The Real Estate Investor’s Guide to Investing with Limited Resources
Every real estate investor has to start somewhere. And at the very beginning, we all have different levels of resources available to us. One of the best (and worst) things about the BiggerPockets community is the diversity of experience across the board with its users. There are so many investors of all levels that it can sometimes seem very daunting for new investors. A new investor can find great advice and plenty of tips, but what about when an investor is starting out with little-to-no resources?
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Investing in real estate with limited resources can be a challenge—but it’s certainly not impossible!
For those dreaming of success in real estate investing, know that financial freedom is not out of your reach simply because of your current financial circumstances.
There are not only options available for you right now to start investing in real estate (even with limited finances), but there are steps you can take to prepare your finances so that you have the best foundation possible for your investment future.
3 Ways to Invest in Real Estate with Limited Finances
1. Private Money Lenders & Partnerships
Naturally, if you don’t have enough of your own money, there’s always the chance to leverage someone else’s! Convincing other people to take a chance on you isn’t always easy, particularly when you’re just starting out. But friends, family, and even a good sales pitch may be able to help you land the capital you need to get going, even if it’s just enough for an initial down payment.
You may also consider going in with a partner—maybe someone with more finances, more experience, or just someone on equal footing who you can pool everything with. Working together can be enormously beneficial!
Both of these options have their downsides. Hard money can be expensive and come with huge consequences if something goes wrong. You may not lose your credit, but you could end up losing your investment and whatever capital you had at the beginning.
Partnerships are tricky too. I know a lot of investors who partner with family and friends. Some of those partnerships are excellent and others are a bit more tricky. If you have to partner, make sure you have set clear terms for how the partnership will end before you begin. This will make it much easier if you find you want to go your separate ways after a deal or two.
Though a new concept to real estate investment, crowdfunding has opened up a whole new world of access for real estate investors. Not only do investors have access to markets that were once far out of reach, but now they can often get involved in projects for as little as $5,000! That’s a low barrier to entry compared with traditional real estate investments. Though crowdfunding is very new and not foolproof, it may be an option for investors with limited resources.
The downsides to crowdfunding should be obvious. Besides the fact that it is so new, if you use this method you’ll most likely be be passively investing and therefore will be pooled. You’ll have no title claim, and while this may be a great way to build your capital over time, it is no way to build assets or wealth. It’s a passive investment, but it could be a great step to build toward bigger things!
3. FHA Purchases
These days, pretty much everyone who doesn't already have the finances to make a down payment on a house may struggle to come up with that traditional 20 percent figure. But never fearâthere are alternatives out there. An FHA loan is a government-backed mortgage that allows for your down payment to be as low as 3.5 percent. There are rules governing this type of loan, naturally, but it's certainly an option to look into to see if you qualify.
2 Ways NOT to Invest in Real Estate with Limited Finances
1. Buying Cheap Properties
When finances are limited, our first instinct is to look for cheaper properties. That seems like a good idea, but I’m telling you: It’ll just hurt your investment future in the long run! Cheap properties are rarely worth it when it comes to ROI, the headaches, and the rent they bring in. As attractive as they may initially seem, the numbers rarely work out.
Don’t fall for the trap of snapping up bottom-of-the-barrel properties just because you can’t afford something better. Wait until you can buy something you can be proud of—something that will give you good returns.
In my opinion, it is always better to invest passively—even if it means putting your money in the stock market before buying cheap properties.
Unless you want to get your hands dirty every week with your investments. If you’re willing to put the time in and deal with the aggravation of managing your investments, then low-price, cheap properties may be a great way to build your resources in order to do something bigger later. There’s an abundance of cheap, run-down properties in every major city. In the midwest, cheap means $10,000 to $50,000, and these properties are everywhere.
If you don’t mind putting in the hard work, these investments may pay off. If you are looking at a passive investment, save the time and the headache and most of all, save your money!
2. Cutting Corners
By the same token, even if you do have the resources to buy a great property, if you don’t have the resources to properly care for that property (maintain, renovate, manage, etc.) it may be tempting to start cutting corners. After all, you’ll have to make sacrifices if your finances demand it.
Be careful! There are some things that seem like maybe you could do without them—or go with something cheaper—but don’t be fooled. Quality services are always going to outweigh the costs saved. They’re worth the investment.
Extra Money Strategies for Real Estate Investing
When you actually look at your numbers, investing in real estate very well may not be realistic right now—especially if you’re young. That doesn’t mean there aren’t things you can’t do to prepare for a future of successful investing! While these two points are obvious, they’re crucial and too often ignored. Don’t make this mistake.
Protect Your Credit Score & Pay Off Your Debts
Your credit score is your reputation. Guard it well! Build up good credit, make payments early, and keep track of your spending. Take all of the little steps you can to build your credit score and protect yourself from the blemishes that can set you back for years.
Dealing with outstanding debts? Mortgages, car payments, or lingering student loans? Paying off your debts quickly and focusing on them sooner rather than later is going to keep you from paying extra interest while keeping you on the track toward financial freedom. Work out a payment plan that prioritizes eliminating debt from your life so that you can fully enjoy the benefits of your investments.
Investing in real estate is often a numbers game: working out logistics, risks and rewards, and ultimately, deciding what makes the most sense for your goals. When you’re just starting out, it’s easy to make poor choices because your options feel limited. Practice patience. If you really want to succeed in real estate and your only real hurdle is the funds, then there will eventually be a solution. It often takes exercising patience and maybe making a few alternative investments until you are ready for the big play.
Lastly, cheap never works and quality always wins. Always! Make sure you don’t compromise on quality: if you need to shift gears and change your strategy in order to have the quality properties and services you investment career needs, do that instead. You’ll be glad you did.
What are the best tips you’ve given or you’ve received on investing when money is tight? Share in the comments below!