3 ways to invest in real estate without 20% equity
When I first started investing in real estate the up front investment was the biggest hurdle to overcome. I didn’t realize that there were so many alternative ways to get started investing that didn’t require 20% equity to get started. Below are just three options that I’ve used in the past and might be helpful for you as you get started investing in real estate! ⠀⠀⠀⠀
Owner Occupied Investment⠀⠀⠀⠀⠀
This is a great way to get started investing in real estate because it utilizes the smallest down payment with owner-occupied financing (zero to 5% down). Once you’re in a property, you can make upgrades over time with the goal of selling the property down the road for a profit or turning it into a rental property. You can also rent out rooms to start making money right away!
When I bought my first house in Casper, Wyoming, I spent time and money to remodel the unfinished basement, then rented it out to a friend. This allowed me to build equity in my home while also having someone else help pay my mortgage!
For my current home in South Dakota (before Pepper came along and while Levi was working on the road) I rented a room out to two different people at different times. Their rental income paid for a third of my mortgage! Even further, we rent our entire home during the Sturgis Rally and have used that money to pay for finishing our basement (and therefore increase the value of our home).
Lastly, I worked with a client earlier this year to buy his first house. We had many conversations about how a house can be an asset that appreciates in value and even makes you money (compared to depreciating assets like cars). He’s now renting out two rooms which more than covers his mortgage and is allowing him to save up for the next investment.
Partner Up
Is there someone in your sphere also looking to get started investing in real estate? Splitting the upfront costs may allow you to get started sooner. Or is there someone who has the capital but doesn’t want to do the manual labor or find the deal? What can you bring to the table that is of equal value?
For our flip house in Rapid City, we partnered up. Our partner provided the financing and we provided the manual labor / management of the job. We kept our partners updated weekly about the progress on the house but they had very little to do with the day to day construction. Win win. They had the money but not the desire to do the work, we didn’t have the money but could manage the construction.
For our spec house in Deadwood, we partnered up 50/50. We split the upfront investment right down the middle (equal money to purchase the lot) and we’re all on the construction loan. While our construction company is doing most of the construction management, just Levi and I might not have qualified for the construction loan with some of the other projects going on. But having our partners also on the loan allowed us to take on another project. (This is important to note if you’re self employed like us. It’s harder to get a bank to finance you when you’re first starting out, adding a partner with a bit more financial history can make all the difference.)
After we finished our two spec houses in Colorado, we had some investors approach us about partnering up on two more. We had the deal, the contacts, the proof of success, they provided the money. “Value” is more than just the dollar bills. Sometimes finding the deal itself is worth more than the money to fund it.
Hard Money
Hard money lenders provide the cash you need to buy a property without financing. They can finance a deal that wouldn’t qualify for traditional financing while you remodel it (ie. a REAL fixer-upper), then you can roll into a mortgage later. Hard money can also allow you to act quickly on a deal in a competitive market with an all-cash offer. Generally, the interest rate is higher but it’s another option that allows you to get started with little to no money down.
As mentioned previously, we partnered with a hard money lender for our flip house in Rapid City. We used this money to purchase the home as traditional financing would not work given the rough condition of the home (this is the case for most foreclosure properties). We also used this money to finance the construction and remodeling of the home.
This has been our only experience using hard money but over the years, I’ve had some investors reach out saying they would be interested in providing hard money. I haven’t found a deal yet where I’ve wanted to take advantage of those offers but I know one will pop up eventually and it will allow me to act quickly on a good deal.
Have you done any investing? What other creative solutions have you found when financing a deal?