Investing in real estate is one of the first things that comes to mind to increase one’s income. Real estate never goes out of style or season, and its tangible assets make it easy for most people to understand. However, these reasons do not make investing easier, with the most common limiting factor being capital.
Lacking substantial money is typically the first counter-argument to anyone suggesting real estate investment because people think they need to own a property in full to get started. But this isn’t true; anyone can invest in real estate. While some financing solutions require a 5% to 20% down payment, needing six figures to invest is a myth. Here are some ways to invest in real estate on a budget.
Basic Principles to Follow When Investing in Real Estate
For the perennial investor, certain principles are golden. Many of these rules are not in investment books and blogs — the most valuable are self-discovered. These three principles can serve as a template for others, whether they plan on investing in a condo, a single-family home, or a commercial property.
Smart & Safe Leverage
Leverage allows investors to do heavy financial lifting because they understand how financial institutions work. This principle can have the most magnifying effect on cash returns if strategically used.
Utilize smart and safe leverage by investing in low-risk properties and using long-term financing plans with fixed interest rates. Investors who explore conservative options are often less likely to:
- Have unrealistic return on investment expectations
- Consider high-mortgage, high-leverage options
- Waste their debt on a bad purchase
Study the Cash Flow
Cash flow is king in any investment. Without careful consideration of cash flow, investors are more likely to have a bad investment or go bankrupt. A near-accurate cash flow calculation considers future expenditure, liquidity risk, and fluctuations in market variables.
With each factor having a cumulative effect on the positive cash flow at the end of the fiscal year, all expenses should be minimized and optimized. Reducing operational costs is one way to do so.
Invest in Only Familiar Locations & Business Models
The most successful investors only put money into business models they understand and locations with fixed property taxes because they are more familiar with the accompanying risks. However, these conditions limit the number of investment opportunities and why investors consult and hire advisors with vast property knowledge of a location.
Understanding a business helps prepare the investor against unplanned occurrences and insulates them from any variables that may sway the market against them.
How to Start Investing in Real Estate With Minimal Capital
Now that you have an overview of some basic principles of successful real estate investment, here are four effective strategies to consider for your next purchase.
Hunt Deals for Financiers (Bird Dog)
The easiest way to get started with real estate investment is by finding the best deals possible for investors with the money. Brokers that link willing buyers to properties with great potential are referred to as bird dogs. The nature of the relationship and financial settlement between the agent and investor are agreed upon before they shake hands on the deal.
Property hunting is best for real estate enthusiasts with an extensive network of agents and those interested in seeing how deals go down in real-time. While bird dogs may not enjoy the same level of financial success as out-and-out investors, they bear no risks, leverage on the knowledge and finance of others, and don’t require official documents to get started.
Real Estate Investment Groups (REIGs)
Properties requiring higher down payments and recurrent expenses may be too much for those investing for the first time. Instead of private investors taking on more debt, they can collaborate and pool their resources together and fund such purchases. This way, all investment group members share the risks and responsibility of keeping the property in good shape.
Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are perfect for those who want to gain experience in real estate — but not in the traditional sense. REITs are typically corporate institutions offering individuals low-income investment opportunities in return for passive income in the form of dividends.
Limiting the risk exposure of private investors comes with an associated absence of leverage. As a result, investors cannot magnify their gains as they would with traditional mortgage options. However, the potential of the investment is not in doubt because they are long-term leases.
House hacking involves commercializing the remaining parts of a residential property. In simple terms, the owner buys a multi-unit property and rents out the spare apartments left. Homeowners who don’t mind cohabiting with others will find house hacking appealing, as they receive additional financing to handle their living expenses.
Don’t Overthink It — Just Get Started!
Getting started in the real estate space requires more knowledge than capital, meaning anyone can begin their real estate investment journey with little money. However, there are higher chances of making life-changing gains in real estate with more capital than without it.
Like every other business, real estate investing success relies on experience. Reading more real estate books or listening to more investment podcasts cannot substitute for real-life knowledge, and getting started is the key. With a conservative investment mindset and a keen eye for properties with positive cash flow potential, investors can find success in the real estate space.