Strategies for Real Estate Investment Without Initial Capital

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I’ve been investing with Fundrise since 2018. Whenever you use my link to sign up, I earn a commission, but all opinions here are my own.

Is it truly possible to dive into real estate without any money? While TV and online infomercials make it seem like everyone is getting rich with no upfront cash, reality isn’t quite that simple. Yes, you can start real estate investing with little to no money, but it’s more complex than those get-rich-quick promos suggest, and patience is key.

Physical Real Estate Investing: Four Things to Consider
When looking at mortgages, it’s crucial to understand that credit scores and verifiable income sources are often overlooked by the quick-rich crowd. Here are four critical aspects to keep in mind if you want to invest in physical real estate, whether you have a large or small down payment, or none at all:

1. Enough income to cover mortgage payments.
2. Stable job or income source.
3. Good to excellent credit.
4. Lenders might ask for “cash reserves” for multifamily properties.

Having these qualifiers in good shape increases your likelihood of approval. Lenders are stricter with investment properties and multi-family homes compared to single-family homes, so ensure your credit score and income source are solid before applying.

How to Invest in Physical Real Estate With No Money
If your income and credit are strong, you might use one of these six ways to buy real estate with no money down:

1. FHA Mortgage With Down Payment Assistance
   Though not for investment properties, you can buy a 2-4 family home with just 3.5% down. Qualify for down payment assistance, and you might not need any money upfront. These programs vary by state and have income limits, but often, the assistance doesn’t need to be repaid if you live in the property for a set time.

2. FHA Mortgage With a Gift
   If you can’t get down payment assistance, an FHA mortgage allows you to use a gift from a family member. You can finance 96.5% with the mortgage and cover the 3.5% down payment with the gift.

3. Conventional Mortgage With a Gift
   For conventional mortgages, if your down payment is 20% or more, it can entirely come from a gift. However, for a 2-4 unit property, you typically need at least 5% from your own funds. Occupying one of the units is required for this to work.

4. Borrow From Your 401(k)
   You can’t borrow for a down payment, but you can use a secured loan like borrowing against your 401(k). You can take out the lesser of 50% of your plan’s vested value or $50,000, and many lenders won’t count this loan against you for income qualification.

5. Home Equity Line of Credit (HELOC)
   If you already own a home with significant equity, you can use a HELOC as a secured loan for the down payment. Be aware, though, some lenders may prohibit using HELOCs to buy investment properties, and those loan payments will count against your income qualifications.

6. Lease With the Option to Buy
   This involves renting a property with the option to buy later, usually with a pre-agreed purchase price. This can be beneficial if property values rise. However, it may require a bigger initial deposit or allocating part of your rent towards the purchase.

Risk Factors of Investing in Real Estate With Little to No Money
Investing with no money is possible but challenging. Here are some things to keep in mind:

1. High-Risk Proposition: No equity means little room for mistakes, and higher monthly mortgage payments.
2. Emergency Fund: Tenants? Things break. Have funds ready for repairs.
3. High-Interest Rates: Especially with today’s rates. Budget carefully.
4. Handy Skills Helpful: Fixing things yourself saves money.
5. Always Get a Home Inspection: Never skip this to avoid hidden problems.

Alternative Real Estate Investments
You don’t need to own physical property to invest in real estate. Here are two ways to start with less than $1,000:

1. Real Estate Investment Trusts (REITs)
   REITs invest in commercial real estate and are traded like stocks. You can start with a single share and receive income through dividends, plus potential capital gains. An easy way to start is through REIT ETFs, which offer diversification and low entry costs.

2. Real Estate Crowdfunding
   Platforms like Fundrise let you invest in real estate projects with as little as $10. Some platforms require accredited investor status, which means meeting certain income or asset benchmarks, but others do not.

Final Thoughts: Investing in Real Estate Without Cash
There are many ways to get into real estate with no money down, but each method comes with its risks. Do your research thoroughly before diving in. Starting with REITs or a REIT ETF can be a more accessible and less risky entry point.