How much money do you need to invest in real estate? If you’re asking this question, you’re not alone. By far, this is the most common question on the mind of new home buyers.
Today there are 28.1 million Americans invested in real estate, and for good reason, too. Real estate has created more wealth for more people across time and history than any other asset class.
The main reasons? First, leverage (that is, mortgages) makes it easy to double or triple your money. Yes, that means to achieve 200 to 300% returns, versus the average of 10% per year that you might make in the stock market.
Why is this? It’s because if you only 3.5% down to own your first home, using a common loan type called an FHA loan, for example, then the home only has to go up 3.5% in value for you to double your money.
That could easily happen in a single year. For example, the value of existing single family homes increased an astounding 23% over the past year, according to the National Association of Realtors. If you used an FHA loan to put 3.5% down on a home a year ago, you already would have achieved about a 650% gain on your initial investment (23% / 3.5% = 6.57 x 100 = 657%). That’s wild, right?
Second, with real estate you benefit from the value of you home going up in over time, but you also benefit from monthly debt paydown, as well as tax advantages, such as writing off mortgage interest and depreciation.
And of course, in today’s era of excessive money printing, it’s always valuable to own a verifiably scarce asset, such as land with a building on top of it. As the old saying goes, “What’s the best investment on earth? Earth.”
Alright, now that you’re convinced, how much money do you need to get started in real estate, exactly? Let’s dig in.
How Much Do You Need to Invest in Real Estate?
You might be thinking, you have to be fairly wealthy to invest in real estate, right? Like loaded. Here’s the cool part — that’s not true.
Let’s dive into practical strategies you can use to get into real estate for little to no money down.
1. USDA Loans for Rural Homes (0% Down)
Here’s a little known secret: you can invest in real estate for 0% down. This is possible with a USDA loan, although it has some stricter requirements on who can use the loan and the properties you can purchase with it.
The goal of this loan program is to make it easier to purchase property in rural areas of America, generally in areas with a population less than 20,000. Meaning, if you have a dream of renovating a mountain cabin, buying a house on a nice plot of farmland, or living in a small, quaint town, this is the perfect loan for you.
It’s also designed for lower-income earners. For a 1-4 person household, you need an income lower than $86,850 to qualify, with a few exceptions for some higher-cost areas.
There is one other catch though. The USDA loan can’t be used for an investment property. It has to be your primary residence, and you can’t buy a duplex with a USDA loan. But there are some loopholes you can still take advantage of.
For example, Air BnB is one way to make money through your USDA property, or you can rent out a spare room.
Or, get this, you can flip houses with a USDA loan. So if you find an eligible property and want to start flipping with little investment, this is a great way. But look out for some common house flipping mistakes.
Since you can buy real estate with little (or no) money down, it doesn’t cost as much to get started as you might think.
2. VA Loans for Military Personnel (0% Down)
If you’ve served in the military, you’re eligible for a VA loan. The good news, you can be either active service or a military veteran.
Similar to the USDA loan, you have to use this loan to purchase a home for your primary residence, but you can use it to buy a multi-unit property like a duplex, so long as you live in one of the units.
If you’re trying to keep your monthly mortgage payments down after you close, you could also use this loan to buy a plot of land as long as you also install a manufactured home on it (previously called a mobile home).
On top of that, a VA loan doesn’t require you to hold private mortgage insurance (PMI), which can be quite expensive. And, these loans typically have lower mortgage rates than most other loans. Plus, you can get into your new home for 0% down.
3. HomeReady Mortgage and Conventional 97 (3% Down)
There are two loan options that let you buy real estate for only 3% down. These are the HomeReady Mortgage by Fannie Mae and the Conventional 97 by Fannie Mae.
With the HomeReady Mortgage, you need a minimum credit score of 620 and 3% down. It’s designed for low to middle-income earners, but you can use the income for anyone living in the house to qualify for the mortgage.
So if children work and contribute to the household, or if parents will be living with you, all that income counts to qualify.
The Conventional 97 loan option is designed for first-time homeowners. If you haven’t owned a home for the past three years, you have a credit score of 620 or higher, and a debt-to-income ratio of less than 43%, you have a good chance of qualifying.
However, you can’t use a Conventional 97 loan option for a multi-family unit. It has to be your primary residence.
4. Federal Housing Administration Loan (3.5%)
There’s another awesome government-sponsored loan that can help you get in a house for 3.5% down and it’s one of the most common loan types used by new homebuyers.
It’s called a Federal Housing Administration (FHA) loan. It’s designed to make it easier for first-time homeowners to get a home without a devastating 20% down payment.
And the cool thing about FHAs compared to USDA loans is you can buy a duplex with an FHA loan.
You’ll still need to pay mortgage insurance, which is a bummer, but inevitable unless you have a 20% down payment. It also has to be for your primary residence — not a summer home or investment property. But if you live in one unit in a multi-unit complex, that still counts.
So how much does it take to invest in real estate? About $9,695. We calculated that based on an average cost of $138,500 per unit in a two-unit duplex at 3.5% down.
5. Piggyback Loans (Usually 10% Down)
A piggyback loan is where you take out a traditional mortgage for 80% of the property’s value and a second “piggyback” loan for another 10% of the purchase price. Usually, the second, smaller loan is issued at a slightly higher interest rate.
For example, I did this on my first real estate purchase. My first loan for 80% of the purchase price had an interest rate around 3.75%, while my second loan for 10% had an interest rate of around 5.25%. With this approach, I only had to come to the closing with 10% out of pocket.
For this to work, you have to put 10% down, but getting the second loan for 10% means that you don’t have to pay for private mortgage insurance (PMI).
If you choose to go with this option, make sure the interest on the second loan is low enough that it’s cheaper than a monthly PMI payment.
6. Investing in (Instead of Owning) Real Estate
And finally, I should mention, there’s other ways to invest in real estate for very little money if you’re not up for owning it directly.
For example, there’s a company called Fundrise and it’s a game-changer when it comes to investing in real estate. With Fundrise, you invest as little as $500 and that money goes to fund major real estate investments across the country.
You get to see the real world properties you’re invested in and get dividends on rent and payments when the property sells for a profit.
And while $500 is the minimum investment, you can keep investing and keep getting returns — there is no max. It’s a great way to get returns on real estate without the stress of buying properties or managing tenants.
There are some cons though. Anytime you invest in real estate, your money is tied up. When you decide it’s time to withdraw from Fundrise, it can take a couple of months. This is normal because that’s the way real estate works, but it is something you should be aware of before you invest.
Alternatively, Cardone Capital is a company that will let you invest in their real estate deals for as little as $1000. However, they don’t always have this option available, because their funds often oversubscribe, so you’ll have to go here to check. If you go this route, you’ll get equity shares in their deals and collect quarterly distribution checks for your share of the cash flow.
How Much Money Do You Need to Invest in Real Estate?
So, how much money do you need to invest in real estate? It depends on your circumstances and what your goals are, but you can often have your own house for as little as 0% to 3.5% down.
I hope learning this has you feeling empowered, confident, and ready to take your next steps. So, go forth and contact a mortgage broker who offers the mortgage type above that best matches your needs.
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