NEW YORK – Most people believe you need to be “rich” to invest in real estate. The fact of the matter is that you don’t need to be rich. You just need to be smart with your money and willing to invest it in an appreciating asset.
There are many ways to invest in real estate, some that require more money than others. Here’s what you must know about investing in real estate and the money you’ll need.
Do you need a lot of money to invest in real estate?
No, depending on how you do it, you may invest in real estate for as little as 3% of the sales price. Some borrowers may even get away with no down payment if they qualify for specific types of financing, such as a VA loan.
How much money you need depends on the type of real estate you invest in and how you’ll manage the property. Here’s what you must know.
Different ways to invest and how much you need
It used to be the only way to invest in real estate was to buy a house, fix it up and sell it. While that’s still a possibility, and many investors do it, there are also other ways to invest in real estate, including buy and hold, which is the most popular way.
Buy and hold real estate
When you buy and hold real estate, you are the homeowner and the landlord. You rent the property out to tenants of your choosing or that are already in the property if you bought a turnkey property (property with tenants in it).
When you are the landlord, you manage all aspects of the property. This means managing its maintenance and repairs, paying the taxes, and homeowner’s insurance. You are the owner, just as you would be if you lived there, except you rent it out and earn cash flow.
You can use the cash flow to offset the cost of the mortgage, which helps reduce the amount needed to invest in buy and hold real estate. You can leverage your investment by investing 3% – 30% down and investing in something worth much more money.
So how much do you need to invest in buy and hold real estate? It depends.
If you have great credit and get conventional financing, you’ll need 20% of the property’s sales price. If you have less than perfect credit or other ‘risky’ factors, you may need a larger down payment to offset the risk, but you may be able to secure financing that helps you leverage your investment.
House hacking is a popular way to get into real estate investing without a large investment. Rather than buying an investment property, you’re buying a property for you to live in, but also units to rent out. It works best with a multi-unit property but only works on properties up to 4 units.
Here’s how it works.
You buy the property and live in one unit. You get owner-occupied financing because you live in one of the properties, but you can rent out the other units. The cash you receive from renting the other properties you can use to pay your mortgage, essentially allowing you to live in the property for free.
You can use the rental income to cover the maintenance costs, repair costs, taxes, and insurance too. Any money left is your ‘profit’ which you can use to pay the mortgage down further, invest in other properties, or as income for your everyday costs.
How much money do you need to house hack?
Like a buy and hold, it depends, but typically you’ll need less than a traditional investment property. Since it’s an owner-occupied property, you can secure FHA, VA, or even conventional financing with a minimum down payment of 3% – 5% depending on the loan program.
Fix and flip
If you don’t consider yourself the ‘landlord’ type, consider a fix and flip. This type of investment requires a different strategy since you won’t hold the property. Most fix and flip investors buy a property and sell it within six months to earn a quick profit.
The key to making a fix and flip property work is you must find an undervalued property. This usually means a foreclosure, short sale, or abandoned home that needs a lot of work and probably won’t qualify for financing.
You’ll either need all cash to buy the home (the most costly option) or find other financing options, such as a hard money loan that focuses on the property’s potential capital versus its current state.
On top of the money needed to buy the home, you’ll need money to fix it up. How much you need varies depending on the property’s condition and what it requires. If you use any ‘standard financing’ such as the FHA 203K, the lender will tell you what you just fix up to bring the house up to code.
So, how much money do you need to invest in a fix and flip?
It varies by house. You could find a super cheap house that doesn’t need a lot of work or a higher-priced house that needs a lot of work. Know your budget and what you can afford as far as renovations before choosing a fix and flip home.
If you want nothing to do with owning real estate but still want to take advantage of its earnings, you can invest in crowdfunding.
Much like other crowdfunding options, you invest money with hundreds of others. The fund manager uses the funds to help a buyer finance the property or to invest in a property’s equity. If you invest in the debt, you’ll earn prorated interest on your investment. If you invest in equity, you’ll earn a prorated amount of rental income based on what you invested.
How to tell if you can afford to invest in real estate
Since you don’t need a certain amount of money to invest in real estate, how do you know when you can afford to buy a home and invest in it?
Here are a few telltale signs:
You have disposable income after paying the mortgage on your primary residence and your other monthly obligations. Your disposable income is the income you can ‘do what you want with’ since all your obligations are covered. This includes things other than bills – such as groceries, gas, medical needs, etc. It’s the money you want to invest or don’t need to be committed to other obligations.
You are looking to diversify your investments. If you are invested in the stock or bond market and want to diversify your risk, real estate could be a great way. Whether you have the liquid assets to invest in real estate or you have to sell existing assets to buy real estate, it’s a great way to diversify your risk.
When you invest in real estate, you don’t have your ‘eggs in one basket.’ If you’re saving for retirement or another big goal, this is important. If you have ‘extra’ money to invest, you can save up for a down payment on a house, buying either a turnkey property or a property that you turn into a rental.
You are ready to handle the obligations owning another home brings. Owning a home means more than buying a house. If you are a landlord, you’re responsible for all maintenance and repairs. This includes big things that could happen like the house needs a new roof or a new A/C unit. Owning a home also means you’re responsible for the real estate taxes and home insurance. The key is to make sure you can afford this without your rental income. There’s no guarantee a house will always have tenants, so you need to be sure you can cover the costs yourself without causing financial issues.
You’re ready to invest in your future. If you haven’t saved for retirement or other future goals yet, but want a way to ensure you’ll have the finances needed, you may be ready to invest in real estate. Once you’re sure you understand all the obligations it comes with, you can invest in a property understanding what you may owe.
Investing in a home is a big decision, but when you’re ready to invest in your future, you’re more likely to do what’s needed to handle the house no matter what happens with your tenants.
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