The most discouraging assumption you could make about real estate investment is that it's only for rich people. Plenty of investors have stories about paying cash for their properties. Many of these same investors got their start buying properties with little or no money down. That's because buying an investment property is less about the down payment than it is about understanding your investment and your market.
Table of Contents - How Much Money Do You Really Need to Get Started Investing in Real Estate?
Starting your real estate investment journey is daunting if you feel like you don't have enough money. Fortunately, there are several avenues you can take depending on your level of investment and engagement. Entering the investment space is easier than you think!
The power of leverage
Leverage is the concept of using borrowed capital for an investment with the expectation the profits will be greater than the interest. For real estate investors, leverage is a loan that helps you buy an investment property. You provide a small down payment and a lender pays the remaining amount of the purchase price. You're also responsible for any closing costs. You'll then make small monthly payments to the lender until the house is paid off or until you sell the property.
Although you have to continue paying the lender, you’ll be collecting income from your investment. You'll charge enough rent from your tenant to more than cover your monthly payment, earning you extra money in the meantime.
Like all investments, there is a risk of using leverage. The more leverage you use, the greater your risk. If you are unable to find a tenant willing to pay an amount that covers your payments and earns you a profit, you're losing money on your investment. If the house drops in value you could end up underwater, owing more money than the house is worth. These will hurt your chances of getting any return on your investment, let alone allowing you to make future investments.
This process might sound familiar if you already own a home. The process of buying a real estate investment is not much different than buying your own house. Every real estate investor isn't paying cash for homes; they know the value of leverage in reaching their investment goals.
If you've decided to use leverage to buy your investment property, you can start with a conventional mortgage. A conventional mortgage is a mortgage that does not carry any high-ratio or lender insurance premium. Lenders typically require a 20 percent down payment for a conventional mortgage on a single-family home without mortgage insurance.
If your mortgage is a high-ratio mortgage (higher than 80 percent of the property value), it must be insured by Canada Mortgage and Housing Corporation (CMHC), Genworth or AIG. This will add an insurance premium to your mortgage payments.
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If you're eager to get started in real estate investment but not sure you can afford it, consider house hacking. With house hacking, you purchase a property to live in along with your tenants. The rent you charge them covers your housing expenses and your payments to your lender. These properties are almost always multi-unit properties, ranging as small as duplexes to as large as four-to-six-unit residences.
While house hacking may not be an ideal living situation, depending on your family size and the property, it's an excellent entry point for investing. You can buy an inexpensive property with little down and rent out the other bedrooms or units until you feel comfortable buying your place. Best of all, when you do move out, you already have a rental property set up, generating cash flow you can use toward future investments.
If you want to get started in real estate investing but don't have enough for a down payment, or the time to manage tenants, there are easier options.
Real estate investment trusts (REITs) are inexpensive and easy investments to add to your portfolio. These securities are traded like stocks. The trust managers invest in real estate properties and/or mortgages directly, sometimes focusing on a specific region. You can get started with anywhere from $500 to $2,500.
Real estate investment groups (REIGs) are a more involved investment option. These are private partnerships in which investors work together to purchase and manage a multi-family property or a portfolio of properties. The group is responsible for maintaining the property and its units. It also handles any marketing. The group's investors then receive a portion of the rent. You can invest in a portion of a property typically starting at $5,000 to $50,000 for a monthly cash return.
Finding your security point
There's no formula or magic number to determine how much your down payment for a rental property should be. Instead, you need to focus on your security. Real estate is an excellent investment, but not if it puts your financial security in jeopardy.
The number or percent of your down payment is not as important as your overall deal. What matters is how much of your own money you put on the line versus the deal the lender offers you.
If you can pay for your investment property in cash, ensure you're still getting a fair value for the property. Just because you can afford to purchase the property outright doesn't mean you shouldn't negotiate. You still need to conduct a thorough analysis of your investment to ensure a solid return.
As the saying goes, knowledge is power. You can minimize your risk by becoming well versed in the real estate market. Much of that wisdom will come with time. If you can perform a thorough analysis of a property before investing, you'll be better prepared for market fluctuations. Don't be afraid to ask a seasoned investor for help.
The great thing about real estate investment is that there are so many ways for people to get started. Whether you have $0 or $100,000, you can start your path to becoming a real estate investor. You just have to know your options.
Real Estate Investing for Beginners: Expectation vs Reality
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