How to Invest in a Rental Property for Beginners
Table of Contents
How Newbie Real Estate Investors Can Start Small and Eventually Earn Passive Income with Real Estate
Investing in rental properties is often seen as a pathway to financial independence and wealth. This investment approach provides multiple income streams through rental payments, offering a potentially steady cash flow.
Over time, property values also tend to appreciate, allowing investors to benefit from capital gains when they decide to sell. Rental properties even offer various tax advantages, such as deductions for mortgage interest, property taxes, and depreciation. These benefits can improve the overall return on investment (ROI). [1]
However, the common perception is that real estate investing requires a large upfront investment. Several strategies exist to enter the real estate market even with limited funds. Here we will discuss how you could invest in rental properties with little money.
Source: Investopedia.com
How to Invest in a Rental Property with Little Money
A common belief among investors is that real estate requires a substantial upfront investment which can be true for lots of high-value properties in desirable locations. These properties may reinforce the idea that real estate is inaccessible to the average investor. In addition to down payments, closing costs, and renovation expenses, ongoing costs like property taxes, maintenance, and insurance can all add to the financial burden.
Still, there are alternative strategies that can help investors enter the real estate market with lower initial investments. Contrary to popular belief, real estate is not solely reserved for the wealthy. The real estate market caters to a wide range of budgets and needs. There are options within residential and commercial real estate. It is all about finding the right avenue based on your financial capabilities. [2]
Source: Medium.com
Here are some Strategies to Consider:
House hacking
House hacking is one of the best ways to invest in a rental property with little money. It involves purchasing a multifamily property, such as a duplex or triplex, and living in one of the units while renting out the others. [3]
This approach allows the rental income from the other units to cover the mortgage payments, property taxes, and maintenance costs. Ideally, the rental income will provide a profit, helping the investor build equity and save money for future investments.
By living in one of the units, the owner can take advantage of lower interest rates and down payments typically associated with owner-occupied properties, making it more accessible for those with limited funds. [3]
Another house hacking strategy is to purchase a single-family home with multiple bedrooms and rent out the extra rooms to residents. This method can be particularly effective for young professionals or college students comfortable with a shared living space. They potentially reduce their housing costs significantly and live rent-free by renting out the additional rooms.
Not only does this help save money, but it gives investors valuable experience as a landlord, which will come in handy as they take on bigger investment properties. Living on-site makes managing the property more efficient and allows maintenance/resident concerns to be promptly answered.
House hacking can be a powerful way to enter the real estate market with minimal upfront investment. At the same time, it helps build a foundation for future real estate endeavors.
Real Estate Partnerships
Investing in rental property with limited capital can be challenging, but real estate partnerships offer a viable solution. By teaming up with other investors, you can pool resources to purchase a property that might be otherwise unaffordable.
Real estate partnerships typically involve several individuals or entities combining their financial resources, knowledge, and skills to acquire, manage, and profit from rental properties. These partnerships can take various forms, including joint ventures and limited partnerships.
Partners may contribute differently, with some providing the bulk of the capital and others offering property management or construction expertise. This creates a synergistic relationship that benefits everyone involved.
When entering a partnership, it is important to establish clear agreements from the outset. A detailed partnership agreement outlining each partner’s contributions and responsibilities is necessary. This agreement should also highlight profit-sharing arrangements and exit strategies. In the long run, this agreement will help resolve disputes and address how decisions will be made.
Legal advice is often necessary to ensure the agreement is thorough and binding. Beyond the legal and financial aspects, successful partnerships require trust, communication, and a shared vision for the investment.
By leveraging the combined strengths of multiple partners, investors can overcome the barrier of limited capital and take advantage of lucrative opportunities in the rental property market.
Seller Financing
Seller financing is another possibility when investing in a rental property with little money. This is a method wherein the seller acts as the lender. This arrangement allows buyers to avoid traditional bank loans and large down payments.
Typically, in seller financing, the buyer and seller agree on the loan terms including the interest rate, repayment schedule, and loan duration. This can be a win-win situation: the buyer gets the property with minimal upfront costs, while the seller benefits from steady income through interest payments, often at a higher rate than traditional savings or investment accounts. [3]
Seller financing can be particularly advantageous in a competitive real estate market or when dealing with motivated sellers who sell quickly. It opens doors for buyers who may not have strong credit histories or substantial savings for a down payment. [3]
This approach can even streamline the purchasing process, reducing bureaucratic hurdles and delays often associated with bank financing.
This method empowers investors to acquire rental properties, generate rental income, and build equity over time, all while preserving their capital for other investments or operational expenses. [3]
Lease Options
A lease option, also known as a rent-to-own agreement, allows you to lease a property with the option to purchase it later. This method requires a relatively small initial investment compared to a traditional property purchase. [3]
Typically, the arrangement involves paying an option fee, a fraction of the property’s purchase price, and a portion of the monthly rent may be credited toward the future down payment. This strategy provides time to accumulate the necessary funds while generating rental income. [3]
Additionally, lease options can be advantageous because they provide flexibility and reduce risk. If property values increase, investors can benefit from the appreciation without committing to the full purchase price upfront.
If the market declines or the property doesn’t meet expectations, there is the option to walk away at the end of the lease term. This approach also allows investors to build a positive relationship with the seller, potentially leading to more favorable financing terms.
By leveraging lease options, investors can enter the real estate market with minimal upfront costs, gradually building equity and experience in property management.
REITs
Real Estate Investment Trusts or REITs offer a more accessible entry point for those with limited funds. REITs can own, operate, or finance income-generating real estate. By purchasing shares in a REIT, investors can gain exposure to the real estate market without directly buying, managing, or financing a property. [3]
This indirect investment method is advantageous for small investors because it allows them to start with relatively low amounts of capital. REIT shares can be purchased for much less than a down payment on a property. REITs are often traded on major stock exchanges, providing liquidity and the flexibility to buy or sell shares easily. [3]
Another benefit of investing in REITs is the potential for diversification. REITs typically own a portfolio of properties, like residential, commercial, and industrial real estate across various locations. This diversification can mitigate risks compared to owning a single rental property, which might be subject to local market fluctuations or property-specific issues.
REITs are also required by law to distribute at least 90% of their taxable income to shareholders as dividends. This ensures a steady income stream, which can be particularly attractive to investors seeking regular cash flow.
Source: Smartasset.com
Real Estate Investment Option for Accredited Investors: Multifamily Syndication
BAM Capital has become a favorite for professional real estate investors. Whether they come from commercial or residential, BAM Capital is helping investors who want a hands-off approach. BAM Capital offers a done-for-you (DFY) solution, that real estate investors, developers, and builders love. Having a team of true professionals manage the properties, and the investor collects the checks? See why so many real estate investors love investing with BAM Capital.
Investing in rental properties with little money is possible with the right strategies. Investors should be willing to start small and gradually build their real estate portfolio before jumping into larger deals.
While real estate is more accessible than most people may believe, there are advantages to having access to more financial assets when it comes to investing. For example, accredited investors can access investment opportunities unavailable to the general public due to their net worth, annual income, and investing knowledge.
The U.S. Securities and Exchange Commission (SEC) allows accredited investors to participate in unregistered securities because they have the experience to assess these deals and the financial means to protect themselves if these larger investments do not work out.
Real estate generally is a great addition to any investment portfolio, but it is no secret that it also has drawbacks. For example, real estate requires a significant time commitment because investors must take on the role of a landlord when purchasing a property. There may also be unexpected maintenance issues and problematic residents, which real estate owners also deal with.
However, real estate syndication solves many of the challenges typically associated with real estate investing. It is a true passive investment in real estate, meaning investors can sit back, relax, and enjoy the fruits of their investment.
A real estate syndication deal involves multiple investors pooling their financial resources to purchase a single real estate property. This can be done with almost any type of real estate, but multifamily syndication is the most popular due to the strong cash flow associated with apartment communities and condominiums. [4]
These larger properties are also more expensive and harder to obtain for a lone investor, making syndication even more appealing. With syndication, investors do not have to take on all the risk alone.
They do not have to worry about property management as this responsibility also falls into the hands of the syndicator. The syndicator, or the sponsor, puts the syndication deal together.
As the general partner (GP), the syndicator’s job is to create and execute the business plan. They handle everything from locating the investment property, performing due diligence, and looking for accredited investors who will participate in the syndication deal. They will also handle property management once the deal is in place, meaning investors do not have to worry about the property’s day-to-day operations. [4]
Investors are limited partners (LPs) in the syndication deal. They provide most of the capital needed to acquire the property and pay certain fees to support the syndication deal. But beyond that, they have no further responsibilities.
For their investment, LPs earn a share of the property’s monthly rental income, providing a consistent source of cash flow. This may be distributed on a monthly or quarterly basis, depending on the profit split that is detailed in the syndication agreement. Investors may also earn a share of the property’s equity upon resale, but every deal is different, so it depends upon the deal structure. [4]
Due diligence is still highly recommended when participating in a syndication deal. With that said, this investment strategy is perfect for accredited investors who want to enjoy the benefits of owning real estate without the headaches of being a landlord.
With multifamily syndication, investors can add a passive investment to their portfolio. Remember that even syndication has risks, so most are exclusive to accredited investors.
Source: Multifamilyrefinance.com
Work with BAM Capital for the Best Multifamily Real Estate Syndication Deals
One of the drawbacks of multifamily syndication is illiquidity. Like other types of real estate investments, investors must be comfortable with not having access to their funds because these deals last several years.
It is important to work with a trustworthy syndicator. BAM Capital is a syndicator with a proven track record of excellence and reliability. This Indianapolis-based syndicator now has over $700 million AUM and 5,000+ units thanks to their award-winning investment strategy. Their approach allows them to create forced appreciation while mitigating investor risk. [5]
BAM Capital prioritizes high-quality real estate properties that are Class A, A-, and B++, particularly those with in-place cash flow and proven upside potential. [5]
Not only is BAM Capital a leader in its industry, but it is also vertically integrated. This means they can handle every step of the syndication process, from acquiring the properties to renovating and managing them.
Disclaimer: All investments carry risk. Before making financial decisions, consult an independent investment advisor for personalized advice based on your individual circumstances and speak to a member of the BAM Capital investment team for additional information regarding its current offerings. The content of this article is solely for informational purposes and is not an offer to sell, a solicitation to buy, or a recommendation of any security or investment product. It should not be considered investment advice or an endorsement of any particular investment strategy or product. BAM Capital and its representatives do not serve as fiduciaries or investment advisors. The information provided is general and does not consider the specific investment goals, financial situation, or needs of individual readers. Past performance does not predict future results. BAM Capital and its affiliates do not guarantee the accuracy, completeness, or reliability of the information in this article.
For accredited investors, including family offices who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.
Source: Thebamcompanies.com
Sources:
[1]: https://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp
[2]: https://medium.com/@nehaasingh840/is-real-estate-meant-for-only-rich-people-b93d261a7fde
[3]: https://smartasset.com/investing/how-to-buy-an-investment-property-with-no-money-down
[4]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important
