Buying and owning property can be a great way to build your net worth while also obtaining residual income. If you become experienced enough, you can turn your investments into a full-time job. If you are just starting out, it can be difficult to obtain capital to purchase multiple properties at once and turn a profit. However, there are certain unexpected ways to invest in real estate without needing large sums of money to begin your investing journey.
1. Consider assets you may already have
An obvious way to invest in real estate is to look into assets you may already have. For example, if you have a savings account built up, you can consider purchasing a property using these funds. If you do not plan on purchasing the entire property in cash, however, you will need to check with your bank on ways to get approved for a non-owner occupant mortgage.
If you have a whole life insurance policy, you can cash in on this policy to fund your investment. If you already have a whole life insurance policy, you are probably aware of the fact that it is more expensive than a term life insurance policy because it essentially serves two purposes—a personal bank account that can be withdrawn upon and a life insurance policy to protect your assets. When you first start paying your premiums on a whole life insurance policy, you will only have a small amount built up but once that account starts growing, it can be worth looking into withdrawing against this amount to fund your investment sooner rather than later.
It’s very important to note that whole life insurance plans vary greatly, and that this strategy isn’t an ideal investment method for everyone—so it’s essential to check the terms of your existing policy with your agent. Additionally, if you think you could see doing this in the future and lack existing coverage, speak with online experts to help you compare life insurance quotes and plans and weigh your investment options.
Pros: You have money to use on the spot without having to take out a loan and it’s easily accessible.
Cons: You are tapping into funds that you might need in the future.
2. Use your current accommodations to your advantage
If you are considering real estate investing but don’t necessarily want to take the plunge and purchase a second property just yet, a good way to get your feet wet and some experience is by renting out a room or two in your home on a site like Airbnb. This has become a popular option because you can use just a portion of your house to generate income and can also be done on your own terms.
Additionally, if you plan on traveling for a week or two, you can rent your whole house out while you are away to generate even more income. If you enjoy this strategy of investing, consider turning part of your property into an “Airbnb backyard.” An Airbnb backyard uses your exterior space to your advantage by either building some kind of unit to promote a more consistent home-sharing option. This is beneficial because:
- Your renters aren’t constantly sharing your living quarters with you
- You have more of a stable income from guaranteed renters for longer periods of time
- Increases resale value of your current property as buyers are likely to find this as an enticing option
- If you live in an area attractive to tourists, this option could prove to be extremely lucrative with a low-risk investment
Pros: This is a low-risk investment option that uses the property that you already have. You can take on tenants on your own terms without committing to a long-term rental.
Cons: If you want to make real estate investing your primary source of income, this option could be more difficult (especially if you don’t have enough space to support multiple renters for long periods of time). Additionally, you are at the mercy of seasonality, location, and demand.
3. Look into multi-family property options
Purchasing a multi-family property can be a great way to start out in real estate investing, especially if you are in the market for your main residence. You can qualify for most types of loans (even an FHA) with a lower down payment on a multi-family property. As an owner-occupant, you could consider a duplex or triplex, where you live on one side and rent out the other. You could also consider investing in a home where there is a separate unit on the property that’s not necessarily attached, such as a garage apartment.
If you already own your residence and are looking to purchase a second property and plan on financing, you will need to check with your bank on the exact terms and conditions of funding your investment. In the majority of cases, you will need a much larger down payment since you will not be occupying the residence. Underwriters will consider similar guidelines when approving you for a loan on a second home that they did for your primary mortgages, such as income, credit score, and job history. Some lenders will take into account potential rental income as well so make sure you discuss all options with your bank.
When investing in a multi-family property with the intention of renting it out, you take on the responsibility of becoming a landlord.. As a landlord, you will be responsible for maintaining the property, fixing problems that may arise, and ensuring rent is paid on time. In the unfortunate event that your tenants do not pay rent, you are also responsible for eviction proceedings. Because there can be hidden costs associated with being a landlord, it’s important to be diligent about organizing the finances associated with the property. To cover your bases, remember to have enough of an emergency fund built up for repairs, have a solid contract written, and research all potential tenants thoroughly.
Pros: A multi-family property can provide a strong source of secondary income and allow you to build equity in a property much quicker when you reinvest your rent into the principal.
Cons: This puts you in the position of being a landlord and responsible for your tenants while also maintaining a safe property.
4. Fix and flip
You’ve seen all of the HGTV shows, a fixer-upper is just that— a property priced below market value that needs repairs to then sell for a higher price. This can be an option if you’re looking for a hands-on investment, as you are a part of the process from start to finish. You will purchase a property under market value because it needs work done to it and then do the work yourself to sell at a profit. This can be a lucrative way to get into investing, especially if you are handy and have some experience doing construction and/or landscaping. Remember that if you have never done work on a house before, it can be easy to underestimate the costs associated with fixing up a property that needs a lot of work. If you plan on having most or all of the work done by a professional, costs can quickly accrue and you might not get as much of a profit as expected after all is said and done.
Pros: A fix and flip property can be a good investment if you have the time and knowledge of home improvement and the market.
Cons: Repairs can sometimes be more costly than expected and getting a loan on a fixer-upper can be more difficult than a traditional loan so check with your bank and real estate agent for the best options for available loans.
5. Look into government-funded programs
The Section 8 Housing Choice Voucher Program is granted through the government to individuals whose income falls below the poverty line to ensure that they have adequate housing. To invest in a Section 8 home, you must be approved as a landlord and the property must also be approved by the local housing authority. The housing authority directly pays rent to the property owner each month. Usually, these homes cost less, which can make this an attractive option for people looking to invest.
This option works well for some investors but you will need to have patience and understand that you will be working with directly housing authority as opposed to tenants. For example, the housing authority is going to want to make sure that your property is safe and sanitary so they will send an inspector to check in on your property annually. You will also want to research the procedures for getting approved to become a landlord before getting too invested.
Pros: Your income is guaranteed each month and on time because it is paid directly through the local housing authority. Less capital is needed because the properties are usually less expensive.
Cons: You are bound by certain requirements from the government to ensure the property is safe and will have inspections to check in on these given requirements. You will also be up against rent control from the housing authority so even if you think you can get more each month for your property, it is ultimately up to the housing authority to decide on a reasonable rate.
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