The average sale price of a home in the United States recently surpassed $400,000. For someone using the oft-quoted 20% down payment standard, this makes it seem like a huge challenge to get into real estate with less than $100,000 in the bank (accounting for a down payment and minimal cash reserves).
If you don’t quite have this kind of cash on hand, fear not. FHA financing, partnerships, and creative Airbnb strategies can all help you to reach your investment goals. Some of these strategies are riskier than others; we’ll start with the safest bets before looking at some options with higher levels of risk and reward. And if all else fails, look into investing in REITs or crowdfunded real estate. These are both solid ways to invest a small amount of money in real estate while steadily saving for that first big investment.
Airbnb Your Current Apartment
If you’ve got a spare room, fill it with some trendy furniture, throw it up on Airbnb, and see what happens. This is a low-risk way to gain experience with short-term rentals and make some side cash at the same time. And, if you realize that you hate sharing your home with randos, no problem—just take down the listing.
Even if you only have a one-bedroom apartment, you can still give Airbnb a try. Take some high-quality photos of your place, set up a listing on Airbnb, and rent it out while you take a vacation or crash at your parents’ house. Again, this is a great, low-risk way to test the STR waters.
- This strategy allows you to gain experience and reputation with the Airbnb platform before moving on to bigger and better styles of real estate investing.
- You’ll get to meet new and exciting people from around the world.
- There’s less risk when you use your primary residence because this is a place you can already afford. Any additional income you earn from a short-term rental business is gravy.
- Having random people coming and going from your house can be sort of weird. There’s also a non-zero chance that one of your guests breaks something or messes with your stuff. If you’re someone who really values personal space, this might not be for you.
- You’ll have to clean and do laundry in between guests.
- If your apartment is leased, your landlord may have anti-Airbnb rules. It’s up to you to assess the risk of breaking any rules the landlord may have in place.
Use FHA Financing on a Duplex or Triplex (House Hacking)
Because the Federal Housing Administration backs FHA loans, banks can offer more lenient credit and down payment requirements than they would with conventional loans. New investors are often surprised to learn that an FHA loan can be had with below-average credit and as little as 3.5% down.
Here’s the catch: To qualify for an FHA loan, the property in question must be the owner’s primary residence.
“House hacking” is a strategy that allows budding real estate investors to fulfill the primary residence requirement and take advantage of affordable FHA loans. By investing in a duplex, triplex, or fourplex, and making one of the units their personal residence, investors can get into their first investment property without perfect credit or a massive wad of cash.
- You get equity, a cash flow, and a place to live, all in one.
- Your personal stuff won’t get broken or messed with because you are physically separated from your tenants.
- You can invest with a small down payment. Depending on your market, you may find an opportunity that allows you to buy the perfect duplex with less than $10,000 down.
- This strategy could result in you being very un-diversified. If you use all of your savings to do this one deal, you’ll have all of your eggs are in one basket.
- Property management can be a massive headache, especially if this is an older property requiring more frequent maintenance. Acting as the property manager for a single tenant may not be a full-time job, but it’s not something you can casually do in your free time, either. You’ll be responsible for someone else’s living situation, and that’s not a responsibility to take lightly. When unexpected emergencies pop up (e.g., furnace malfunctions in the dead of winter), you’ll need to drop whatever you’re doing, get the problem fixed quickly, and have the cash reserves to pay the bill.
Invest with Partners
Even with the significant cost-savings of the FHA/house hack strategy, you may still find yourself short on capital. In cases like these, you might consider partnering with someone to raise the funds you need to get the deal done.
There are all kinds of ways you could lay out such an arrangement. The simplest might be to go into the deal as 50/50 partners, sharing in all management and maintenance responsibilities, and incurring an equal proportion of profits and losses. Working 50/50 is a great strategy until you disagree with your partner and find yourself without a tiebreaker. Working with an odd number of partners would alleviate this.
- The deal gets done.
- Smaller investments make it easier to diversify.
- Investing with your spouse or a trusted friend can be really fun.
- Partners can delegate responsibilities according to their strengths
- When problems arise (they will), the partners can put their heads together to devise creative solutions.
- A partner may not pull their weight, leaving you with an unfair proportion of management responsibilities.
- Disputes may be tough to resolve. With this much money involved, a severe disagreement could do lasting damage to friendships, marriages, and personal finances.
- No tiebreaker exists in situations with just two partners (unless the two partners use an agreed-upon mediator).
- In situations with three or more partners, the division of responsibilities related to the property becomes more complex. In cases like these, it may make sense to designate one active managing partner and several equity partners who have a less active role.
Try Your Hand at Airbnb Rental Arbitrage
The idea here is that you lease an apartment, and then, instead of moving in yourself, you furnish it and put it on Airbnb. The goal is to net more from the Airbnb listing than you owe on the lease. This strategy can work really well, but it can also work really not well. Proceed with caution.
- No down payment and no debt.
- It’s easier to qualify for a lease than it is to qualify for a loan.
- Repairs and common area maintenance are not your responsibility.
- If the deal goes well, the ROI on this strategy can be big. Nightly rates for fully furnished short-term rentals are often significantly higher than what is owed on the lease.
- Many landlords and apartment communities prohibit the use of Airbnb and other short-term rental services. You will either have to find a landlord who gives you permission to use Airbnb or make a conscious decision to flout the rules.
- With an unexpected drop in occupancy, you could find yourself suddenly owing more on your lease than you make from your Airbnb listing. Because your lease payments don’t build any equity, you’ll quickly find yourself hemorrhaging money. If you have a portfolio of rental arbitrage properties, this effect could quickly multiply in a downturn.
- Many cities have laws that limit Airbnb. Check to make sure there aren’t any laws in your market that will keep you from hitting your target ROI.
- You’ll need to set up a contract with a housekeeping service or clean the place yourself between guests.
- If the investment is a failure, you’ll either be stuck paying the lease or will owe an early termination fee. And if you fail to pay your lease, your credit will take a major hit, making it difficult to obtain financing on future deals.
Which strategy is right for you?
There are pros and cons to every investing strategy. Higher reward often comes with higher risk, and it’s up to the individual investor to do their due diligence and decide what’s right for them. However, if you’re young, now is the time to take on risk. And if you’re in it for the long haul, an investment strategy that builds equity in real property is always a solid one.