Real Estate Investing Basics

3 Steps to Invest in Real Estate With a Lump Sum & No Prior Experience

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
133 Articles Written

Have some money set aside and wondering how to best use it to start investing in real estate?

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Maybe you’ve been scrimping and saving, or maybe you inherited some cash. Or perhaps you’re a rare lottery winner who didn’t go broke within a few years. You know that if it just languishes in a savings account, it will lose money to inflation every year. So it's time to dress that money in overalls and put it to work for you!

How much is a “lump sum,” you ask? For the sake of argument, let’s say $150,000, but don’t get hung up on that number. You don’t need exactly $150,000 for this strategy to work. Maybe you have $15,000 put aside or perhaps a cool quarter million; that’s not really the point.

Think of this strategy as a broad-stroke approach on how to start investing in income-producing real estate with some cash in the bank, some discipline in your budgeting, and serious ambitions for passive income.

Phase #1: Start by house hacking.

House hacking is an excellent way to get your feet wet with investing and multifamily properties. You can use residential, owner-occupied financing for up to a 4-unit building, which means low interest rates and low down payments using conventional, FHA, or VA financing.

Speaking of down payments: Don’t blow your cash reserve on this purchase. Put only the minimum amount down—you’ll need a lot more cash for your next two deals. Take advantage of the low down payment requirement, and keep your cash for now.

Your new home's rental income should cover your mortgage (no housing payment!) and ideally provide some positive cash flow to boot. The average person would just spend all that extra money they're saving by not having a housing payment—a new ride, dinners out, new clothes, etc.


Related: 4 Steps to Finally Tackle Your Debt—and Start Growing Real Wealth

You’re not going to do that.

Take every penny that you’re saving by not having a housing payment and funnel it right in with your other savings. Heck, live on half your income, and really accelerate your savings!

Over the next 12 months, while you’re saving money like a champ, you’re going to gain experience managing rental properties. You’re going to practice filling vacancies, screening tenants, reading up on rental investing. You’re going to learn how to calculate cap rates, how to budget for CapEx, how to accurately predict rental property expenses.

In addition, you're going to talk to lenders about investment property loans. You're about to need one.

Phase #2: Buy another 3-4 unit multifamily.

By now, you should have developed some confidence that you can manage a small multifamily property. After all, you’ve been doing it for a year and taking every opportunity to learn even more.

It’s high time to double up and buy another one!

At this point, you have a choice. You can borrow an investment loan for this next property. Typically, investment loans require 20% down.

Alternatively, you can borrow another owner-occupied loan and move into the new property. Keep in mind, you usually can't have two FHA loans simultaneously, so if you went FHA the first time around, you'll need to either go conventional this time or refinance your prior FHA loan.

Once again, don’t allow any lifestyle inflation! You should be earning substantial income from your two multifamily properties now, but don’t spend a cent of it. It should go back into your investment fund because next time around, you’re going to need a lot more cash.

Your friends and family may be increasingly interested at this point about what you’re doing. Whenever they ask you about what you’re up to, tell them about your success with multifamily properties. If they express enthusiasm, tell them to let you know if they’re interested in investing funds when you buy your next multifamily property.

Give yourself another 12 months to acclimate to managing two multifamily buildings and set aside more cash. Keep devouring as much information as you can, particularly about investing in apartment buildings.

Start reaching out to commercial lenders. Your next loan will be a commercial loan, and the rules are different.

Phase #3: Buy an apartment building.

Start looking for 5-10 unit buildings. Commercial financing varies, but you’ll need a significant down payment. Hope you’ve been disciplined about saving all that rental income you’ve been earning!

Go back to all of your friends and family who expressed an interest in investing with you. Offer them a 7% return on their money, paid in interest payments every month.

Bear in mind that if you raise funding from friends and family, it’s an enormous responsibility. No matter what happens, you must pay that money back or you endanger the most important relationships in your life. Not everyone is comfortable with this responsibility, so follow your gut.

There is much less competition for multifamily properties with five or more units because they require commercial financing. You’re now competing with only serious real estate investors, not every Tom, Dick and Harry. While that might sound scary, it actually means you’ll have far less competition and should earn better yield and cash flow per door.

Related: 6 Ways to Get Started in Real Estate While You Save Money to Invest

Managing your own rentals has served you well through this point. It's taught you valuable lessons about what kinds of properties to buy, what kinds of renters and neighborhoods you want to work with, and countless other experience that will inform your future investments. Although you've been able to manage your properties on the side of your full-time job until now, it may be time to consider hiring a property manager.

After all, you now probably manage more than 10 units! Welcome to the big leagues.


To Infinity and Beyond

You’ve probably chewed through your initial savings (and then some), but you should now have significant income from your three multifamily buildings—what will you do with it?

One option is quitting your day job, maybe to invest in real estate full-time. Or not; you could go lie on a beach, volunteer, or take a low-pay, high-reward job with a cause.

But you don’t have to quit your day job. You could keep working while expanding your real estate portfolio. At this point, you’ve taken your initial savings and turned it into 10-20 rental units and some great passive income. The sky’s the limit!

Whatever you choose to do, think in terms of your long-term goals. What does your perfect life look like? Describe it in detail, on paper. Then work your way backwards from there. How much income do you need? What will it take for you to get there?

The less money you can be satisfied living on, the sooner you’ll achieve financial independence. But there are no wrong answers, as long as you’re actively moving toward your perfect life.

Happy investing!

Have some other ideas about what you would do if someone handed you a check for $150,000? What kinds of goals are you aiming for with real estate investments?

Like we said, no wrong answers!

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Lacey S. from Carrboro, North Carolina
    Replied over 3 years ago
    A coworker and I were discussing what we’d do if we won the lottery a few years ago and I said if I won 200k I’d buy 4+ rentals, then in 5 years I’d be ready to retire most likely as I’d have some of them paid off.
    G. Brian Davis from Baltimore, MD
    Replied over 3 years ago
    Amen Lacy! Can’t say the same if you invested $200,000 in stocks.
    Sarah Karakaian Rental Property Investor from Columbus, OH
    Replied over 3 years ago
    We doubled our home value in Queens, NY and decided to sell! Every penny will go into more properties so we can continue to grow as professionals. Love this breakdown!
    G. Brian Davis from Baltimore, MD
    Replied over 3 years ago
    Thanks Sarah, and congratulations on the home equity and the decision to capitalize on it! Sounds like you have some exciting opportunities to look forward to.
    Ryan Tatro from Los Alamos, New Mexico
    Replied over 3 years ago
    Great post, well written. It light a bit more fire in me after just finishing renovations on a townhouse that I plan to hold. I agree, house hacking is a good way to get a jump start. I plan to take a close look into it when a whole quad comes on the market. Unfortunately, there are a lot of them in my town but very few owned by one individual selling them at the same time. I know of an eight unit building that the owner wants to sell. However, the market is so strong he plans to sell them individually at market price. If viable I may talk to him about aggressive terms on a contract. Any ideas on how to get very low down financing on a building like this please let me know. Thanks again for the great post!
    G. Brian Davis from Baltimore, MD
    Replied over 3 years ago
    Thanks Ryan, and it depends on how the buildings are zoned. Zoning is not my area of expertise, but my understanding is that they have to be zoned for separate condominium ownership in order to sell off units individually. I don’t recommend jumping straight from SFHs to an 8-unit building though – I’d start with a 2-4 unit, so you can get residential financing and get your feet wet with managing multi-unit buildings before buying a full apartment building.
    Tim Porsche Investor from Denver, Pennsylvania
    Replied over 3 years ago
    Great article! I’m already doing almost exactly what you have outlined. My plan is slightly different though, house hack until I have four multi-unit buildings, and then start looking at small apartment buildings that require commercial financing. From what I understand banks will give you four conventional loans fairly easily if you have good credit and a good paying W2 job, so I want to max those out. After the fourth one conventional lending is harder to find, although some banks will go up to ten I believe but with higher rates. One thing I haven’t decided yet, is at what point do I try to cut back my W2 hours and spend more time in REI? Cutting back hours would slow my momentum, unless I’m able to make as much or more money another way in the time that would be freed up. Still thinking about this.
    G. Brian Davis from Baltimore, MD
    Replied over 3 years ago
    Nice plan Tim, and you’re absolutely right about lenders and their comfort with your number of residential mortgages. Having full-time W2 work helps in a lot of ways, not all of them as obvious as your paycheck. Borrowing can become trickier. Health insurance might not be as easy. There’s also the question of how comfortable you are with unpredictable take-home income each month. A lot to think about. You could always hire a property manager while you’re still in the “acquisition” phase, to make the labor demands light while you’re still working full-time. Just a though. Exciting stuff!
    Julie Rogers from North Lauderdale, Florida
    Replied over 3 years ago
    Nice article.
    G. Brian Davis from Baltimore, MD
    Replied over 3 years ago
    Thanks Julie 🙂
    Eddie Lehwald Investor from Austin, Texas
    Replied over 3 years ago
    Very timely for me! Much like Sarah above, I’m about to realize a major windfall from the sale of a property that’s experienced big time appreciation (closing in three weeks!) and I’ve been trying to figure out how to put that lump sum to work as effectively as possible. I’ve got top notch credit, but I don’t have W2 income (self-employed musician=lenders quietly shoo you out the door, tut tutting softly to themselves), so I’m not totally clear on my next move, but I’m looking forward to the journey. My girlfriend and I are house hacking a duplex on a street with a bunch of other run down multifamily, but it’s in a great location in a rapidly improving area, so ideally I’d be able to buy one of them with an FHA and we could just move across the street!
    G. Brian Davis from Baltimore, MD
    Replied over 3 years ago
    Glad to hear it Eddie! Congratulations on the profits from the sale, and it sounds like you’re in a perfect position to house hack. Lenders will accept self-employed income as long as you can document it. Best of luck!
    Account Closed Rental Property Investor from Ames, Iowa
    Replied almost 2 years ago
    Really loved the article, @Brian. The steps outlined to follow through on this approach was really well explained. Currently, I am house hacking on my first purchase, used my FHA eligibility to purchase a duplex for my wife and me a few months ago. We are renting out the other room, which pays the entire mortgage payment, all while we are saving about half our income. We are working on saving enough money for a second triplex or quadplex next year. I got really excited when you mentioned that feasibility of a newbie REI to quit their day job and fully focus on ReI after their thrird purchase. Can you elaborate more about how you would go about investing in real estate full time? Also how would you know from a financial standpoint that your ready to quit your day job to focus on REI full time? Thanks so much!
    Darrell Harris
    Replied about 1 year ago
    thanks for the great article
    G. Brian Davis from Baltimore, MD
    Replied about 1 year ago
    Thanks Darrell, much appreciated!
    Jay Williams Rental Property Investor from Los Angeles
    Replied 9 months ago
    This article is still so relevant and insightful. We purchased our 1st home several years ago and I recently convinced my husband to begin investing with me. We're planning to pull the equity out of our 1st home to purchase a smf (2-4 units). We'll live in one unit and then rent our original home. Thanks for the inspiration and any words of wisdom.
    G. Brian Davis from Baltimore, MD
    Replied 9 months ago
    Thanks Jay, much appreciated, and glad to hear you're moving forward with a strategic plan!