Can you really start investing in Real Estate using just your tax refund?
Obviously, it depends on the amount you received back, but since the average return for a US Taxpayer in 2011 (according to Wikipedia) was right around $3,000 – I’m going to use that number. So, how can you get started investing in real estate with just $3,000 bucks? This post is going to show you five different ways you can use your tax money to start building your financial future with real estate.
1.) FHA Down Payment
One of the most popular methods for new investors to get into real estate investing, the FHA loan allows a homeowner (yes, you have to live there) to put down just 3.5% of the purchase price for your investment property. So, how much would $3000 get you? Well, not a whole lot. However, if you live in an area where you can pick up a small duplex in need of cosmetic repairs for under $80,000, this might be a great option for you. Be sure to have the seller pay the majority of your closing costs and use your own sweat equity to improve the property and begin making serious monthly cash flow.
For more information on using this strategy to get started investing, check out this great article by Frank DeFazio “New Investor Strategy: How to Buy Your First Multi-Family Investment Property & Live Rent Free.”
2.) Pay off Debt
Yes, true, paying off debt doesn’t really help you “invest” in real estate – BUT by paying off your high interest debt (such as credit cards or other lines/loans) you can save more money year round, allowing you to qualify for higher real estate loans and ensuring financial stability in your home. You may be tempted to go out and buy that nice Samsung 65-Inch 1080p 240Hz 3D Slim LED HDTV (or you may be tempted to buy one for me! … ) but paying off that $3000 in credit card debt will get you much closer to your goal of financial freedom.
There is a reason Baby Step 2, in Dave Ramsey’s “7 Baby Steps to Financial Peace” is to quickly and intensely pay off all debt. Getting out of debt allows you to fully maximize your income by reducing your expenses. Don’t underestimate the value of being debt free.
No – I don’t mean go out and pay for a $50,000 training from a real estate guru and get sucked into the “guru trap.” (Read more about The Real Estate Guru Trap – How It Works & 4 Ways to Avoid It) I’m talking about using your $3,000 to gain a real education. This might mean taking a week off work to read all 21 of the best real estate investing books. Maybe it means buying a plane ticket and a few nights in a hotel and flying out to visit a seasoned investor and friend that you met on the BiggerPockets Forums. There are a lot of low-cost ways to get education, and spending your tax refund on it might be the best way to do so.
Maybe you just want to use real estate as part of your overall investment plan, but want to keep it as passive as possible. For you, a REIT might be perfect. A REIT, which stands for Real Estate Investment Trust, is kinda like a mutual fund but for real estate investors. Basically, a whole lot of investors pool their money together in order to buy large pieces of real estate, managed by the REIT. If you want to learn more, check out this awesome article on REITS from Ankit Duggal.
Finally, $3,000 will buy you quite a few pieces of direct mail and stamps, so you can start prospecting for leads to wholesale to other investors. Direct mail is the process of sending out a large number of pieces of mail (either letters or postcards) to targeted homeowners, in the hopes that a small percentage of motivated sellers respond to the mail and reach out to you, allowing you to buy their home for a discount. There are many different companies who specialize in this, such as PostCard Mania or Click2mail.com – so be sure to check them out and see how much Direct Mail you could send out.
For a great case study on an investor doing this right now, check out Arthur Garcia’s “Go Where Others Won’t – My Direct Mail Journey.”
So – how are you going to use your refund to better your financial future? Leave your comments below and let me know!