Top 8 Tips on How to Invest in Real Estate With No Money
Posted On November 2, 2022
Basics of Investments
An investment is an asset acquired with the intent of generating income. When you buy an asset as an investment, the objective is to use it for extra financial freedom, to create wealth in the future, and not for immediate consumption.
There is always an expense involved, either in cash or time and effort. There is also the ever-present risk of losing the investment capital or not generating income. A diversified portfolio can reduce the risk; however, this safer option may result in reduced gains.
Types of Investments
There are many avenues for investing capital, though they can be broadly classified into stocks, bonds, mutual funds, commodities, collectibles, and property. Cryptocurrency is a new entrant to the world of financial investments.
Serious investors will add diversified assets to their portfolios to minimize potential risks. Generally speaking, high-risk investments yield higher returns. Because an investment is usually a long-term commitment, an in-depth analysis of the risks and benefits is always advisable.
Even though there is an element of risk in all investments, they are an additional source of income. Planned well, they can make your retirement comfortable.
Investments in Real Estate
A real estate investment refers to buying or owning property solely to generate profit, either by renting it out or through appreciation in market value. Compared to other investments, your rental property has limited liquidity but offers advantages such as home equity and appreciating property gains.
Most Common Methods
The most common version of real estate investing is to buy a property and grow equity – either by selling for a profit or through financial options like a home equity line of credit (HELOC). Another method is rental properties, which give you the advantages of property ownership, generating cash flow and offsetting costs through rental income.
Apart from Residential rental properties, Commercial real estate is another avenue for an investment properties – this is property used for business purposes, including offices, industrial units, rentals, and retail.
Alternative Ways to Start Investing
However, as real estate gets more expensive every year, many potential investors do not have enough money for the down payment. Fortunately, you can invest in real estate with little or no money; you need to understand how to leverage non-traditional methods of raising money.
Successful real estate investors have realized that a steady cash flow or substantial money reserves are not absolutely necessary for real estate investments. This article will tell you how to invest in real estate with no money in Canada as they do.
And all of them are perfectly legal too.
Methods of Real Estate Investing With Little or No Money
1. Home Equity
If you own a home, you can opt for a cash-out refinance or a Home Equity Line of Credit.
A cash-out refinance is excellent if a significant part of the mortgage has been paid off. It allows you to leverage your existing property for a new, larger loan. Though you may pay higher interest rates and mortgage payments, the gains from the second property can easily compensate for the extra costs of a cash-out refinance.
A Home Equity Line of Credit (HELOC) is credit secured by the equity in your primary residence. You can use the extra money to make additions or improvements to your home, which can then be a source of rental income.
2. House Hacking
Simply speaking, House hacking means renting out an unused part of your home (a bedroom, perhaps) for additional income. If you own a multi-unit property, you can live there cheaply or for free by renting the extra units.
House hacking allows you to use the rent to pay off the mortgage. While building up equity, the money becomes additional passive income once the mortgage is paid in full.
You can also get loans with a lower down payment or at a better interest rate since you house hack only a primary residence, making it an ideal strategy for a real estate investor with little or no money.
3. Partnership in Real Estate Investing
Instead of using your own money, you partner with someone who can provide the funding. One of the most common examples of a real estate Equity Partnership is a parent helping with their child’s down payment, in part or whole.
Or you get a partner who gives you a loan for real estate investments while you pay him back with monthly payments or a portion of the home’s equity. In short, you use other people’s money to buy the investment property while you bring your time, energy, and talent to the table. For example, you can scout around for a distressed property, while your partner funds the purchase.
4. Hard Money Loan
Hard money loans or Private money loans are short-term loans from private lenders with high-interest rates. A hard money lender tends to have fewer requirements for approval, though private money lenders may check your credit score.
A real estate investor can borrow money from hard money lenders to help you buy an investment property, as hard money lending allows investors to secure financing based on the property’s value. Some hard money lenders might let you qualify for a hard money loan using personal assets like retirement accounts. House flippers find hard money lenders a better bet than a traditional loan.
However, since private lenders take more significant risks, the interest rates on hard money loans are higher. Hard money loans require the borrower to cover closing costs, application fees, appraisal fees, and other costs associated with purchasing a property.
5. Seller Financing
Seller financing or owner financing is a good example of using other people’s money for real estate investing.
The property’s seller or owner acts as the funding agency, allowing the buyer to pay them directly rather than through traditional mortgage lenders or a real estate agent. This can be a very flexible funding strategy because everything can be negotiated – loan duration, interest rate, payment terms and down payment.
The seller gets paid monthly over several years and can take the property back if the buyer does not make the monthly payments, as agreed. Owner financing is an excellent win-win for owners with no existing mortgage or who have inherited a property and do not know what to do with it.
This strategy is not a usual option as not every owner is open to seller financing. However, it is worth exploring as you can buy your first rental property with little or no down payment.
6. Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) are the real estate version of mutual funds, a formalized real estate investment group that offers a convenient, hands-off method to start investing.
A real estate investment trust collects money from investors and builds a real estate portfolio through purchases of investment properties or mortgage investments. Many REITs have different minimum contributions, making it easy to start investing with fewer funds.
The investor gets regular dividends and the advantages of a professionally managed diversified portfolio. In addition, because they do not own real estate, there is no property management to be handled.
Perhaps the most significant advantage is more accessible liquidity of holdings, much quicker than getting a line of credit or selling a property. You can eventually have enough saved up to sell out your holdings for a down payment.
7. Mortgage Backed Securities and Canada Mortgage Bonds
Similar to REITs, Mortgage-backed securities (MBS) and Canada Mortgage Bonds (CMB) offer their investors the benefits of real estate investing without owning any property.
MBS and CMBs let financial institutions merge insured mortgages into marketable securities. Investors buy these securities, generating funds for residential mortgage financing while reaping the advantages of low-risk investment deals.
Since the Canada Mortgage Housing Corporation (CMHC) guarantees them, MBSs and CMBs are at a lower risk than REITs, which offer higher returns but with more risks.
8. Rent-to-own or Lease Option
When you have little or no money for real estate investing, you can explore the rent-to-own or the lease option.
This is a great option for saving passive income. Under the rent-to-own or the lease option, the property owner charges you a slightly higher rental fee, as a monthly or yearly premium. The excess rental fee gradually funds a down payment or the purchase price for the property, while allowing you to live in the same home. The higher rental payments help those who have trouble saving consistently, though others may find it less helpful.
However, in recent years, rent-to-own properties are becoming less popular in hot real estate markets where it offers little benefit for landlords. They can reap the benefits of more profits by maintaining their rental properties themselves.
A Few Other Options for Real Estate Investors
In addition to the above options, there are a few more avenues that financially strapped investors can explore other than a traditional mortgage.
For example, in real estate crowdfunding, several investors come together and invest small sums of money. The total pool of funds is usually large enough to buy rental properties or other investment properties, making it a win-win real estate deal for investors and developers.
Other financing options include Microloans, which are smaller loans with more lenient qualifiers than traditional lenders. You can also take out a personal loan, park it in your checking account for a few months and then apply for your mortgage, using the funds for a down payment for buying rental properties.
You can turn your primary residence into your first rental property and use the passive income to fund your next real estate investment.
Real estate investors have many financing options to start investing, even if they have little or no money for the down payment or the purchase price. A steady cash flow or your own money is not the only route to financial freedom; property owners can leverage their equity in their primary residence. Commercial real estate or owner-occupied properties can also be a good source of income.
You do not need a real estate license or be a part of the real estate business with a few deals under your belt. All you need is a little patience and know-how about the other options available.
You can consult a local real estate brokerage to get the benefit of their expertise and to help you find the right real estate to invest in.