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How to invest in real estate with little or no money

by Corben Grant on 23 Feb 2022

Real estate is commonly seen as one of the best ways to invest your money and grow your wealth and it has become a popular choice for everyone – from big-time investors to homeowners looking to have a bit of extra money for retirement, more and more people are looking to enter the world of real estate investing every year.

However, real estate as an asset also gets more and more expensive every year. In fact, it’s no secret that it’s becoming harder for the average person to fund their real estate investments. With housing prices seeing double-digit increases for the last couple of years, many people believe that they are too late to become a real estate investor and simply do not have the finances to cover the high costs of starting out. 

However, this may not be the case.

There are multiple ways that you can invest in and take advantage of real estate with little or no money, though you can't take advantage of these opportunities if you don't know about them. The most common and popular form of real estate investing is to simply buy a property and benefit from the growth of equity either by selling for a profit or by tapping into your equity through financial options like a home equity line of credit (HELOC).

Another popular real estate strategy is in rental properties, which allows you to grow equity through property ownership while also generating cash flow and offsetting your carrying costs through rental income.

Beyond these methods, however, there are even more options. If you think that you are unable to begin real estate investing for a lack of funds, it may be time to think again. In this article, we will go over some of the less lesser-known options to invest in real estate with little or no money to begin growing your wealth and achieve financial prosperity.

How much do I need?

It may sound strange to start investing with little money, but some strategies make it more possible than it seems.

Now, naturally, you need some amount of funds to start with, but this doesn't necessarily mean you need hard cash on hand. On the no-money end of the spectrum, you will need to tap into some value, but you may be able to leverage your existing assets or get loans with no money down.

The most common example of this would be utilizing your home equity. If you already own a home or other property that has grown in equity, your lender will often allow you a home equity line of credit or a refinance that can help you pull funds for investments from your existing real estate assets.

There are also investment options that do not require you to own the title to any property yourself, such as real estate investment trusts (REITs). These options allow you to pay into larger funds and trusts that own real estate themselves and distribute the benefits to their shareholders and investors.

There are also options like rent-to-own schemes that allow you to build an investment fund while continuing to pay rent that you would otherwise be paying anyway.

Let’s look at some of these options in more detail.

Low-cost real estate investment options that involve owning property

Taking advantage of existing home equity

If you already own a home, you may already have money available to you to begin investing in real estate. Options such as a home equity line of credit are popular to allow homeowners to free up funds for investing. Once you have paid a significant amount of your mortgage off and your home has increased in value over time, lenders may let you borrow money leveraged from your existing property. You will need to pay back any money you borrow on top of interest, but these options allow you to access larger amounts of money without having to sell your home.

Refinancing and HELOCs have become a popular option for homeowners to acquire funds for the down payment and closing costs on a second property or rental property, which then becomes an investment to build further equity or collect income through rentals.

Though you will need to pay interest on the money you borrow, the potential gains from a second property mean that the financial benefits of using this strategy can easily outweigh the money you put in through interest.

Buying a multi-unit property

You don't need to own a dedicated investment property to collect money through rentals. In fact, many investors use a strategy of owning a multiplex that they both rent out and use as a primary residence. This is also known as 'house hacking'.

If you are able to put together a down payment (which is a barrier in itself, though there are strategies to make this easier) you can purchase a multi-unit property and, through rental income, essentially live there for cheap or free by renting out the additional units that you do not live in.

The beauty is that you will still be growing equity in your property, and as you pay off the mortgage, the money you collect through rent will then become passive income.

Partner on a home purchase

By partnering with someone you know who has money, you may be able to make buying a home much easier for yourself. Though you won't need the money yourself, you will need a friend or family member who has enough money they are willing to put in.

The most common example is when a parent helps with a child's down payment, in part or in full, though they cannot legally make the repayment on this gift

You may also work with a partner who may be able to offer you a loan to help with the purchase of a home, who then gets something in return for their initial investment such as monthly payments or a portion of the home's equity.

The only thing to consider is that this loan will affect your debt ratios, so a large enough loan may cause your lender to reject your mortgage. Alternately, You may also be able to use a cosigner on a mortgage that allows the bank to qualify you based on the collective funds and credit history of both borrowers, making the purchase easier for you.

This option will depend a lot on your circumstances and whether or not you can find a willing second party to help you with the purchase, but if you are lucky enough to make it work, it can be an easy way to start off in real estate.

Hard money loans

A hard money loan can help you come up with funds to buy a property if you don't have the money now. These loans are handled through private hard money lenders and do not have the same rules as a regular mortgage from a regulated lender, so you could get a loan with little to no money down.

The downside is that these loans tend to cost you more due to higher interest rates and usually have shorter terms. However, they may be ideal for someone looking to purchase a property with private money for a flip, an area where a traditional mortgage loan is not as easy to come by.

Seller financing

Seller financing is a home buying option where the owner of the property finances the sale themselves. Essentially, rather than getting money for their home upfront from a mortgage lender, they will allow you to pay them directly for the home over time. Because they are not a mortgage lender, they do not have to follow the same regulations such as minimum down payments, meaning you may be able to get a nice deal.

Since this is a less used strategy for sellers, your options for buying a home using seller financing may be much smaller than when buying with a traditional mortgage.

Options beyond owning property

Rent-to-own

Rent-to-own is a scheme that allows you to gradually pay for a property while you rent it. Essentially, you will pay a marginally higher rent payment than a standard rental scheme, and the additional money will go towards funding a down payment on the property. This can be a great option to save passively in order to buy real estate and allows you to live in the same home after you have saved your down payment.

You could simply save the extra money on your own, but for some people who have trouble consistently saving, the framework of forced savings can make the process effortless.

However, given the hot real estate market seen in recent years, rent-to-own properties are becoming less popular in hot markets where it offers little benefit for landlords who stand to benefit a lot more from maintaining their property.

REITs 

A real estate investment trust is an investment trust that specializes in holding or developing real estate and then passing the benefits on to its shareholders. Investors can purchase positions in REIT much in the same way they would purchase shares in stocks or mutual funds, allowing you to reap the benefits of the real estate market with much less starting cash.

There are numerous benefits to investing with REITs. Firstly, they are convenient for anyone who is already comfortable investing in products like stocks. 

In addition, though investing in a REIT does not mean you own property, this can be seen as a good thing. Since you own no property yourself, you do not need to take care of property management and maintenance, making REITs a much more hands-off experience. Finally, REITs offer very competitive returns when compared to other investments like stocks, making them both convenient and effective.

Real Estate Funds are kind of like a REIT, though they usually require a bit more starting cash. With a real estate fund, you get the same benefit of hands-off returns and a portfolio managed by qualified professionals. Real estate funds collect money from interested investors and then put the money towards a real estate portfolio or development. There are many real estate funds, each with their own minimum contribution amounts, allowing you to potentially begin investing with less money than it would take to buy a home.

These options may also allow you to easily free up money by selling your holdings, which is much faster than getting a line of credit or selling a home you own. And, if you grow your wealth through these tools, you may even eventually have enough to sell and put towards your own down payment.

Mortgage-backed securities and mortgage bonds

Mortgage-backed securities (MBS) and Canada mortgage bonds (CMB) are like REITS, as they offer you the ability to benefit from the real estate market without owning any property. MBS and CMBs are essentially securities that are backed by mortgage loans taken out by homeowners, that are bundled by lenders and sold to financial institutions.

Thanks to features of the Canadian mortgage system, such as mortgage insurance and the fact that they are guaranteed by the Canada Mortgage Housing Corporation (CMHC), MBS offers a low-risk place to put your money. This is their main benefit over REITs which may offer higher returns though with more risk.

Is it a good option for me?

It’s no surprise that the most successful real estate investors have a lot of money to work with so that they can make work for them. However, if you do not have upfront funds, these options can be viable to help you take advantage of the real estate market with less money. Ultimately, the viability of each option will come down to your own circumstance.

If you are looking to grow wealth in the long term, something like a REIT or rent-to-own may be a good idea to get started now, though they will grow slower than owning property. Something like working with a cosigner for a personal loan can be viable but may put the lender at risk and put you under more financial pressure than simply saving yourself. Ultimately, growing your wealth through investing can be a long process, but using these low-cost strategies, you may be able to start sooner than you think!



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