How to get involved in Real Estate and start a business around it with no money

Why You Should Consider Real Estate Investing

Real estate is the I.D.E.A.L. investment and has many benefits. When you own investment real estate, you make money from income, depreciation, equity build-up, appreciation, and leverage.

And I also love that real estate investing is a hybrid between a small business and pure investment. While not always easy, it is possible to start and grow a real estate investing business from scratch.

Then once your business matures, you can live off your investment income for the rest of your life. And that means work becomes optional and you can do whatever matters most with your time.

Sound good? Ready to get started?

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4. Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is best for investors who want portfolio exposure to real estate without a traditional real estate transaction.

A REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, like any other stock.

A corporation must payout 90% of its taxable profits in the form of dividends in order to maintain its REIT status. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits and then have to decide whether or not to distribute its after-tax profits as dividends.

Like regular dividend-paying stocks, REITs are a solid investment for stock market investors who desire regular income. In comparison to the aforementioned types of real estate investment, REITs afford investors entry into nonresidential investments, such as malls or office buildings, that are generally not feasible for individual investors to purchase directly.

More importantly, REITs are highly liquid because they are exchange-traded trusts. In other words, you won’t need a real estate agent and a title transfer to help you cash out your investment. In practice, REITs are a more formalized version of a real estate investment group.

Finally, when looking at REITs, investors should distinguish between equity REITs that own buildings and mortgage REITs that provide financing for real estate and dabble in mortgage-backed securities (MBS). Both offer exposure to real estate, but the nature of the exposure is different. An equity REIT is more traditional in that it represents ownership in real estate, whereas the mortgage REITs focus on the income from real estate mortgage financing.

Pros Essentially dividend-paying stocks Core holdings tend to be long-term, cash-producing leases Cons Leverage associated with traditional rental real estate does not apply

Exchange Your Skills

A buyer may be able to offer skills instead of cash. Accountants, contractors, mechanics, plumbers, doctors, lawyers, and so on, all have tradable skills that would be useful in lieu of a cash down payment.

Assume the Existing Mortgage

Some purchasers can use a “subject to” contract, where the buyer uses the seller’s existing financing for part of the purchase price. Using the seller’s existing financing is especially successful if the current loan has a low interest rate. The buyer receives the title to a property in return for making payments on the seller’s mortgage. Research of the existing loan is imperative, however, in that some loans have a due-on-sale clause, which prohibits the new buyer from assuming the mortgage.

100% Mortgage  

Historically, the process of getting a mortgage was not nearly as straightforward as it is today. Several hoops and hurdles needed to be jumped through before landlords could purchase a property and rent it out.

Related fact: For decades, the national average for a down payment on a home in the US floated somewhere around 20%. In 2021, the average down payment reached an average of 6%.

However, with the introduction of 100% mortgages for buying rental properties, the process has become much easier than before.

A 100% mortgage means no down payment on your mortgage.

Aspiring landlords now only have to take out an interest-only mortgage for 12 months and turn it into a full-priced mortgage after the period has passed.

  • Pros – Gives future landlords a break from paying a down payment.
  • Cons – The risk of defaulting on a 100% mortgage is that the landlord could lose all their equity in the property and pay the cost of selling and buying another home. Many landlords become alarmed by this thought and decide to avoid risk at all costs by not taking out a 100% mortgage.

4. Live-In-Then-Rent

The front of my Live-In-Then-Rent house
The front of my Live-In-Then-Rent house

The Live-In-Then-Rent technique is a close cousin of house hacking. Essentially, you move into a house, get it ready to rent, and then keep it as a rental later on when you move out.

To make this strategy work, you’ll need to buy a more modest house that will also work financially as a rental.

Like house hacking, you can benefit from the small-down-payment loans for owner-occupants. But unlike a house hack, you don’t have to live next door to your tenants!

And because a house is typically bigger than an apartment, it makes this technique more beneficial to people with families.

Doing just 3 or 4 Live-In-Then-Rent properties can set you up with a nice portfolio of rentals for many years to come.

>> Interested in the Live-In-Then-Rent strategy? See my own Live-In-Then-Rent Case Study <<< 

How to learn about real estate investing

Understanding the terms and formulas that are used in investment real estate help you zero in on smart investments. Education also gives you the confidence you need to avoid the analysis paralysis that comes from the fear of making the wrong decision.

  • Books offer affordable instruction in an easy-to-understand format.
  • Online lessons are available with blogs, podcasts, courses, and videos from sites like BiggerPockets, Active Rain, and the Roofstock Knowledge Center
  • Seminars and workshops are perfect for people who want intense, in-person, instructor-led classes.
  • Investment clubs in your local market – like those from the Real Estate Investor Association – offer plenty of networking opportunities with like-minded investors and potential mentors.
  • Real estate schools and university courses offer a way to earn continuing education credits and credentials in a formal classroom.

3. Find The Cash For Your Down Payment Or Investment

At some point, you are going to come to the realization that you have to put away your disposable income so that you can fund your real estate investing dreams. You can do so even if you earn a meager salary, or even if you are a starving college student. You can do this, and the important thing is to begin with the end goal in mind.

You can raise funds quickly by working on your side hustle or following your new budget.

Your Real Estate Investment Plan In a Nutshell

Real estate can be a lucrative option, but you need to make informed decisions and take consistent action. Use the action guides linked above to fast track your real estate investment education, but remember to do your research based on your own unique financial situation to reach your maximum potential in real estate investing.

Have you ever thought about investing in real estate? Does knowing that you can invest in real estate without a lot of money motivate you to get started? Why or why not?

1. Invest in a new home and make your primary residence a rental

If you already own a home, you’re ahead of the game.

One of the more common ways to become a real estate investor is by turning your current primary residence into a rental property.

There are significant advantages to “backing into your first rental property” this way.

  • Traditional investment property loans require a larger down payment and come with higher interest rates. Often times, you can expect a 20% down payment requirement
  • The interest rate on an investment property is generally higher than the rate on your primary residence by a half percent or more

So the investment strategy is: Rent out your current home, and finance the next home you buy as a primary residence (meaning, you’ll be living there full time).

That way, you pay a lower interest rate on both properties. And if you’re still making mortgage payments on that first home, you can use the income you make from rent to cover part or all of the mortgage.

“Be prepared to provide a letter of explanation,” notes Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “It may be requested depending on how long you have been in the original home.”

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1. Online Real Estate Investing Sites

Online investing sites have changed the game in recent years. With these sites, you can own fractional shares of real estate projects. What this means is that you can get exposure to real estate, but you don’t need to come up with huge sums of capital or deal with tenants. This is a strictly passive income strategy.

Fundrise is my top pick in this category because you can start with very little money and you do not need to be an accredited investor. Here’s a link to our full Fundrise Review.

For other sites, you must certify that you have a net worth over a certain amount or make a certain amount of money per year.

How It Works

With Fundrise, you can start with as little as $500. You open an account and select from a number of portfolio options. Fundrise charges a management fee of around 1% per year, which is fairly low compared with other options, and its 2021 annualized return was 22.99%! You can see how my Fundrise account has performed here.

What You Gain

Investing this way, you gain a ton of freedom and you gain exposure to the real estate asset class with very little money or effort. 

What You Risk

You don’t get to really use any local expertise you may have, and you don’t necessarily get the pride that comes from visiting a real estate project that you wholly own, improve, and can see easily. For some people, that’s a big draw to investing the old-fashioned way!

Get Started With Fundrise

Home Equity Line of Credit – HELOC

The HELOC is a loan that allows homeowners to borrow money against their home's equity – the value of their home minus what they owe on the Mortgage. Landlords can use this financing in two different ways:

First, landlords might purchase or refinance a property with the HELOC funds and then rent it out. They can then use the remaining HELOC money as an emergency fund for repairs or other expenses.

Second, landlords could use the HELOC to pay ongoing expenses such as mortgage payments, taxes, insurance, and utilities without worrying about cash flow. This helps landlords avoid taking out a second mortgage which would incur additional interest charges.

One of the great things about a HELOC is that landlords can borrow as much money as they want, and they will receive a set time frame to pay it back. This is a perfect way to invest in a property that needs work because you only need to borrow what is necessary for work on the property and not its total value.

The interest rates are usually pretty low, so this is also good if you want to purchase something with an opportunity for appreciation but don't have all the cash right now.

  • Pros – This option can provide a steady source of income, and it can allow you to buy a property without having to take out a loan or Mortgage. The HELOC loan also covers the initial costs for renovations. It can help you buy property in an area that is not yet crowded and has high growth prospects in the future.
  • Cons – A drawback of this strategy is that there may be penalties or fees if you don't stay within your original borrowing limits. You may have difficulty selling your property if you cannot make payments on your home equity line of credit.

What Is Direct vs. Indirect Real Estate Investing?

Direct real estate investments involve actually owning and managing properties. Indirect real estate involves investing in pooled vehicles that own and manage properties, such as REITs or real estate crowdfunding.

3. Option a Property

A third way to make money in Real Estate investing without money or credit is to “Option” a property. 

How It Works

This type of transaction is similar to a Lease Option, but very different as well. Consider it a Lease Option’s cousin, who is much hotter and more fun.

Here is the simple difference between the two:

  • Lease Option: the seller has agreed to take a monthly payment for a specific amount of time, with a set purchase price to come at some point in the future. I do not accept any less than 5 years for these transactions and try to get ten years. 
  • Option to Buy: the seller is not accepting monthly payments. They have simply given you the exclusive right to buy a property at a certain price for a certain period of time.

Why would a seller choose one over the other?

Let’s look at a few circumstances and reasons that may persuade a seller to decide one way or another.

  • With an Option, the seller can continue to live in the house. At the same time, he/she will continue to make the monthly payment and take care of all maintenance and repairs.  The seller may not want to accept monthly payments, with the idea of someone else is living in their house.  While they may be motivated to sell, the thought of someone else eating dinner and walking around naked where they raised their children may be too much for them to handle. 
  • They may not have the time required for a Lease Option. If a seller is ten months behind on their payments with foreclosure knocking on the door, and you (the investor) don’t want to make up those payments and there is still a TON of equity in the house, an Option may be your only choice, short of paying cash.
  • With a straight “Option” the seller has nothing to lose. You have a set amount of time to buy their house, which you will only do if and when you find a buyer at a higher price than you have an Option for.  In this type of transaction, your target audience is not the B/C credit buyer, but rather the individual with cash or the ability to go to a bank and get a loan.

Why You Should (or Shouldn’t) Invest

The positives for you the investor, are as follows: You are not dealing with tenant buyers, repairs left by tenant buyers, angry sellers, evictions, lawsuits, monthly payments with no tenant-buyer… the list goes on and on. 

The negatives are you do not make any money at all unless you successfully find a qualified buyer within the time allotted in your Option to buy. The seller benefits because they pay no Real Estate commission, and they have the privilege of living in the house while you are trying to sell it.

Avoid Becoming House-Poor

There is a phrase in real estate and finance called “house-poor.” The term describes people who stretch themselves too thin when buying a home and are left without any emergency money. When unexpected events happen, such as a job loss or broken appliance, these homeowners are in such a tight spot financially that it is difficult to recover. Unfortunately, this is all too common when attempting to invest in real estate with no money.

There are a few ways to avoid being backed into a corner financially when purchasing real estate. It is always a good idea to keep your emergency fund separate from other money and not include it in your estimates when buying a house. That way, if anything were to happen, you have funds you can rely on. In some cases reserving your emergency money may force you to make a smaller down payment than you want. Remember that even if you are required to get mortgage insurance initially, you can always refinance down the road when you have more equity in the home.

Drawbacks of Poor Credit

A poor credit score won’t keep you from loan approval, but the interest rates are higher than traditional bank loans. Most interest rates range from 10% to 15%, depending on the lender. Hard money borrowers also have to pay “points,” which are a percentage of the loan. Points can range from 2% to 4% of the total loan amount.

So, you’ll pay heftier fees in exchange for convenience, but that’s okay given the potential profit you’ll walk away with.

Another obstacle is that they may not cover the full cost of buying the property. These lenders usually lend 65%-75% of the current value of the property. Some will lend based on the value of the property after it’s been improved, also known as the "after repair value" (ARV).

That leaves you to fund the difference or find another source of funding to bridge the gap.

Five steps for getting started as a real estate investor

Instead of sharing the fruits of their labor, many investors today prefer to keep the income and tax benefits of directly owning real estate all to themselves.

Here’s how to get started as a real estate investor:

1. Determine your investment strategy

Real estate investment strategies fall into three general categories: 

  • Active: Hands-on real estate investing includes fixing-and-flipping, wholesaling to other investors, finding and managing rental properties yourself, and working as a licensed real estate agent to earn commissions while you build up your investment portfolio.
  • Mostly passive: Investing for recurring cash-flow streams and long-term property appreciation includes partnering with other investors, or purchasing professionally managed rental properties from Roofstock. There is some work involved but the day-to-day management can be handled by a property manager. 
  • Passive: This includes buying shares through crowdfunding and REITs, of a property or property portfolio, that are fully managed.

2. Become an expert in your field

The best way to learn about something is by doing it. However, it’s important to understand exactly what it is you’re doing and why.

The most successful real estate investors are always learning. Real estate courses can be taken online from sites like Udemy and REI, while Roofstock Academy offers a comprehensive educational program for serious investors ready to take their investing to the next level. 

3. Understand the market

In order to really know whether you’re getting a good deal, it’s critical to thoroughly understand the ins and outs of the local market you’re investing in.

Important things to consider include:

  • Fair market property values and whether they are trending up or down.
  • Market rents to know what the true income potential of a property is, and if it will be cash-flow positive.
  • Don’t overpay, because money is made in real estate when the property is bought, not when it’s sold.

4. Have access to plenty of working capital

Renowned real estate investors like Sam Zell and Roger Staubach don’t need to look for capital because people are literally lined up to do deals with them. 

Until you’re ready to join the ranks of the ultra-wealthy, it’s important to make sure you have access to plenty of capital. That’s because investing in real estate sometimes requires more cash than expected. 

Plan on putting at least 20% down for a rental property, set up a separate capital reserve account for repairs and maintenance, and factor in the loss of cash flow created by vacancies and the time it takes to turn a tenant.

5. Learn the local real estate rules and laws

When you’re renting real estate to the general public, the odds are that sooner or later a legal situation will arise. Investors can avoid potential problems and litigation by understanding the local and state laws that govern real estate:

  • Eviction processes vary from place to place and may limit your rights as a landlord.
  • Conducting background checks on potential tenants helps avoid renting to problem tenants in the first place. However, always be sure to treat every applicant fairly and equally.
  • Rental security deposits and prepayments often have their amounts capped by local landlord tenant laws.
  • Insurance coverage for rental property differs from owner-occupied homes and should include general liability coverage that protects you against claims from the tenant or the tenant’s guests.

Start investing in real estate now

Fortunately, you don’t need to be a seasoned real estate entrepreneur to get started in real estate investing.

With interest rates still near historic lows, as well as homes continuing to appreciate, now could be a favorable time to start investing in real estate.

You have financing options. Stop paying rent, living with your parents, or living with a roommate and get out on your own.

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