How to Invest Your First $25,000

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It is not uncommon for us to work with investors who have saved somewhere along the lines of $25,000 and want to know the best way to invest this money. For starters, there isn’t a right or wrong answer to this question. But as a point of discussion, I’ll put myself in the shoes of a brand new investor and explore the thought process behind how I would invest that money.

There are a number of different options presented to a brand new real estate investor when it comes to investing that first big chunk of change. Many people decide to invest the money in some form of coaching in hopes of learning as much as possible before actually buying real estate. Unfortunately, most people end up spending way too much money on expensive coaching that doesn’t equate with the amount of education they received in return. Don’t get me wrong, I believe there is a time and place for appropriate coaching, but sadly, too many eager investors get duped into super expensive coaching programs that simply aren’t worth the money. Truthfully, I think new investors can learn almost everything they need to get started right here on BiggerPockets for free – so my advice is to pass on the up front coaching.

What, Where and How

Once you’ve decided the money will get spent on actual real estate rather than education, it’s a matter of narrowing down what you’re going to buy, where you’re going to buy, and how you’re going to buy it. With $25,000 to invest, it’s likely that you’d be in the market for residential real estate as it would be tricky to get into a commercial deal without a little more money. You could consider putting the money into a real estate fund of some sort, but chances are if you’re reading BiggerPockets and interested in real estate investing, a fund would be too passive for your taste and probably wouldn’t provide you with the kinds of returns you’re looking for.

Most investors will want to invest somewhere close to home, but this is not always feasible … especially if you live in an expensive market and only have $25,000 to invest. If you decide it makes sense to invest in another market, I would suggest analyzing what your long terms goals are and try to pick a market that makes sense based on that. For example, if you want to invest in a long term rental that will provide cash flow for a long period of time and you are not concerned about appreciation, you’d want to research those markets that fit this description. On the other hand, you may want to invest in markets that seem to be on the upswing that may provide an opportunity for quick growth and allow you to sell at a profit over the next several years. Either way, there is much information about specific markets and current trends that can be found on the internet to help you make this determination.

If it’s my $25,000 and I’m trying to get as much return as possible, it’s the “how” that needs to the most attention. If you want to make that money go as far as possible, I would try to buy multiple properties using these same funds multiple times. For starters, I would not advise buying a cheap property for cash with this money (at that price point, you’ll only end up with a headache). At this stage in your investing career, it’s important that you find a way to leverage your cash as far as you can. To do this, you’ll need to make sure that you have the ability to get financing. Ask around, find a good lender and get prequalified for a non-owner occupied loan. Once you know what you are prequalified for, you can begin to devise a plan.

Using Hard Money

The key to using the same funds on multiple purchases is finding properties that can be acquired and rehabbed for a good bit less than what they will appraise for. In most cases, this will involve buying foreclosures or wholesale properties and having some direct involvement in the rehabbing of the property. Once you’ve determined that you qualify for a loan and have identified a property, you can use a portion of your $25,000 as a down payment on a hard money loan. The hard money loan will supply the funds needed to acquire the property and the renovations as well. The interest rate and fees associated with the hard money loan will be high, but the ability to leverage your funds to buy, fix and temporarily hold a property is worth it. After you’ve owned the property for at least 6 months, some lenders will allow you to refinance based on the new appraised value. While you may have only had break even rents during these 6 months because of the high interest rate on the hard money loan, the fact that you could get most of your capital back after the refinance makes it very worthwhile. You can then turn around a do the same thing again on another property!

Let me reiterate that this approach is not for everyone, this is simply what I would do if I was starting out again and only had $25,000 to invest. There are definitely risks associated with short term loans and refinancing. However, I believe using this strategy with single family homes is a powerful way to make your dollars go as far as possible. Happy investing!

(By the way – the picture we used is an actual house we sold to an investor who used this exact strategy)

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About Author

Ken Corsini G+ is the founder of Georgia Residential Partners, LLC - a real estate investing firm based in Atlanta, Ga focused on creating turn-key investments for investors all over the country. He's been investing in real estate since 2005 with hundreds of real estate transactions.

16 Comments

  1. Great Post!

    If somebody say has the 25k but can’t qualify for a traditional mortgage yet because they just started a new job or are in between jobs, what might you suggest?

    That’s kind of the boat I’m in right now. I really want to be able to leverage my money into a higher and better property, however I feel like my only option at this point right now would be to pay cash for a kind of iffy property.

    Thoughts?

    Thanks so much!

    • Ken Corsini

      Hey Nick -great question! Actually, I think Paula may have answered your question below – I would recommend trying to find a good local bank that could give you bridge financing. I actually did this when I first started out and still have good relationships with these banks to this day.

  2. Great post, Ken. I’d add that with $25k, some investors might be able to get an investor loan from their bank (particularly with a smaller community bank / regional bank), which is a cheaper alternative to a hard money loan. I’ve had success with this.

    (My success, I should add, stemmed from getting a recommendation from someone else who had an “unusual mortgage” situation, and who found a mortgage broker who totally “went to bat” for him and went the extra mile to help him get approved. He recommended that broker to me, which was invaluable. So the lesson, I suppose, is to get good referrals from people who have also been in a bind.)

  3. Great article, Ken! Really good insight! I’m somewhere in the middle of building up that 25K and posts like these really open things up! Hopefully I will be able to possibly do something with you in Atlanta soon. I’m located in upstate South Carolina myself!

  4. Great article. I am curious what banks are offing the refi using a new appraisal at 6 months? I have contacted most of the banks in my area and they all require 12 months of ownership to use the new appraisal value?

  5. I’m in a similar starting position to what Ken describes but with a few more bucks to start with. I’ve been thinking about using this strategy for several months and have been looking for properties that would work. Unfortunately, I have been unaware of the six month refi period. Is this a pretty hard rule, or does anyone know of exceptions or ways around it. Ideally, I thought I would be able to rehab a property and get tenants in within 6-8 weeks and refi out of the hard money loan into a conventional mortgage in as little as 2 months. Is this thinking flawed? Thanks!

    • Ken Corsini

      Great Question. The way I understand it is you can do a rate and term refinance without seasoning (meaning you have to leave your equity in the deal – probably 75% loan to cost). If you want to refinance and use the appraised value, you’ll need to wait at least 6 months.

  6. Jason Carter on

    I love this strategy and want to implement it. My question is how do you manage the rehab from another market? Is it even wise to try to manage from afar?

    I live in Los Angeles but invest in other markets. I’m confident I could do better with this strategy than buying turnkey, but the rehab component has scared me away.

    Any suggestions?

  7. Christopher Lesko on

    Ken,

    Great advice! You mention in your article that there is much information about specific markets and current trends that can be found on the internet. Which sites would you recommend for that? I’m trying to decide which Philadelphia neighborhood to focus on when looking for my first small multi-family investment. Since the city is expanding and many areas are up and coming, it would be nice to see some metrics to be able to make a better decision.

  8. This is great advice! I’m sure a lot of people would think $25,000 isn’t enough to invest in real estate but the hard money option (that most newbies wouldn’t even know about) allows serious investors to get started.

  9. I purchased my first investment cash, about seven months later I did a cash out refinance and got more money back than what I invested in it, now it is worth more and has been a very profitable rental. great suggestions and comments. best of luck to all new investors!! :-)

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