Here’s a question I get a lot: “Can I invest in real estate with no money of my own?” There are some variations, like “Can I invest when I have very little capital?” or “Is it really necessary to risk my own capital when I could use other people’s money instead?” But it’s pretty much the same question being asked.
My answer?
Well, in theory there are ways you can get started as a real estate investor with little or no capital of your own… but why in the world would you want to do that?
We’ll take the two halves of my answer in order.
Sure, You Could…
There’s no doubt about it: you can find all kinds of gurus and experts out there teaching folks how to get started as real estate investors when they have little to no capital of their own… and/or poor credit… and/or some other reason to take such an approach.
There are hard money lenders and private money lenders. They’ll loan you the cash so you can do deals. Cash is a good thing, so having some in hand can help you move deals along more quickly.
Of course, you’re going to pay considerably higher interest rates than you would if you put your own money down and financed the remainder via a traditional bank loan. And you’re probably going to pay some hefty fees in terms of “points,” on top of the interest payments. It’s a very expensive way to borrow money.
Then there’s wholesaling. This is often touted as a low-barriers-to-entry way to break into real estate. Instead of overseeing the whole rehab process and flipping houses like that, you find deals on houses that can be flipped and then entice investors to buy them from you ‒ letting them do the rehab work and selling end it to the end user.
However, you’re going to need some capital to make this work. And it’s very labor intensive in terms of building a solid network to create deal flow: finding investors, digging around for deals, knowing your margins, and having your fingers in a lot of pies.
We shouldn’t leave out the home equity option, either. The idea here is something like this: “Hey, you don’t have cash, but you do have a house that’s worth a lot. You can do a cash-out refinance or take out a home equity line of credit. Bingo! You’ve got capital and you’re good to go!”
Again, this can work. But you’ve got to wonder: how much sense does it make to jeopardize and basically play around with the loan on the house where you live? And, as Robert Kiyosaki pointed out many years ago (and it was news to typical middle-class homeowners), your house isn’t an asset, financially speaking ‒ it’s a liability. So you want to increase your cash flow and pay down that home loan. You don’t want to go further into debt on a house that doesn’t pay you money every month.
We could go on and look at seller financing models, quick ways to give your credit score a boost, or whatever. But we’ve covered enough so far to get the point…
Yes, there are ways to invest in real estate that require little or no money of your own to get started, and that don’t require you to have a stellar credit score. These ways have worked for some people, and in theory one of them could work for you. But they all have serious downsides and are not as easy to pull off as the promotional materials make it sound.
Which brings us to the second half of my answer…
But Why Would You?
Let’s move beyond a simple list of pros and cons. There’s something more fundamental going on here…
Notice that all these approaches are “tricks” or “hacks” or “shortcuts” trying to convince you there’s some “pixie dust” way to get around one very simple fact:
If you have no capital to work with, then you aren’t ready to invest.
(For that matter, if you credit’s a wreck, then you’re probably not ready, either.)
Look, here’s a good working definition of “investing”: committing money or capital to some endeavor with the expectation of obtaining additional income or profit. Notice the goal is to have “additional income or profit.” So if the current amount of profit in your life (in terms of savings, cash, retirement accounts, or whatever) is more or less nothing, you can’t really invest. You can play around with other people’s money ‒but then that’s their investment, not yours.
Your goal as an investor is to leverage what you already have into even more. You’re after extra profit.
Do It Right
So you need to have a very low and manageable level of consumer debt (or none!). You need to be bringing in money that pays the bills, supports the day-to-day life of your family, and leaves a good amount left over to set aside… as capital to invest.
It’s like with this couple, Scott and Valerie. They came to me so they could get started as real estate investors. I studied their financial situation… looked them in the eyes… and said, “I can’t help you.”
They had way too much credit card debt. Their finances were completely out of whack, and they just weren’t ready to invest yet. (So, actually, I did help them ‒ by steering them away from disaster.)
Instead, I helped them make a plan to get their finances in order and save enough money so they could become investors. It was just going to take a little time. And, sure enough, they made massive progress within just a couple of years.
That’s how you do investing right. Don’t let “the experts” convince you it’s a good idea to style yourself as an investor… when you don’t have anything to invest. And don’t let them convince you that trying to take easy shortcuts where you avoid the basics of sound money management is a good idea.
It isn’t.
Give us a call at (801) 990-5109 or schedule your free appointment here to build a personalized Wealth Plan. We’ll help you understand how RP Capital can help you clarify and reach your financial goals by investing in real estate…
