How Do I Invest in Real Estate if I Have $50,000?

11 Sep How Do I Invest in Real Estate if I Have $50,000?

Every week I get asked, “How would you invest in real estate if you only had $__________?” Today we’ll explore your options if you have $50,000 that you’re willing to put into real estate. The good news is that you have lots of options!

First, let’s clarify what we’re dealing with here. The assumption is that you have $50,000 in liquid assets, which include cash, cash equivalents, or marketable securities. I’ll assume that we’re talking about residential properties. (Commercial deals are certainly possible, and I’ve done some with less than $50,000. However, today we’ll focus on a residential deal because those are generally simpler to acquire with $50,000 or less.)

If you are in a market where $50,000 is enough to buy a house and renovate it as needed, then that’s great. For the purposes of this article, I’ll assume that the typical After Repair Value of a decent investment property is around $250,000. That means you’ll need more than $50,000 to buy and renovate a property. $50,000 should cover a 20% down payment on a $250,000 purchase price, yet you wouldn’t have money left over for closing costs, carrying costs, or renovations.

Below are some real estate investment options if you have $50,000:

• Purchase a non-owned occupied single family house that is a modest fixer-upper using a 15% down or 20% down mortgage loan. For instance, if you bought a fixer-upper for $150,000 that needs $20,000 in renovations, you could put down 15% ($22,500). You would have enough left over to cover the renovations and the closing/carrying costs.
• Partner with someone who can bring enough money to make the deal happen. I’ve done partnerships in which the partner put up 100% of the money for 50% of the ownership. In that kind of deal, technically you wouldn’t need any of your $50,000! I’ve also done partnerships where we each put in half the money. So, if you have $50,000 and the partner invested $50,000, you could buy something up to $100,000. In most markets, $100,000 won’t get you a decent property. Usually with a partner scenario, you share control of the property or at least need partner approval on big decisions.
• Obtain a loan from a private lender or hard money lender. If you have a rich Uncle Jimmy who wants to loan money to you, or if you have a reputable hard money lending option, you can acquire a property. For example, let’s say you need a total of $200,000 to buy and renovate a property. You could invest $50,000 and have Uncle Jimmy loan you $150,000 at 8% interest or whatever you agree upon. That way Uncle Jimmy sees that you have skin in the game, and he receives a higher interest rate than most other investments out there. When you borrow money instead of partnering with someone, you have more upside since you’re only paying interest instead of a share of the profits. And, you have total control of the project instead of sharing control with a partner. Hard money works well too if you can live with the higher interest rate and points/fees. For instance, a hard money lender might expect you to put 20% down and finance the entire renovation. The hard money lender in this situation would loan you 80% of the purchase price. For many hard money lenders, they won’t care where you get the 20% down payment and renovation money. In theory, Uncle Jimmy could loan you the 20% down AND the renovation money while you use the hard money for the 80% loan. Technically, that would be 100% financing!
• Obtain a HELOC (Home Equity Line of Credit), term loan, or other type of loan against other real estate or assets that you already own. A lot of people jump-start their real estate investing this way. If you have sufficient equity in your personal residence, why not refinance or set up a HELOC to extract some of that equity? For example, you could pull out $50,000 to cover the down payment and renovation costs of an investment property. If your home’s fixed mortgage loan has a rate around 2.5% to 4.5%, refinancing into a 6.0% rate doesn’t make sense. In that case, keep the mortgage loan in place and set up a HELOC. Many HELOCs are interest-only which makes the monthly payments lower, and you only make payments when you use the money.
• Obtain a mortgage loan to purchase a home that you live in for at least a year. One scenario if you do not own your personal residence is to use a mortgage loan to buy one. Live in it for at least a year, and then consider renting it out or selling it. (I recommend the renting out option so you can build wealth over time.) Loans for a personal residence almost always offer the lowest interest rate, lowest down payment requirements, longest amortization period, and lowest points and fees.
• Find a seller who is willing to provide owner financing. Seller financing is much more common in down markets. Regardless of the market, with effort and persistence you may find a seller who is willing to provide owner financing. You could enter into a lease purchase (rent-to-own) deal or a contract for deed (land contract). You could also negotiate to have the seller deed the property to you, and they can hold a mortgage until you pay off the loan. If the seller has a mortgage loan, another option (although there are serious drawbacks) is a “subject-to” transaction. Read our blog on subject-to deals.
• Find a seller who is willing to partner with you. I’ve seen situations in which a seller had a fixer-upper yet didn’t have the money to conduct the renovations. An investor could partner with the owner in a deal whereby the investor funds and manages the renovation. When the house is sold, each party receives a predetermined amount or percentage of the proceeds.

Here are some other options if you don’t want to have management responsibility.

• Invest in a REIT. Buying shares of a Real Estate Investment Trust allow you to receive dividends and possibly share price appreciation. You have no management responsibility and no legal liability.
• Invest in a syndicate. Some large scale investors may solicit private money to build out an apartment building or construct homes in a development. They may elect to fund part or all of the project through investments from a pool of investors. These types of investments are passive. You would not have management control. Also, there are likely fixed time-frames in which you cannot receive the money back. You have to trust the management team and be patient for the return on investment.
• Be a private lender. You could fund another investor’s real estate project. There are even mortgage brokers who vet borrowers for you to ensure that you are lending to qualified people.

If all you have is $50,000, be especially careful. Real estate investments generally offer numerous protections, yet there are still ways to lose money. Consult your attorney, tax advisor, and financial advisor prior to making investment decisions.

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.