a homeowner that’s behind on their property tax bill.
When the payments are made, you collect with interest. If the payments are not made, you have the right to foreclose on the home, making it now your property and responsibility.
This method does have risks, and most real estate investors don’t get involved with tax liens. But if you’re willing to learn about the process and undertake the risk, you can purchase these liens without a lot of cash.
Getting started in real estate investing isn’t easy. There’s a huge learning curve, on top of the fact that you need some form of capital. But these investments in real estate can help get you in the market without taking on a huge mortgage, making them attractive options for those who are risk averse.