Starting Real Estate with Little Money?

In the history of the planet, probably nothing has crushed more real estate dreams than the illusion that one doesn’t have enough resources to get started and how to get started in real estate with little money.

In reality, I’m talking to people all the time who don’t know that investing in real estate without getting the absolute, 100% purchasing price of a property is completely feasible. They look at a $100,000 property and try to do the math in their mind, saying, “Well, if I saved $100 a month from my work, I might start saving 83 years from now. But that’s never going to happen because buying real estate is only for the fortunate rich.

Not that!

Enter your Leverage

Leverage is a financial concept that essentially involves using a limited amount of power to produce much greater returns. In real estate, leverage usually comes in the form of a loan. While a loan of this type might come from various outlets, the procedure is very similar. The real estate owner shall make a minimal down payment, the seller shall pay the remaining balance of the land’s purchase price, and the owner shall pay the seller a small sum per month before the debt is paid off.

For e.g., I could think of the same $100,000 house but get a bank to lend me 80 percent of the purchase price. They’d be offering $80,000 via a bond, and I’d have to come up with only a $20,000 down payment (plus closing expenses, which I’ll cover in a moment).

Let me reiterate using this strategy. I just need to save up to $20,000 to buy the property instead of the whole $100,000 selling price. Yeah, I’m going to have to pay the bank a certain sum every month for several years, but if I’ve done my calculations right, I’m going to make a lot more money every month than I’m going to spend on that loan payment. Granted, saving $100 a month will also take several years to save a $20,000 down payment, as I described in my previous example. Still, there are other methods possible for having even more leverage or seeking lower-priced homes. In the later chapter of this novel, I’m going to address these techniques.

Yeah, this is pretty straightforward stuff, but you would be amazed at how many potential players don’t know how the game is played.

Leverage, of course, maybe both a blessing and a curse. The more leverage you utilize, the greater the risk that you might be taking. For e.g., if you paid 100% cash for a home, you wouldn’t have to pay for a loan every month, then a three-month vacancy on the home wouldn’t matter as much. And if you rented a home with just 5% down, and the value of the property fell by 20%, you’d be “underwater” on your debt, which means you’d owe more money to the home than its value. This, in fact, restricts the potential choices and can make selling, refinancing, or doing just about something else about the property very challenging.

In reality, leverage was primarily the key cause of the housing crisis and default crash on the market in 2007 and 2008. Homeowner Hank bought a home for $100,000, using 100% funding and putting $0 on the house. When the valuation of the property fell down to $80,000, and Homeowner Hank lost his employment, he couldn’t sell the property because he owed way more than he could receive. The bank wanted $100,000 to be successful, but the most Hank could have recovered from selling the property was $80,000. As a result, Homeowner Hank — like millions of others — allowed the bank to foreclose and seize the property.

What’s the Magic Number?

So, was it the leverage to blame? Are we expected to pay 100% for rental properties? What’s a magic number?

I would like to reframe these questions and push you to think about them in a completely different way. Rather than worrying about how much money to put down for a house, I want to inspire you to ask, “How safe can I be? “There are ways to improve your defense when you use leverage, so let me cover the two key aspects.

Next, the down cost on the property is not as relevant as the price you receive.

To explain this, let me ask you a simple question, “What of the following is riskier:”

You buy a house for $100,000 and decrease it by 30% while securing a loan of $70,000;
I buy the same house for $70,000 with 0 percent down, so I get a $70,000 deposit.

Who’s really at risk, then? Although our loans are the same, I’d say you are more likely because you’ve spent more cash. I just did the first job of paying $70,000, and you did not do it. Instead of a down payment, I leveraged my imagination.

Secondly, awareness can help to reduce the possibility of debt when investing in rental assets. The more you understand the business, your investment, and how to handle the investment, the lower the risk of an error. For example, if you math appropriately when you purchase an investment property and realize that a certain proportion of the year needs to be spent on the property, the vacancy won’t adversely affect your income as it happens. It only belongs to the company. Your experience will help to ensure that your investment(s) do not go wrong.

Two-Faced with Traditional Lending Techniques

Maybe now you can see why I couldn’t address the query “How much money needs to be spent on rental accommodations?” however I don’t want you to do anything without a decent amount, so encourage me to give two of the more popular scenarios to start with little money in real estate.

Home Hacking

You will get a bank loan for as low as 3.5% through the FHA loan scheme if you intend to buy and live in a small multi-family property of between two and four units. This technique, which is known as ‘home hacking,’ is an excellent method for people who have just recently started out with property in terms of their limited cash and expertise.

Conventional Borrowing

A traditional loan is a loan that follows the stringent requirements of the government. For rental assets, most banks require a minimum 20% down payment. Some banks allow less, in some cases 10%, whereas other banks demand more, for example, 25% or even 30%. Each bank has its own, but it should be possible to receive funding for about 20% less, as long as you are entitled to such a loan. Understand, though, that the volume of the dollar or the ratio of diminished payments is not as relevant as the surface definition.