It’s not uncommon for people to hesitate to invest in real estate because they don’t believe they could qualify to carry an extra mortgage, and they haven’t saved up a big enough down payment. And yes, most traditional mortgage lenders require a 20% down payment for investor loans. This is simply to protect their interests, given that non-owner occupied homes (i.e. investment properties) face foreclosures at a higher rate than owner occupied homes.
The good news is that there are several non-traditional ways to invest in real estate that don’t require such a large capital investment or credit qualifying. In fact, some of the non-traditional ways to invest in real estate that I will share don’t require any money out of pocket.
This is a real estate investment strategy that requires you to invest time and energy to find property owners that need to sell their properties, and are willing to sell them at below-market rates. As a wholesaler, your goal is to be the middleman between the seller and real estate investors who have the means to purchase and settle quickly. A typical scenario would be as follows:
You find a distressed property situation – someone that needs to sell quickly. This home will often not be in the best shape, so many real estate agents would be hesitant to list it, because agents often don’t want to have a reputation for listing “as is” properties. The agent would also likely have trouble selling the property quickly, and may not be able to help a borrower get financing on a home in disrepair. The best option for this seller is a cash buyer because there are few – if any – restrictions on how one can use their cash to purchase real estate. If you don’t have the money to be that cash buyer, you can certainly find someone who does. It’s best to find this investor before finding a distressed seller, so that you can truly help the seller meet their goal of a quick sale.
Closing the Wholesale deal!
In this instance, you would write a purchase contract with the seller, and make sure the contract is assignable, meaning that it can be fully transferred to another party. Your profit will be made by selling the contract. For example, if the house is worth $150,000 and the seller is willing to sell it to you for $115,000, you can sell the contract to your cash investor for $5,000. In the end, the cash investor will get the property for $120,000 by paying you $5,000 and then executing the contract to purchase for $115,000.
Use an FHA Loan
People don’t often think of an FHA loan when they think of buying an investment property, but it may surprise you to know that you can purchase a 1, 2, 3, or even a 4-unit property using an FHA loan and putting just 3.5% down. You would still need to credit qualify, but many people start out in investing by using an FHA loan to purchase a multi-unit property and then live in one of the units. The downside is that your tenants are your neighbors, but the big upside is that they are helping you pay off your mortgage and allowing you to invest with minimal money out of pocket.
Land is another area that novice investors don’t understand. My first real estate investment was actually a land deal. The strategy that I used was more traditional in terms of buying wholesale, finding an investor, and then selling it to a retail buyer. The technique I want to share with you is a bit stronger and requires little to no money out of pocket.
I now recommend looking for land that you can pick up for pennies on the dollar. This is typically land where there is a tax lien and the owner has lost interest in maintaining ownership. Now keep in mind, this has to be desirable land that is actually usable, so you might need to consult with a real estate professional if you don’t understand zoning. The idea here is that if you can put the land under contract for 25% of the value and then find an end buyer by offering financing, you can not only make money, but develop a cash flow.
Essentially, you would negotiate a purchase on the land for 25 cents on the dollar. Next you would market the land for sale (at retail price) with owner financing, and ask for a 30% down payment. This down payment can now be used to purchase the property and then all of the other payments you receive are positive cash flow. You would need to use a title company that can do a dual close in order to use the money from your sale to fund your purchase and in this case, you would have to satisfy the tax lien as well.
Tax Lien Investing
When a property owner does not pay their taxes, a tax lien can be assessed against the property by the taxing municipality. The tax liens are then sold off so the municipality can collect the tax revenue. Anyone with the funds can purchase these tax liens and pursue collecting this money along with interest. The typical tax lien will yield between 3 and 7 percent interest, and each state establishes a limit to how much interest can be charged (and it can be as high as 18% or more.)
In the rare event that the property owner does not pay the taxes within the allotted redemption period (which also varies by state), the investor who bought the tax lien has the right to foreclose on the property. Please note that there are many courses out there that lead novice investors to believe that this is a great way to acquire properties for pennies on the dollar, but in reality tax lien foreclosures are rare because people will usually find a way to pay the taxes to avoid losing their property.
Real Estate Crowdfunding
This is a real estate investing model where companies pool investors’ money together, allowing anyone to invest in real estate without having to take on 100% of the financial burden. Some real estate crowdfunding sites such as Fundrise allow you to get started as a real estate investor for as little as $500, and do not require you to be an accredited investor. Here are a few sites that can help you get started in real estate investing via crowdfunding:
- Fundrise – https://fundrise.com/
- Rich Uncles – https://www.richuncles.com/how-it-works
- Realty Mogul https://www.realtymogul.com
Using this model, you simply open an account, make a deposit, and then allocate your investment to a specific real estate project. You can then watch your money grow as the project progresses. There is always a risk of loss, but by working with professionals, you minimize the risk and by only owning a portion of the project, you minimize your potential losses. Lastly, you should know that these are typically longer-term investments.
Air BnB Properties
Surely you have heard of Air BnB, the app that lets you find a place to stay almost anywhere in the world by connecting with someone that has a place available for rent. Owners offer up either a whole house or a part of a house (such as a room or in-law suite) for rent, and sometimes even offer unique properties such as boats, RV’s, or mobile homes.
If you want to cash in on this trend, all you need to do is put your home up – or a portion of it – on the network for others to rent. Many people are using this form of “house hacking” to pay some or all of their mortgage. I have also heard of some people buying homes in highly desirable areas (such as the beach or in college towns) exclusively for the purpose or renting them out on Air BnB.
If you don’t own your home and you are considering renting via Air BnB, it is advisable to check your rental agreement or discuss this with your landlord first, otherwise, it could result in you being evicted for violating your lease agreement.
Now that you know you can start small and leverage your profits for even bigger real estate investments down the road, I hope this helps to inspire you to take action on becoming a real estate investor.
Disclosure: This article is provided as information only and should not be considered as, or relied upon as, legal, real estate, or investment advice. The information provided is deemed reliable but is not guaranteed and its accuracy is subject to change without notice. Anyone who seeks to pursue any real estate investing strategy mentioned in this article should obtain counsel from their own legal, real estate, or financial advisors.
Anthony Kirlew is a lifelong entrepreneur, digital marketer, and personal finance coach. A published author and former mortgage company owner, Kirlew is passionate about consumer financial education. His focus as a personal finance coach is helping people make wise choices regarding what is typically their largest purchase – real estate. He has been featured on several leading financial websites including Money Crashers, Redeeming Riches, and the Wall Street Journal. You can learn more about him at his blog FiscallySound.com.
*David’s notes* Thank you, Anthony, for writing this awesome article about non-traditional ways to invest in real estate! You wrote about some topics I haven’t covered yet, and my audience and I thank you for that!
Start Here to learn about more traditional ways to invest in real estate!