Investing With Limited Funds

Short on funds? No worries! There are many ways that investors with limited cash can start their foray into real estate investing.

Even if you’re short on cash, it often makes sense to try to begin your foray into real estate sooner rather than later. For one thing, the sooner you invest, the longer you’ll have for your investment to grow. Most property appreciates in value over time, so getting your foot on the property ladder early on can be a great way to put your money to work for you right away, and ensure that you don’t miss the boat. Another reason to invest sooner rather than later is cash flow. The sooner you begin, the sooner you’ll be able to start generating cash flow every month as the rental income rolls in.

Another bonus of investing in rental property early on is that you’ll be able to grow your portfolio faster. Once you’ve built up equity in your rental property, you’ll be able to borrow against that when obtaining an additional loan for your next property. You should also be able to claim the proceeds from the rental as income as well, which can help you to qualify for your next loan. 

If you’re not able to pay all-cash for a property right now, then there are still things that you can do to get started. Let’s take a look at some different ways you can start investing. Even with limited funds. 

• House Hacking 

House hacking allows you to live rent-free. This strategy involves purchasing a multi-family property and living in one unit while renting the others out. It can also be done in single-family homes, by renting extra rooms or the basement. You might also consider converting part of the home into a rental if space allows. 

While this option requires you to have your own home, it is a great way to get started in investing with limited funds. The extra income you receive can be used to pay the mortgage, allowing you to live rent-free, or at least, helping to make your portion a lot more affordable. 

One of the reasons that house hacking is especially attractive is because with this option, you can obtain owner-occupant financing to help buy the property. It’s a lot easier to qualify for a loan as a homeowner, rather than an investor. You may even qualify for an FHA loan, which means you’ll be able to make a lower downpayment (currently, 3.5%) helping you to get on the property ladder easier. 

• With a Live-In Fix-and-Flip 

Fixing and flipping a house is another great way to get started with investing. Living in the fix-and-flip though, is a twist you might not have seen coming. With this approach, you buy a house at a discounted price that needs some work. You then live in the house while performing the repairs and either sell it for a profit or turn it into a rental at the end. 

A live-in fix-and-flip can also allow you to take advantage of some tax benefits, mainly the 121 exclusion that states that if the home is your primary residence for at least two of the five years before the sale, you are exempt from capital gain tax on the first $250,000 if you’re single and $500,000 if married. 

It is important to note that there are exceptions to this rule and you should be sure to read the fine print or consult an accountant before you start just to make sure you’re clear on the tax implications.

• By Finding an Investment Partner 

If you are strapped for cash and looking to invest in a more traditional property, then you could consider finding someone to partner with, particularly, someone with money. Start by asking friends or family members who may be interested in investing, or expand your network and try to find an equity partner that you can join forces with. Generally, these partnerships are structured so that one party puts in “cash equity,” and the other party puts in “sweat equity.” So one party will usually put in the money for the down payment and secure the loan, while the other party finds investment properties, manages the property, and handles all of the leg work.

Looking to get creative with a down payment?  Consider reading: Creative Ideas for Down Payments, for some creative and helpful ideas to help get you started today!  

• Using the BRRRR Strategy

The BRRRR strategy is another great strategy. It provides you with a great way to get started and allows you to grow your portfolio faster as well. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. Here is how it works: 

• Buy – The most important part of this process is to buy a property that will work in the long run. Most often, this means buying a property at a discounted price due to the repairs needing to be done. Be sure to consider the location of the property as well, as you’ll want to invest in an area that’s expected to see housing price appreciation. You can do all the necessary repairs and upgrades but you can’t change the location. 

• Rehab – Next comes the rehab. It’s important that you only do repairs that will increase the home’s value or make the home functional and livable. You will also want to complete the rehab process as quickly as possible. 

• Rent – Renting the property out will help make way for the next step. While this is a time-sensitive step, it is important to not rush this process either. Make sure you take the time to find a qualified tenant, so ensure you implement a screening process and don’t compromise just to fill the vacancy. Most banks require you to establish a rent history with a tenant before they will consider refinancing your property so it is important to move quickly and carefully. 

• Refinance – Once you have an established tenant you can start the refinancing process. To refinance, you’ll want to shop around to compare lenders and rates. You’ll also want to make sure your credit is in good shape as this will impact the loan terms that you qualify for.

• Repeat – Once your home has been refinanced, you should be able to pull the original money out, pay back any of your loans, and use the rest as a down payment to repeat the process.  

This is a great strategy that enables you to build a passive income over time. By “house hacking” with this strategy, you can get yourself off to a great start, even with a minimal initial outlay.

• Start With REITs 

Real estate investment trusts (REITs) are another option for those looking to invest with a low entry free. REITs used to be limited to those investors with more than $1 million in assets, but are now available to just about everyone. You can sometimes get started with as little as $500. 

REITs allow you to earn profits off the proceeds of investment property without actually having to be involved with the property, however, they’re not for everyone. One of the things that people enjoy with rental property, is that it allows you to own a tangible asset. Additionally, with rentals, you have a great deal of control over its performance as well. For instance, you can make improvements that will help you to bring in extra rental income, or adjust your strategy to fill vacancies faster. It’s your asset, and it’s in your hands. Additionally, with an REIT, you won’t benefit from long-term appreciation, whereas you would in most cases with a rental that you own yourself.

• Consider Using Your Home’s Equity 

This option is available to you if you already have a home with equity built up in it. In order to be eligible for a home equity loan, you’ll need to be buying your own home, and it’ll need to be worth more than you owe on it. If this is true, then you already have a source that you can use to help get you started with investing. 

There are two options available to use your home equity: HELOC (home equity line of credit) or a home equity loan. These loans can be used to cover the down payment of an investment home or to fund any renovations that are needed. 

A HELOC is a line of credit that operates similar to a credit card, giving you access to a certain amount of money when and if you need it. 

A home equity loan on the other hand, while similar to a HELOC, works like a loan, giving you a lump sum to use instead of access to a line of credit. Once your investment is finished and it starts turning a profit, you can pay back the loan and start over again if you choose. 

Looking for more details about how to use your home for leverage? Read: Leveraging Your Home to Buy Rentals. 

Get Yourself Into a Strong Position to Borrow

Okay, now that we’ve seen how you can get started with investing, let’s take a look at some tips for setting yourself up for investing success. Here’s a look at some things that you can do to get yourself into a strong position to borrow, which means you’ll have an easier time qualifying for a loan and will be able to secure the best loan terms possible; including a better interest rate, and lower down payment.

Start Saving

Even if you don’t have enough funds to begin your foray into real estate investing, you can still start saving. Cut back on any unnecessary purchases or subscriptions, dial back to the basics and save any and all spare money that comes your way. You can be as drastic as you wish with this method; choosing to cut everything out and save as much as possible for a dedicated time period, or take it slow and cut back things that you won’t miss, such as unnecessary entertainment or going out to eat nightly. Then put the money you would have spent into a separate account. Watching it grow can be great motivation to start cutting from other areas as well. 

Work to Improve Your Credit Score

You’ll need to have a good credit score if you want to qualify for a good loan. Even if you’re hoping to obtain an FHA loan, having a good credit score can help you to qualify for a lower down payment. If your credit score is low, you can take steps to improve it. Paying off your credit cards every month, building your credit file, and ensuring that you don’t use more than 30% of your credit card limits can help you to build your credit score up. 

See more tips on improving your credit rating.

Work Toward Building a Consistent Income Stream

You’ll need to have proof of regular, consistent income if you hope to qualify for a loan. So make sure you’re in full-time employment. If you’re self-employed, the banks will usually want to see two years of consistent income.

Consider Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is how much of your gross monthly income goes towards paying your expenses. The lower your DTI ratio, the better. To calculate your DTI, you’ll want to determine how much you pay in reoccurring monthly debt, and divide it by your monthly pre-tax income. If you find that your DTI is 36% or higher, you’ll want to try to pay it down before you apply for a loan.

One way to pay down debt is by using the snowball method, which involves paying off the smallest debts first and rolling the payments into the next largest debt. Once you have paid off all your debt, you can roll all that extra money straight into your savings for a real estate investment. 

Getting started with investing can be a wonderful opportunity, and you don’t have to wait until you are financially stable first. While it can be helpful to have some money saved up to begin with, even if you have limited access to funds, you can still get started early on by working on your credit score and striving to secure a steady source of income. 

Remember: the sooner you start, the sooner you’ll be able to start generating cash flow, and the longer your investments will be able to grow.

Ready to get started? See: 30 Tips for Financing Your First Investment for more ideas on getting started with real estate.