True or false:
If you want to invest in real estate, you need to save lots of cash first.
That’s certainly one way to get started. But if you’re like most of us, that route will cause you to wait longer to invest than is actually necessary .
Little to no cash on hand? There are lots of ways to raise money for your first real estate deal. Here are three.
#1 Partner with a Private Lender
A private lender is a person who lends you money. This person can be a friend, a relative, or someone you traded business cards with at your last networking event.
To form a partnership like this, you’ll have to do something that is always simple but not necessarily easy.
You’ll have to ask.
Nine times out of ten, no one is going to just hand you thousands of dollars for kicks and giggles. But you might be surprised by how many people in your circle are genuinely interested in the opportunity you’re offering them.
You don’t need to wait until you’ve found a deal to start the conversation with a potential private lender. If you know you’re ready to dive into real estate investment, reach out to people you know and trust. Then tell them how you plan to invest and ask if they’d be interested in partnering with you.
#2 Apply for a Hard Money Loan
A hard money loan is one way to get most if not all of the money you need to buy and rehab a home quickly.
These loans typically come with high interest rates and other fees. It’s not unusual to pay your hard money lender a monthly interest rate of around 11% on your first deal. That’s not inexpensive, but don’t let that scare you away from the deal if the numbers make sense.
It’s a good idea to have a preliminary phone conversation with a hard money lender before applying for a loan. During the call, make sure you cover these topics:
- How much of the total project (price of property + rehab) the loan will cover.
- How much interest you’ll be paying each month.
- How long you have to pay back the loan.
- What the penalties for exceeding the loan ending date are.
- If you can pay back the loan early without a penalty.
#3 Use Your Equity
If you are a homeowner, you may have enough equity to finance your real estate investment ventures. Equity is your home’s appraised value minus what you still owe on your mortgage. So if your home appraises for $200K and you have $100K left to pay on your mortgage, the equity in your home is equal to $100K.
There are a couple of ways you can use that equity. You can take out a home equity line of credit (HELOC) or a home equity loan.
Like a credit card, a HELOC is a source of capital you can use when needed. Also like a credit card, you can’t use more than the approved line of credit. You’ll only have to pay off the amount you borrow.
A home equity loan gives you a certain percentage of your equity in one lump sum. You’ll pay it off monthly as you would a traditional mortgage.
You can invest in real estate even if you have little to no extra cash on hand. The methods described here are riskier than saving cash. But with greater risk, a solid deal, and the right partners, real estate investment becomes much more math than luck.