27 Oct How to Start Investing in Real Estate
Real estate can seem daunting. With so much information out there and so many real estate agents offering advice around every corner, it’s difficult to know how to start investing in real estate.
Often, it feels like everyone has an opinion on what works and what doesn’t.
So how do you know how to start investing in real estate when there are so many resources out there? Well, you go to a company with a high rate of success — look for companies that have been in the business a long time and offer step-by-step instructions for beginners.
Investing in real estate shouldn’t be anxiety-inducing. It should be an adventure to reach all of your financial goals. Check out the first steps to investing in real estate, even when you don’t have a ton of monetary resources.
Investing Without Liquidity
One of the common questions that people have is, “Can you really get into real estate investing with zero money down?” Today, we’re going to walk you through how you can get started in that process.
We’re going to start by telling you a story about this gentleman in Pennsylvania–this was a deal we did together–a beautiful estate auction on ten acres. We purchased the home for $420,000.
But we didn’t put any money down.
We structured an owner financing deal with them using principal-only payments of $1,540 a month for 24 months. With principal-only payments, you pay no interest.
After purchasing the home on a 24-month principal-only lease, we turned around and sold the home to a buyer for $499,000 as a rent-to-own property.
Our buyers will pay us $2,100 a month–no credit and principal–it's just a straight lease payment, so we're paying out this. We're getting principal credit, and they're paying us the monthly fee we owe the auction company plus a little more.
But before we get into the payment structure, let’s talk about the rent-to-own deal. We found a buyer who wasn’t yet ready to buy the home conventionally–so we created an agreement with our buyer where they had to put down a down payment. Without this down payment, we would only have a renter.
Our buyer put down $64,000 that’s non-refundable on this house. This down payment is what we call Payday #1. For all of our deals, we like to structure 3 Paydays™ per deal.
Payday #2 is the difference between what we're collecting and what we're paying out for 24 months. On this deal, Payday #2 comes to a little over $13,000 over the length of the term. Then, we have Payday #3. What is that exactly?
Well, at the end of our lease agreement with the seller, we paid for 24 months on principal, so we only owe $383,000.
So you take the $420,000 minus the payments made. We owe this to the seller… but what does the buyer owe us?
Our Payday #3 is the markup on their purchase price plus principal paydown, minus their initial deposit. That totals in at around $50,900.
With all 3 Paydays™, it’s going to be well over a six-figure deal for us.
If you would like to hear more about our student’s story in his own words, be sure to check out this YouTube video.
Why Rent-to-Own?
Another question our students often ask is why would a potential buyer want to opt for a lease-purchase rather than buying the home with a traditional bank loan? What makes rent-to-own an attractive option?
These are very good questions.
With a typical rent-to-own buyer, especially in the current market, sometimes potential buyers are having trouble with financing. This could be anything from challenges with their credit to needing some seasoning.
What does ‘seasoning’ mean? Well, for some buyers, such as those who are self-employed, traditional banks often won’t provide them with a loan unless there are at least two years of tax information proving they aren’t a risk for the bank.
With the rent-to-own option, buyers can start making payments toward homeownership while giving themselves time to prove to the bank that they can handle loan payments.
As investors, people who are ready to buy but need a little extra time to get all their finances in order are great. It allows us to invest and see returns relatively quickly.
Don’t Forget When Learning How to Start Investing in Real Estate
- There isn’t just one single way to start investing in real estate.
- It is absolutely possible to begin investing with no money down.
- Rent-to-own is a good way to enter real estate investing.
Want some additional guidance on how to start investing in real estate? Consider letting the team at Smart Real Estate Coach help get you started and schedule a FREE strategy call!
Don’t forget! Get your free copy of our Real Estate Investor’s Blueprint. Just fill out the form to the right and we’ll email you our step-by-step guide to getting into investing and owning more homes without using your cash or credit.