Is it really possible to make money from real estate without much starting money?
The answer is both yes and no.
Here’s the No part:
Investing with no money down is a popular topic at high-hype, low-information seminars. The truth is, when people say you can make money from real estate with little or no money down, they are being slightly misleading.
Indeed, they are right: you personally do not need any money to get started. BUT, you have to get the money from somewhere. Speakers at these high-hype seminars mention OPM (Other People’s Money). The way to invest in real estate with no money down is to borrow from other people (family, friends, and investors) to get started.
This is perfectly true, it’s not YOUR money, therefore you’re starting with none of your own money down, but wouldn’t you agree “invest in real estate with no money down” is a misleading statement?
Even if it’s not your money, it is your responsibility. And it’s your debt if something goes wrong.
Here’s the Yes part:
There are ways that you can MINIMISE the amount of money down. I’ve found that there is an inverse relationship between start-up money and creativity. Generally, the less money you have, the more creative you have to be.
Here are a few creative strategies:
Note: These are by no means easy. They require a lot of work and a lot of explaining to people what you’re doing. There is also potential for investors to exploit their clients when doing strategy 2 or 3, so these strategies are for ethical investors only.
- 1. Negotiate terms.
You can negotiate the settlement terms in a way that best suits you. For example, you could buy a cosmetically challenged house with a five month settlement period, and negotiate access to the house within those five months.
In that time you could renovate the place and then sell it on the settlement day for more than you pay. Of course, you’d need the money for the renovations, but it’s not as much as you’d need to buy the house.
- 2. Sandwich Wrap.
Find someone who will sell their house to you on terms instead of for a lump sum (i.e. wrap it for you). Instead of getting a loan and paying the seller the sale price in one go, you simply make weekly/fortnightly/monthly repayments to the seller until you’ve paid the sale price.
Then you repeat this process for someone else – i.e. you sell the house to someone else on terms instead of for a lump sum.
Because you want your client to be paying you more than you are paying the original seller, you need to increase the value of the house somehow (e.g. by renovating). You make a profit by receiving higher repayments from your client than you have to pay to the original seller.
- 3. Some now, some later.
Find a house that has been on the market a while and is having difficulty selling. Go to the owner and tell them that you can sell the house for their asking price if they are willing to accept most of the money in a lump sum, but some of it in instalments. Then advertise the house as FOR SALE, NO DEPOSIT REQUIRED.
The house will now quickly attract buyers. The buyer will get 80% finance from a bank and pay it to the seller. You then finance the other 20%. Pay it back to the seller in instalments, with a little bit of interest. And get the buyer to pay you back with a little more interest than what you are paying the seller.
You can charge this extra margin because you are taking on the risk that the buyer might default on their payments and leave you stuck with the debt. The extra interest is essentially your charge for taking on this risk. You make a profit by receiving repayments that are higher than you make.
I must stress once again that strategies 2 and 3 are hard work, especially because they involve specific legal paperwork. It is actually easier to just save up and use more traditional real estate investing strategies than to spend the money learning how to do these more obscure strategies.
The more traditional strategies I would recommend include positively geared rentals, wraps (simpler than sandwich wraps), and lease options. For more information about these highly profitable strategies, go to http://www.sustainable-wealth-creation.com/property-investing.html
About the Author
Nat has a passion for property and education. She is co-director of a property investing company and is the author of several high quality articles. To read more of what Nat has to say go to http://www.sustainable-wealth-creation.com/property-investing.html or if you would like to contact her directly go to http://www.sustainable-wealth-creation.com/contact-us.html.