Owning your own home is honored as an important piece of the American Dream and often touted as a wealth-building tool. However, investing in real estate may seem more like a pipe dream when your savings account looks a little anemic. The good news is there are plenty of pathways available to help you overcome financial barriers to owning real estate for long-term financial security; if you know how to start investing in real estate with no money (or with very little of it), then you’ll be able to get your foot in the door. But … you might not know how or where to begin!
We have enlisted the help of one of Colorado’s top real estate agents, Alexa Elliot, who has helped many of her clients buy their first home in addition to helping buyers with investment properties.
We also spoke with Elliot’s investment partner, Dan Chapman, who provides strategies for generating funds to get started, and Kathryn Hardiman, a homeowner from Charlotte, North Carolina, who shares how she entered the market with very little capital.
How to get started while renting
If you are currently living in a rental space, there are several steps you can take immediately to start building your real estate empire.
Here are a few strategies you can implement.
Create an apartment vacation rental
If you have friends and family with whom you can occasionally share space, you can turn your apartment into a vacation rental and strategically vacate for additional income.
It’s important to go into the vacation rental business mindfully, however, to make sure you are protecting your assets and creating a welcoming environment for your guests. And you’ll also need to check with your landlord and leasing agreement to make sure renting your apartment is permitted in the first place (many leases prohibit subletting).
A few tips:
- Remove valuable items to another location.
- Lock up any items or rooms you do not want your guests to access.
- Clean thoroughly before their arrival to ensure a positive review from your guests.
- If you will have to pay for temporary quarters for yourself, make sure it makes financial sense to do so.
Rent out your extra space
Turning yourself into a landlord is a great way to start bringing in a little extra cash to help you cover your own expenses while saving money for a house.
If you have a spare room, bringing in a roommate can help cut down on your monthly expenses. You can also consider renting out your extra space part-time — for instance, if you live near a college or university where housing is in short supply.
Please note, however, sub-leasing involves a lot of legal challenges and responsibilities, which you will need to thoroughly investigate before you take the plunge, including:
- Reading your lease to make sure you are permitted to share the space with another renter
- Carefully screening any potential roommates or renters
- Navigating references if the renter is unknown to you
- Insisting upon a signed and notarized legal rental agreement
In addition to your legal agreement, you may want to further manage expectations by providing your tenant with a written explanation of how you will share the space. Make sure you have clarity around parking and driveway access, use of common rooms and appliances, storage space, and more.
Consider a master lease agreement
A master lease is a more formal way to access income-producing property.
In this scenario, you take on the full responsibilities for a property for a period of time, including the ability to renovate the property. In addition, you have the opportunity to charge any co-tenants higher rent than what you’re paying.
If you do intend to substantially renovate the property, you may be able to negotiate lower lease payments in exchange for the value you are adding to the asset.
The advantage to a master lease is that you have more control over the property and a much greater opportunity to grow your income faster. The downside is you may have greater liability than you would have with a normal rental property.
Like renting out rooms in your apartment, you will be responsible for screening any tenants and obtaining the necessary signed rental agreements. It is advisable to enlist an attorney before getting involved in a master lease to ensure you understand the financial and legal responsibilities.
Ways to access money for a down payment
No matter how many tricks you have up your sleeve, eventually, you are going to have to put some money down if you want to buy a house (although zero-down-payment options do exist!).
Start a savings regimen
Financial discipline is an important key to getting into your first home. Begin immediately setting aside a portion of your paycheck to start building that nest egg.
A REIT is a company that owns and operates income-producing properties, such as apartment buildings or commercial lease properties, for its investors. REITs are often traded like stocks, so this type of investment allows you to keep your funds more liquid, as compared to owning an individual rental property.
Tap into your retirement account
Hardiman was inspired to get into the market at the age of 26 when she realized her rent money was enough for a monthly house payment.
“I wanted to put down roots, and I was tired of paying rent,” Hardiman says. “I decided I would rather invest that money where I could build equity.”
Like most first-time homebuyers, her challenge was getting together the money for the down payment.
“I took a loan against my retirement account with no penalty,” Hardiman explains. “In addition, President Obama had just set up the $8,000 first-time homebuyer credit, and my fiancé chipped in some cash, which helped.”
Unfortunately, that first-time buyer credit no longer exists, but there are other ways to get assistance with your down payment.
Apply for a first-time homebuyer program
Elliot notes that there are first-time homebuyer programs available that can help with the down payment.
One program will “cover the 3.5% down payment and some of the closing costs” needed for an FHA loan, she explains.
“I also encourage buyers to identify properties that have been on the market for a while with no offers. Then we jump in and negotiate with the seller to pay some closing costs.”
Whether you decide to invest in a single-family home or a multi-unit investment property, you will need some cash upfront. One way to supplement your funds is to enlist a friend or a family member to partner with you for a share of any returns.
How to build wealth if you own property
If you are already a homeowner, there are ways to leverage the value you already have in your home to substantially build your equity more quickly.
Consider a live-in flip
Elliot says buying a fixer-upper that you intend to live in for a while is particularly advantageous for homebuyers in Colorado because there is a lot of competition for move-in ready homes from all-cash buyers coming in from other areas of the country.
“In Denver, there are still plenty of opportunities for a fixer-upper,” Elliot notes. “We always suggest that first-time homebuyers go into the properties that need some work because those are the ones where we can get them under contract with little money down. Then they can invest some sweat equity to improve the property.”
One caveat to that, according to Elliot, is that since many first-time homebuyers use FHA loans, the properties that they’re getting into have stricter FHA requirements.
“That means that the house can’t need a ton of work, like a new roof or a furnace,” she explains. “To get FHA approved, it can only need cosmetic repairs. Most young homebuyers can do the cosmetic work themselves or hire, for instance, a carpet installer to do new carpet. So, it’s going to be work that they can do or hire out for very little money to fix up the property and grow the equity in the home.”
There are also loans that will allow you to package the home’s estimated repairs into the mortgage, such as a 203(k) loan.
Trade up: A rags-to-riches story
One of the most profitable ways of building wealth in a healthy real estate market is by trading up to a more expensive home.
“About three years ago, I got one of my clients into a house for $285,000,” Elliot recalls. “Just recently, I sold that first house for $445,000, took the equity, and got them into their second home for $550,000. With just a three-year investment in the market, they were able to take enough equity out of their first house to put it into their dream home.”
This is the approach Hardiman decided to take when she purchased her first home.
“I watched my parents buy fixer-uppers when I was growing up,” Hardiman says. “I always intended to buy a house that needed a lot of work.”
She got into the market in 2009 when real estate had bottomed out in Charlotte due to the Great Recession. She found a modest home that needed some work in a moderately priced neighborhood.
Hardiman acknowledges that it is helpful to have some skills if you are going to buy a house that needs work, as well as patience and a willingness to do the work. Her fiancé, it turns out, had painted houses while putting himself through college.
“We did all the painting,” she recalls. “We also built a deck with help from my family. We were unwilling to pay people to do things we could do.”
Five years later with nearly $70,000 in equity from the sale of that first house, Hardiman was able to buy a house in an older neighborhood near downtown Charlotte that was undergoing a major revitalization.
“We saw an opportunity to live in a great neighborhood close to our jobs,” she says.
“We knew we could use this house to build our net worth. But you have to be willing to invest in the upgrades to improve the property.”
In five short years, due to the investments they made plus a dramatic increase in home prices, her second home nearly doubled in value. With equity that had now more than quadrupled, they made the leap again, this time targeting the least-expensive fixer-upper in a neighborhood boasting larger properties and substantial green space.
If buying and selling feel a bit challenging, there are programs that facilitate trade-ins, making it extremely easy for homebuyers to make the leap. You can unlock the equity in your home to purchase a new one by simply trading in your current house through an online platform, such as HomeLight Trade-In.
The chief advantage of a trade-in program is that it allows you to make an offer on your next home with no lending or home sale contingencies, an important advantage in a competitive market.
Leverage your home equity to further invest
Another great growth opportunity is to tap your home equity to invest in other real estate.
“We often get our first-time homebuyers into condos or townhomes,” Chapman explains. “After a year or two, they can use the equity in the condo to upscale to a home. They keep the condo and use it as an investment property. We show them how to do that.”
Buying a multi-unit property is another solid strategy, Chapman says. His clients start by living in one unit and renting the others out. Over time as they build up equity in the property, Chapman encourages them to use the equity to buy a home, keeping the original property as an income-producing asset.
You can also take the equity out of your home by refinancing and taking a portion of the equity to invest in a REIT or a rental property.
Another strategy is to “borrow” against your equity by opening a home equity line of credit (HELOC) and using those funds to invest.
As you contemplate making your first real estate purchase, it is critical to note how important it is to find a real estate agent who is committed to helping you identify which strategy makes the most sense for you.
Elliot and Chapman explain that they are with their clients for the long haul. Their approach is to treat their clients as investors first, assisting them with asset protection, estate planning, retirement planning, and even property management as they grow their portfolios.
Header Image Source: (Joshua Mayo / Unsplash)