One of the biggest objections I hear when I advocate others on real estate investing is: I want to get into it but just don’t have the money to.  I have a multifaceted relationship with the phrase that I’ve heard countless times over the years.

It’s a common misconception that investing in real estate requires boatloads of cash (yes – it can help however).  One of the greatest advantages of real estate investing is the power of leverage and subsequently the ability to generate wealth from little or no money down.  Here I wanted to cover four financing strategies that could be used with good success to help you land your first (or next) real estate deal and begin taking advantage of all real estate has to offer.

FHA Loans

A loan often used by home buyers when purchasing a primary residence is an FHA loan.  These are loans that are insured by the Federal Housing Administration and a huge benefit of this is the ability to purchase a primary residence with as little as 3.5% down.  The main catch to this is you’re only able to purchase a primary residence.  That said, there are two ways to shift this to become an investor loan:

• 1-year Residence – FHA loans are only allowed for primary residence purchases but the rule behind this is that within a year’s time, you’re able to move out and are not forced to obtain a new loan.  Investors will often take advantage of FHA loans to begin home ownership when they don’t have enough money for a significant down payment, live in the home for a year, and then move out and rent the home while still holding onto the 3.5% down payment loan.
• House Hacking – Another strategy that helps you quickly get into a home with a low down payment is house hacking.  House hacking is a strategy where you’re able to purchase a multifamily residence (between 2 – 4 units), live in one while renting out the other units.  The FHA has a clause that enables you to purchase 3.5% down payment while still renting out the vacant units.  Oftentimes, the rent from the other units covers part of, if not all, of your housing expenses and allows you to quickly purchase a home.

Hard Money

A non-traditional financing strategy is leveraging hard money loans.  Hard money loans are loans are provided by non-traditional lenders and carry a significantly higher interest rates (~10% range) and shorter terms.  That said, hard money loans are deemed “hard” as they take a closer analysis of the hard underlying asset as opposed to the scrutiny that a borrower is put under with conventional loans.

Hard money is typically a strategy that’s used for quickly purchasing a home and often requires you to have an exit strategy as the loans are typically short in duration.  Two common exit strategies I’ve used are to 1. sell at a profit or 2. refinance into a long term loan.

Cash-out Refinancing

That leads me to cash-out refinancing.  Banks allow you to cash-out refinance mortgages but often do not lend on distressed properties (this is where we could buy homes at the steepest discounts).

What I’ve done with great success is to purchase a distressed home below market value, stabilize (repair and rent out), and then refinance into a long term loan and cash-out my initial capital as banks oftentimes lend up to 80% of the homes value.  Here’s an example:

• Purchase price – $75,000
• Repairs – $5,000
• All-in cost – $80,000
• Market value – $100,000
• Bank loan (80% of home) – $80,000 ($100,000 x 80%)

With the numbers in the simple example above, you’re able to purchase and stabilize the home without any net cash while enjoying all of the upside including rent cash flow and appreciation potential.

Private Money

This is probably my favorite and most utilized strategy.  Private money is roughly defined as non-institutional lending.  In my case, this is capital that’s been borrowed from family or friends in my direct network.  With this strategy, I’m able to create a win-win for those around me as well as myself.

For myself, I’m able to gain access to capital as needed for my real estate projects and for my network, I’m able to create an investment vehicle for them to earn significant interest (current average APR for savings accounts is just 0.06%) with an asset that’s backed by real estate (and my good name!)

And there you have it – four of my favorite strategies that helps investors purchase homes without a need for large sums of cash.

Have you thought/heard of these strategies before?  Let me know below!