How to Invest in Real Estate Without Breaking the Bank

September 2, 2021 by Matthew Fraker

Here are a couple of helpful tips for breaking into the lucrative field of real estate investment without substantial upfront costs.

Investing in real estate can be a very profitable opportunity, but it requires patience, like many good things. Real estate can produce returns through appreciation, tax advantages, amortization, and more. If you want to make a relatively quick return in real estate, it is possible through a fix-and-flip, but that also involves more risk. I have spent years studying the metrics behind buy-and-hold real estate investment, so that’s what I will focus on in this post.

You want to start investing in real estate, but you don’t have, or you don’t want to spend the excess cash to do so. Suppose you buy a secondary property the traditional way with the intent of collecting rent. In that case, you will typically need to put at least 20% down, and the interest rate will generally be higher than it would be on an owner-occupied home. The lender may also request a bank statement to verify that you have cash reserves. For these reasons, many people can’t afford to start investing in real estate. However, there may still be a way to invest in real estate if you don’t have tens of thousandths. According to numerous websites, you can build a respectable real estate portfolio, and all it takes is patience and a relatively small amount of upfront cash.

Buying a Primary Residence, and Eventually Renting It:

When you buy a primary residence, you typically put much less down than you would for an investment property. Depending on the type of loan and your credit, you may only need to put 3.5%-5% down. Returns can be further increased if you can buy a property below market value. There are several ways to get a property below market value, and I plan on discussing this in future posts. When considering this strategy, it is essential to remember that it would be fraud to turn around and rent the primary residence immediately after buying it. Attorneys may have you sign a document at closing stating that it is a primary residence. According to My Mortgage Insider, you need to live in the home for at least 12 months, during which period you can save money to buy another property. Before doing any of this, you should check with your lender as you don’t want to do anything illegal. Furthermore, you will want to stay in your lenders’ good graces as you may use them again in the future. Don’t be distressed if it takes you longer than twelve months to save up enough to buy another property. In my opinion, real estate investing is a marathon, not a race. Building wealth through renting real estate takes time, regardless of whether you live in it or not. It is worth mentioning that tax benefits change when you rent something that was previously a primary residence. Either way, you will be well on your way towards your portfolio of properties.

House Hacking:

I first saw this term in the Bigger Pockets blog, where an author and investor named Brandon Turner mentioned it. The concept is very clever, so long as you are okay with sharing space. Instead of buying a primary residence and eventually renting it, you rent out rooms or areas of your primary home. Of course, this works best with a duplex or triplex as you can live in one of the units and rent the others. However, I have heard of people buying a condo and renting a room to a friend. As mentioned, it’s best to check with your lender first, but if it’s a primary residence, you may be able to get desirable financing, at which point the rental income may cover your mortgage entirely. Again, depending on your annual income, it may take years to develop a portfolio of properties using these strategies, but that’s okay! After all, it was Warren Buffet that said, “always invest for the long term.”

The content published in this post and other posts on this site are for informational purposes only and should not be interpreted as investment, tax, financial, or legal advice.