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)