Real estate investing would be significantly easier if you had mounds of cash ready to make a deal. However, few people are that financially stable. Most go through the lending process and put down between 20 and 40 percent of the purchase price. But there are ways you can invest with little money on hand.
Each option comes with certain risks and a higher overall price tag, given the extra interest charges and financial expectations. Before entering into such a venture, consider your options thoroughly and ensure you can make a profit from your investment before proceeding.
Gap Funding
When asking for a real estate loan from a conventional lender, a certain down payment is always required. Ideally, you’ll have 20-40 percent for commercial investments, but some banks will do it for as little as 10 percent if you have the right history in real estate speculation.
However, 10 percent of 300,000 is still a lot of money, and if you don’t want to wait to save up that down payment, you might consider gap funding. This is a junior-position loan that fills the gap between the money you have for a down payment and the bank’s requirement.
So, if you only have 5 percent on hand, but your lender requires 30 percent, you can use gap funding to make up the extra 25 percent.
Check out this enlightening guide to gap funding pros and cons before taking this route. It’s not the best option for every loan, but if you’re planning on a fast turnover of property, such as a fix-and-flip rehab, it can be the perfect solution for getting the funding you need.
Seller Financing
In many cases of commercial real estate, the seller will enter into an agreement with you that circumnavigates banks and their requirements. Instead of applying for a traditional loan with a hefty down payment, you can ask the seller to put up the money for the investment. They’ll collect interest on the loan, making it mutually beneficial for both of you.
Seller-financed investments can be difficult to find if you’re a novice investor. It’s typically reserved for investors who have a long-established history of successful investments. However, if you know someone who’s looking to sell personally, they may be willing to put up the money for a first-time investment.
Crowdfunding
Crowdfunding real estate is growing in popularity. It connects interested investors in the acquisition of properties so that everyone gets a piece of the pie. Those who contribute earn equity, interest, or profits according to the contract they choose and the amount they invest.
If you choose to do crowdfunding for your investment, proceed with caution. It can be a highly successful venture, but it’s a concept still in its infancy. Therefore, it’s easy to make mistakes or use a platform that doesn’t guarantee results.
Carefully choose your platform before investing, researching the pros and cons of popular websites. Review investments personally rather than taking the advice of others, and don’t overlook the risks of investing in this fashion.
Open a Home Equity Line of Credit
For investors just getting started, a home equity line of credit (HELOC) can be a great resource for investing in an income property. Typically, a HELOC is used for smaller investments like a single-family rental property or a duplex. It may also be used for short-term real estate investments, like house flipping.
There are pros and cons to using a HELOC, just like any other option on this list. Interest rates are typically very low, and there are usually no closing costs associated with it, so you can save big on the purchase of a property.
However, it comes with significant risk, as it’s technically a second mortgage on your home. It should never be used for risky ventures that don’t have a return right away. If you can’t keep up with the payments on your HELOC, you risk losing both your investment and your current residence.
Real estate investing doesn’t have to be out of reach for those interested in turning a profit. When you’re ready to save for retirement and make more out of your primary income, these options make it simple to get started. Once you’ve made money from your first real estate investment, you’ll have a sizeable chunk of income to fuel future investments.
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