Real estate investments make money through appreciation and rental income. Real estate can diversify a portfolio and act as a hedge against inflation, since landlords can pass rising costs to tenants. But the down payment on multifamily investment properties? At least 20%, or 25% to get a better rate.
It’s true that eligible borrowers may use a 0% down U.S. Department of Veterans Affairs (VA) loan for a property with up to four units as long as they live there. But those loans serve a relative few and are considered residential financing. Properties with more than four units are considered commercial.
So how can a cash-poor but curiosity-rich person tap the potential of multifamily properties? By not footing the entire bill themselves.
Can You Buy a Multifamily Property With No Money?
When you buy real estate, you typically have two options: Buy with cash or finance your purchase with a mortgage loan.
There are various types of mortgages. If you take out a home loan, you’ll likely need to pay a portion of the purchase price in cash in the form of a down payment. The minimum down payment you make will depend on the type of mortgage you choose — the average down payment on a house is well under 20% — and it will help determine what terms and interest rates you’ll be offered by lenders.
This money needs to come from somewhere, but it doesn’t necessarily need to come from your own savings account. When investors buy multifamily properties with “no money down,” it just means they are using little to no personal money to cover the upfront costs.
If you don’t have much cash of your own, there are several ways that you can fund the purchase of a multifamily investment property. 💡 Quick Tip: Jumbo mortgage loans are the answer for borrowers who need to borrow more than the conforming loan limit values set by the Federal Housing Finance Agency ($766,550 in most places, or $1,149,825 in many high-cost areas). If you have your eye on a pricier property, a jumbo loan could be a good solution.
6 Ways to Pay for a Multifamily Property
Find a Co-Borrower
If you don’t have the money to front the costs of a property yourself, you may be able to partner with a family member, friend, or business partner. They may have the money to cover the down payment, and you might pull your weight by researching properties or managing them.
When you co-borrow with someone, you’ll each be responsible for the monthly mortgage payments. You’ll also share profits in the form of rents or capital gains if you sell the property.
Give an Equity Share
You may give an equity investor a share in the property to cover the down payment. Say a multifamily property costs $750,000, and you need a 20% down payment. An equity investor could give you $150,000 in exchange for 20% of the monthly rental income and 20% of the profit when the property is sold.
Borrow From a Hard Money Lender
Hard money loans are offered by private lenders or investors, not banks. The mortgage underwriting process tends to be less strict than that of traditional mortgages. Depending on the property you want to buy, no down payment may be required.
These loans (also called bridge loans) have high interest rates and short terms — one to three years is typical — with interest-only payments the norm. For this reason, they may be used by investors who may be looking to flip the property in short order, allowing them to make a profit and pay off the loan quickly.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
House Hack
House hacking refers to leveraging property you already own to generate income. For example, you might rent out an in-law suite or list your property on Airbnb.
Another option: You could rent out your primary residence and move into one of the units in a multifamily property you buy. This way, you’d probably generate more income than if you had rented out the unit to a tenant.
Finally, you could hop on the ADU bandwagon if you own a single-family home. Accessory dwelling units can take the form of a converted garage, an attached or detached unit, or an interior conversion. The rental income can be sizable. To fund a new ADU, homeowners may tap home equity, look into cash-out refinancing, or even use a personal loan.
Seek Seller Financing
If you don’t have the cash for a down payment on a property, you may be able to forgo financing from a lending institution and get help instead from the seller.
With owner financing, there are no minimum down payment requirements. Several types of seller financing arrangements exist:
• All-inclusive mortgage: The seller extends credit for the entire purchase price of the home, less any down payment.
• Junior mortgage: The buyer finances a portion of the sales price through a lending institution, while the seller finances the difference.
• Land contracts: The buyer and seller share ownership until the buyer makes the final payment on the property and receives the deed.
• Lease purchase: The buyer leases the property from the seller for a set period of time, after which the owner agrees to sell the property at previously agreed-upon terms. Lease payments may count toward the purchase price.
• Assumable mortgage: A buyer may be able to take over a seller’s mortgage if the lender approves and the buyer qualifies. FHA, VA, and USDA loans are assumable mortgages.
Invest Indirectly
Not everyone wants to become a landlord in order to add real estate to their portfolio. Luckily, they can invest indirectly, including through crowdfunding sites and real estate investment trusts (REITs).
The Jumpstart Our Business Startups Act of 2013 allows real estate investors to pool their money through online real estate crowdfunding platforms to buy multifamily and other types of properties. The platforms give average investors access to real estate options that were once only available to the very wealthy.
REITs are companies that own various types of real estate, including apartment buildings. Investors can buy shares on the open market, and the company passes along the profits generated by rent. To qualify as a REIT, the company must pass along at least 90% of its taxable income to shareholders each year.
As investment opportunities go, REITs can be a good choice for passive-income investors. 💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.
The Takeaway
Buying a multifamily property with no money down is possible if you take the roads less traveled, including leveraging other people’s money. And if you have the means to make a down payment on a property, your first step is to research possible home mortgage loans.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
Can I buy a multifamily home with an FHA loan?
It is possible to buy a property with up to four units with a standard mortgage backed by the Federal Housing Administration (FHA) if the buyer plans to live in one of the units for at least a year. The FHA considers homes with up to four units single-family housing. The down payment could be as low as 3.5%. There are loan limits.
A rarer product, an FHA multifamily loan, may be used to buy a property with five or more units. The down payment is higher. You’ll pay mortgage insurance premiums upfront and annually for any FHA loan.
Is a multifamily property considered a commercial property?
Properties with five or more units are generally considered commercial real estate. Commercial real estate loans usually have shorter terms, and higher interest rates and down payment requirements than residential loans. They almost always include a prepayment penalty.
Photo credit: iStock/jsmith
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Real estate investing can be an effective way to hedge against the effects of inflation in a portfolio while generating a steady stream of income. When it comes to how to invest in real estate, there’s no single path to entry.
Where you decide to get started can ultimately depend on how much money you have to invest, your risk tolerance, and how hands-on you want to be when managing real estate investments.
Why Invest in Real Estate?
Real estate investing can yield numerous benefits, for new and seasoned investors alike. Here are some of the main advantages to consider with property investments.
• Real estate can diversify your portfolio, allowing you to better balance risk and rewards.
• Provides the opportunity to generate investment returns outside of owning securities such as stocks, ETFs, or bonds.
• Historically, real estate is often seen as a hedge against inflation, since property prices tend to increase in tandem with price increases for other consumer goods and services.
• Owning real estate investments can allow you to generate a steady stream of passive income in the form of rents or dividends.
• Rental property ownership can include some tax breaks since the IRS allows you to deduct ordinary and necessary expenses related to operating the property.
• Real estate may appreciate significantly over time, which could result in a sizable gain should you decide to sell it. However, real estate can also depreciate in value, leading to a possible loss or negative return. Investors should know that the real estate market is different than the stock market, and adjust their expectations accordingly.
There’s one more thing that makes real estate investing for beginners particularly attractive: There are many ways to do it, which means you can choose investments that are best suited to your needs and goals.
💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.
Alternative investments, now for the rest of us.
Start trading funds that include commodities, private credit, real estate, venture capital, and more.
7 Ways to Invest in Real Estate
Real estate investments can take different forms, some of which require direct property ownership and others that don’t. As you compare different real estate investments, here are some important things to weigh:
• Minimum investment requirements
• Any fees you might pay to own the investment
• Holding periods
• Past performance and expected returns
• Investment-specific risk factors
With those things in mind, here are seven ways to get started with real estate investing for beginners.
1. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a company that owns and operates income-producing properties. The types of properties you might find in a REIT include warehouses, storage facilities, shopping centers, and office space. A REIT may also own mortgages or mortgage-backed securities.
REITs allow investors to enjoy the benefits of property ownership without having to buy a building or land. Specifically, that means steady income as REITs are required to pay out 90% of taxable income annually to shareholders in the form of dividends. Most REIT dividends are considered to be ordinary income for tax purposes.
Many REITs are publicly traded on an exchange just like a stock. That means you can buy shares through your brokerage account if you have one, making it relatively easy to add REITs to your portfolio. Remember to consider any commission fees you might pay to trade REIT shares in your brokerage account.
2. Real Estate Funds
Real estate funds are mutual funds that own a basket of securities. Depending on the fund’s investment strategy, that may include:
• Individual commercial properties
• REITs
• Mortgages and mortgage-backed securities
Mutual funds also trade on stock exchanges, just like REITs. One of the key differences is that mutual funds are not required to pay out dividends to investors, though they can do so.
Instead, real estate funds aim to provide value to investors in the form of capital appreciation. A real estate fund may buy and hold property investments for the long term, in anticipation of those investments increasing in value over time.
Investing in a real estate fund vs. REIT could offer broader exposure to a wider range of property types or investments. A REIT, for instance, may invest only in hotels and resorts whereas a real estate mutual fund may diversify with hotels, office space, retail centers, and other property types.
3. REIT ETFs
A REIT ETF or exchange-traded fund is similar to a mutual fund, but the difference is that it trades on an exchange just like a stock. There’s also a difference between REIT ETFs and real estate mutual funds regarding what they invest in. With a REIT ETF, holdings are primarily concentrated on real estate investment trusts only.
That means you could buy a single REIT ETF and gain exposure to 10, 20 or more REITs in one investment vehicle.
Some of the main advantages of choosing a REIT ETF vs. real estate funds or individual REITs include:
• Increased tax efficiency
• Lower expense ratios
• Potential for higher returns
A REIT ETF may also offer a lower minimum investment than a REIT or real estate fund, which could make it suitable for beginning investors who are working with a smaller amount of capital.
But along with those advantages, investors should know about some of the potential drawbacks:
• ETF values may be sensitive to interest rate changes
• REIT ETFs may experience volatility related to property trends
• REIT ETFs may be subject to several other types of risk, such as management and liquidity risk more so than other types of ETFs.
As always, investors should consider the risks along with the potential advantages of any investment.
4. Real Estate Crowdfunding
Real estate crowdfunding platforms allow multiple investors to come together and pool funds to fund property investments. The minimum investment may be as low as $500, depending on which platform you’re using, and if you have enough cash to invest you could fund multiple projects.
Compared to REITs, REIT ETFs, or real estate funds, crowdfunding is less liquid since there’s usually a required minimum holding period you’re expected to commit to. That’s important to know if you’re not looking to tie up substantial amounts of money for several years.
You’ll also need to meet a platform’s requirements before you can invest. Some crowdfunding platforms only accept accredited investors. To be accredited, you must:
• Have a net worth over $1 million, excluding your primary residence, OR
• Have an income of $200,000 ($300,000 if married) for each of the prior two years, with the expectation of future income at the same level
You can also qualify as accredited if you hold a Series 7, Series 65, or Series 82 securities license.
5. Rental Properties
Buying a rental property can help you create a long-term stream of income if you’re able to keep tenants in the home. Some of the ways you could generate rental income with real estate include:
• Buying a second home and renting it out to long-term tenants
• Buying a vacation home and renting it to short-term or seasonal tenants
• Purchasing a multi-unit property, such as a duplex or triplex, and renting to multiple tenants
• Renting a room in your home
But recognize the risks or downsides associated with rental properties, too:
• Negative cash flow resulting from tenancy problems
• Problem tenants
• Lack of liquidity
• Maintenance costs and property taxes
Further, the biggest consideration with rental properties usually revolves around how you’re going to finance a property purchase. You might try for a conventional mortgage, an FHA loan if you’re buying a multifamily home and plan to live in one of the units, a home equity loan or HELOC if you own a primary residence, or seller financing.
Each one has different credit, income, and down payment requirements. Weighing the pros and cons of each one can help you decide which financing option might be best.
6. Fix and Flip Properties
With fix-and-flip investments, you buy a property to renovate and then resell it for (ideally) a large profit. Becoming a house flipper could be lucrative if you’re able to buy properties low, then sell high, but it does take some knowledge of the local market you plan to sell in.
You’ll also have to think about who’s going to handle the renovations. Doing them yourself means you don’t have to spend any money hiring contractors, but if you’re not experienced with home improvements you could end up making more work for yourself in the long run.
If you’re looking for a financing option, hard money loans are one possibility. These loans let you borrow enough to cover the purchase price of the home and your estimated improvements, and make interest-only payments. However, these loans typically have terms ranging from 9 to 18 months so you’ll need to be fairly certain you can sell the property within that time frame.
7. Invest in Your Own Home
If you own a home, you could treat it as an investment on its own. Making improvements to your property that raise its value, for example, could pay off later should you decide to sell it. You may also be able to claim a tax break for the interest you pay on your mortgage.
Don’t own a home yet? Understanding what you need to qualify for a mortgage is a good place to start. Once you’re financially ready to buy, you can take the next step and shop around for the best mortgage lenders.
How to Know If Investing in Real Estate Is a Good Idea for You
Is real estate investing right for everyone? Not necessarily, as every investor’s goals are different. Asking yourself these questions can help you determine where real estate might fit into your portfolio:
• How much money are you able and willing to invest in real estate?
• What is your main goal or reason for considering property investments?
• If you’re interested in rental properties, will you oversee their management yourself or hire a property management company? How much income would you need them to generate?
• If you’re considering a fix-and-flip, can you make the necessary commitment of time and sweat equity to get the property ready to list?
• How will you finance a rental or fix-and-flip if you’re thinking of pursuing either one?
• If you’re thinking of choosing REITs, real estate crowdfunding, or REIT ETFs, how long do you anticipate holding them in your portfolio?
• How much risk do you feel comfortable with, and what do you perceive as the biggest risks of real estate investing?
Talking to a financial advisor may be helpful if you’re wondering how real estate investments might affect your tax situation, or have a bigger goal in mind, like generating enough passive income from investments to retire early.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
The Takeaway
Real estate investing is one of the most attractive alternative investments for portfolio diversification. While you might assume that property investing is only for the super-rich, it’s not as difficult to get started as you might think. Keep in mind that, depending on how much money you have to invest initially and the degree of risk you’re comfortable taking, you’re not just limited to one option when building out your portfolio with real estate.
Ready to expand your portfolio’s growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi’s easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it’s important to consider your portfolio goals and risk tolerance to determine if they’re right for you.
Invest in alts to take your portfolio beyond stocks and bonds.
FAQ
How Can I Invest in Property With Little Money?
If you don’t have a lot of money to invest in property, you might consider real estate investment trusts or real estate ETFs for your first investments. REITs and ETFs can offer lower barriers to entry versus something like purchasing a rental property or a fix-and-flip property.
Is Real Estate Investing Worth It?
Real estate investing can be worth it if you’re able to generate steady cash flow and income, hedge against inflation, enjoy tax breaks, and/or earn above-average returns. Whether investing in real estate is worth it for you can depend on what your goals are, how much money you have to invest, and how much time you’re willing to commit to managing those investments.
Is Investing in Real Estate Better Than Stocks?
Real estate tends to have a low correlation with stocks, meaning that what happens in the stock market doesn’t necessarily affect what happens in the property markets. Investing in real estate can also be attractive for investors who are looking for a way to hedge against the effects of inflation over the long term.
Is Investing in Real Estate Safer Than Stocks?
Just like stocks, real estate investments carry risk meaning one isn’t necessarily safer than the other. Investing in both real estate and stocks can help you create a well-rounded portfolio, as the risk/reward profile for each one isn’t the same.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing. Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor’s risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds. Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
Recourse loans are secured loans in which the lender can seize a borrower’s collateral and, if necessary, other assets, should the borrower default on the loan. Common types of recourse debt are auto loans, credit cards and, in most states, home mortgages. Recourse loans are low risk to lenders so they tend to have lower interest rates than non-recourse loans.
Non-recourse loans are also secured by collateral but in this case, the lender can only seize the collateral pledged for the loan; they can’t take any other assets. Non-recourse loans are less common than recourse loans and tend to have higher interest rates due to their higher risk.
Read on to learn more about how non-recourse and recourse loans compare.
What Is a Recourse Loan?
A recourse loan is a secured loan for which the lender can seize more than just the collateral if the borrower defaults. The lender is also able to seize other assets the borrower didn’t use as collateral, including income and money in bank accounts.
How Recourse Loans Work
When a borrower defaults on a recourse debt, the lender can seize not only the loan’s collateral, but can also attempt to attach other assets to collect what’s owed. In essence, the lender has additional recourse to recoup their losses.
Between recourse vs. nonrecourse debt, recourse debt favors the lender while nonrecourse debt favors the borrower.
Examples of Recourse Loans
Hard money loans, which are typically based on the value of the collateral rather than just the creditworthiness of the borrower, tend to be recourse loans.
An auto loan is one example of a recourse loan. If an auto loan borrower defaults on the loan, the lender has the right to seize the vehicle and sell it to recoup its losses. If the vehicle has depreciated, however, and the sale doesn’t cover the loan balance, the lender can ask for a deficiency judgment for the difference. In that case, the borrower’s wages could be garnished or the lender could seize other assets. 💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.
What Is a Non-Recourse Loan?
A nonrecourse loan is a secured loan for which the lender cannot seize assets that weren’t put up as collateral in the original loan agreement.
How Non-Recourse Loans Work
When a borrower pledges collateral on a secured loan, the lender can take that asset — but no others — if the borrower defaults on the loan. The lender will typically sell the asset to recoup their loss on the loan. The lender has no other recourse than seizing the collateralized asset, even if the sale of that asset doesn’t cover the balance of the loan.
Examples of Non-Recourse Loans
Lenders may be cautious about offering non-recourse loans because it limits their ability to recoup losses in the event of a default. Therefore, loans are typically classified as recourse loans.
Mortgages are classified as non-recourse debt as a matter of law in 12 states, meaning the lender cannot pursue a borrower’s other assets if they default and end up in foreclosure. The financial consequences would likely be limited to foreclosures of the home and damage to the borrower’s credit score.
A lender might be willing to offer a non-recourse loan to an applicant with excellent credit and steady, verifiable income if confident in their ability to repay the debt.
Recourse vs Non-Recourse Loans
Both recourse and non-recourse debt can be secured by collateral, which a lender can seize in the event of nonpayment.
The biggest difference between the two is that the lender is prevented from pursuing other assets owned by the borrower to repay what’s owed on a non-recourse debt. Basically, the lender has no other recourse for repayment of the debt other than the collateral that secures the loan.
Recourse Loan
Non-Recourse Loan
Lender can seize assets other than those put up as collateral
Lender can seize only assets that were put up as collateral
Borrower can lose collateralized and other assets if they default
Borrower can lose collateralized asset and have a negative entry on their credit report if they default
Loan rate and terms are based on the value of asset used as collateral and creditworthiness of applicant
Lender may consider creditworthiness of applicant greater than value of collateral when determining loan rate and terms
Less risky for lenders
Less risky for borrowers
Pros and Cons of Recourse vs Non-Recourse Debt
Depending on whose perspective the situation is being viewed from, recourse and non-recourse debt each has benefits and drawbacks.
Pros and Cons of Recourse Loans
Recourse debt is more favorable to the lender than the borrower because this type of debt gives the lender more avenues to collect when a debt goes unpaid.
Approval for recourse loans, on the other hand, may be easier since they pose less risk for lenders.
From the borrower’s perspective, here are some pros and cons of recourse loans:
Pros of Recourse Loans
Cons of Recourse Loans
Approval qualifications may be less stringent than for a nonrecourse loan
Lender can seize collateralized asset and other assets if the borrower defaults
Interest rates can potentially be low
Borrower assumes greater risk than lender
Pros and Cons of Non-Recourse Loans
A non-recourse loan is more favorable to the borrower in the case of default. In that situation, the lender could only seize the asset put up as collateral, but couldn’t lay claim to any of the borrower’s other assets.
Non-recourse financing is usually riskier for the lender since they’re limited to collecting only the collateral when a borrower defaults. As such, lenders may charge higher interest rates for non-recourse loans and/or require borrowers to meet higher credit scores and income requirements to qualify.
From the borrower’s perspective, here are some pros and cons of non-recourse loans:
Pros of Non-Recourse Loans
Cons of Non-Recourse Loans
Only the asset put up as collateral can be seized if the loan is defaulted on
Borrower’s credit can be negatively affected if the lender must write off uncollected debt
Personal assets are not at risk
Interest rates may be high
Managing Recourse vs Non-Recourse Loans
Generally, the only reason for a borrower to be concerned about whether they have recourse vs. non-recourse debt is if they’re in danger of default. As long as they’re keeping up with their payments, whether a debt is recourse or non-recourse shouldn’t be an issue.
But if there is a concern about potentially falling behind in paying a debt, then it helps to do some research before borrowing. For example, if trying to qualify for a home loan, asking upfront whether the loan is treated as recourse or non-recourse debt under a particular state’s laws will help in the decision making.
Making a larger down payment, for example, means less a borrower has to finance. Ultimately, though, a borrower should do what is right for their particular financial situation. It may be better for some borrowers to choose a home loan that allows for a lower down payment so they can keep more cash in the bank to cover financial emergencies down the line.
If you’re planning to apply for a car loan, you might consider buying a vehicle that tends to hold its value longer or making a larger down payment. Those could both help you avoid ending up underwater on the loan if you happen to default for any reason.
Credit cards are revolving debt, not a lump sum being borrowed, so the amount owed can change month to month as purchases are made and paid off. Some ways to manage this type of recourse debt include:
• Keeping card balances low
• Paying the balance in full each month, if possible
• Setting up automatic payments or payment alerts as notification of when a due date is approaching
With any type of debt, recourse, or non-recourse, it’s important that you get in touch with your lender or creditor as soon as you think you’ll have trouble making payments. The lender may be able to offer options to help you manage payments temporarily. Depending on the type of debt, that may include:
• Credit card hardship programs
• Student loan forbearance or deferment
• Mortgage forbearance
• Skipping or deferring auto loan payments
Reaching out before a payment is missed can help you avoid loss of assets, as well as any negative impact on your credit. 💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why SoFi credit card consolidation loans are so popular.
Is a Recourse or a Non-Recourse Loan Best for You?
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If you are presented with both options, choosing a recourse or Non-Recourse loan may depend on your financial situation.
• A recourse loan may be a good option for those with a limited credit history because in exchange for additional avenues to recoup their losses, if necessary, a lender may offer low interest rates.
• A non-recourse loan could be a good option for an applicant with good credit and steady income, as the lender may consider them a low-risk borrower and not feel the need to have additional assets to secure the loan.
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What does recourse mean in lending?
Recourse refers to a lender’s options when recouping losses when a borrower defaults on a loan. With a recourse loan, lenders can recoup defaulted loan balances by seizing both the loan collateral and — when necessary — the borrower’s other assets.
Are you required to pay a non-recourse loan?
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Are non-recourse loans more expensive?
Non-recourse loans can have higher interest rates than recourse loans because lenders may perceive them as having higher risk.
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Getting money to start in real estate investing is the biggest hurdle for people. Traditional lenders have stringent requirements, making it hard for people just getting started and hard for people looking to take their real estate investing to the next level.
This is where private money, an alternative to traditional financing, comes in. In this article, I’ll cover what you need to know.
Private money has been a key piece of my strategy. I would not have built my real estate business without it.
Table of Contents
Understanding Private Money
Private money refers to loans sourced from individuals or non-traditional institutions rather than conventional banks. These people invest their own capital directly in your project, secured by the property itself.
Said another way, private money usually means borrowing from a person who is looking to earn interest on their cash. For taking a risk on you and your project, they get some form of recourse, which may include getting the title to your property if you don’t pay the loan back according to the terms of the agreement.
Here’s what real estate investors get with private money:
Faster closing times: No red tape, which expedites deal execution.
Flexible criteria: Less rigid evaluation and underwriting, catering to scenarios banks might reject.
Private money loans are different than hard money loans. You can read about Hard Money here.
Want to make a lot of money? Learn about money with my Money Mastery course.
Key Points to Remember
Higher interest rates: Compared to traditional loans, expect rates ranging from 8% to 15% or higher.
Shorter loan terms: Private money is typically short-term financing, lasting 6-24 months.
Due diligence is crucial: Verify the lender’s credentials, experience, and track record thoroughly.
Legal agreements are everything: It’s best to have a lawyer draft a comprehensive loan agreement outlining terms, rights, and responsibilities. If there is a dispute, it’ll come down to the terms of the agreement. A lot can be on the line in these deals, so ensure you understand the agreement in full.
Just starting out? See my post The Best Way To Invest In Real Estate.
Pros of Private Money
Private money is one of the best options to start your real estate investing and to scale it.
It can also help kickstart the BRRRR method to rapidly expand your real estate holding. Here’s my article on How to Use the BRRRR Method, including using private money.
Access to capital: Secure funding even with imperfect credit or unconventional projects.
Speed and agility: Move quickly on time-sensitive deals and capitalize on fleeting opportunities.
Direct relationship: Build rapport with the lender, potentially fostering future collaborations.
Cons of Private Money
High costs: Interest rates and origination fees can significantly impact your profit margins.
Short timelines: Pressure to exit the investment quickly for repayment can limit options.
Risk of default: Non-compliance with loan terms could lead to property foreclosure.
Additional Tips
Start small with your first private money loan to build trust and experience.
Network with real estate professionals and advisors for recommendations on reputable lenders.
Have a solid business plan and financial projections to demonstrate your investment’s viability.
How to Find Private Money
Private money can be a great option for real estate investors. And it’s been a great way for me to scale my real estate.
If you want to find private money, you can read my article How To Find Private Money For Real Estate Investments.
Conclusion
Private money can be an incredible way to get started and also scale up. It’s been critical in my journey.
However, know what you’re getting into. Carefully understand the terms, exit strategy, and your risk tolerance.
Investing in real estate is some of the oldest and most reliable financial advice in the books. Few other assets can compete with real estate’s vast array of benefits. These benefits include tax advantages, appreciation, relative impunity to market shifts, and even the potential for passive income.
But even if you have every intention of investing in real estate, it can be challenging to get started. After all, even a modest home usually requires a substantial down payment. And it can take years to save up those five-figure sums. The term “real estate investor” may bring to mind a multi-millionaire who manages several properties, leaving you feeling overwhelmed enough to give up the ghost entirely.
Fortunately, it is possible to invest in real estate with little or no money, even if you aren’t swimming in discretionary income. For instance, with an Opportunity Fund or REIT (Real Estate Investment Trust) you can get your foot in the door even if you can’t afford to purchase an entire property. There are also a host of ways to leverage your own home. These include house hacking, renting vacation space on Airbnb, and more.
In this post, we’ll break down everything you need to know about how to invest in real estate. We’ll go over some of the most common types of real estate investing. We’ll also break down how they can help you make money. And we’ll explain how you can begin, no matter how much capital you have in hand.
Why Invest in Real Estate?
Before we dig into the meat of the post, let’s take a moment to backtrack. Why is real estate investing such a well-worn piece of financial advice?
You’ve probably heard that diversifying your portfolio of real estate investments is essential. But your “portfolio” doesn’t just have to live on the stock market! Real estate investing gives you, as the name suggests, a real, tangible asset. And it’s much less vulnerable to the capriciousness of the market.
Real estate investing can help you not only build home equity but also generate passive cash flow. Both through the process of appreciation and the more intentional, hands-on approaches we’ll study further below. And owning your own home can help you reap financial benefits while simultaneously providing for one of your most basic needs.
How to Invest in Real Estate with Little Money
When a down payment might cost as much as $60,000, it’s understandable that many first-time property shoppers feel overwhelmed. They say you have to spend money to make money. Yes, but that’s quite a hefty figure for the average American earner.
To be sure, some real estate investment strategies require a good deal of cash upfront to be workable. But there are other tactics that don’t necessitate such a large lump sum to begin with. This means you don’t have to be a real estate mogul to be a property owner. We’ll break down various strategies at both ends of the spectrum below.
Types of Real Estate Investing
Let’s get into the nitty-gritty. What types of real estate can you invest in?
There are three main types of investment properties available to real estate investors.
Residential properties are probably the ones you’re most familiar with. They are exactly what they sound like: buildings used by individuals and families as residential living spaces. These properties include single-family homes, duplexes, apartments, condominiums, and townhouses, and multi-family homes (so long as they’re being used residentially and don’t exceed four units).
Commercial real estate are properties used to conduct business. They may include offices, storefronts, retail spaces, farmland, and large multi-family houses or apartment buildings.
Industrial real estate are properties that serve industrial business purposes, such as factories, power plants, or storage and shipping warehouses.
Furthermore, there are both active and passive forms of real estate investing.
Active investing is, well, active. It requires a good deal of time, energy, and commitment from the investor. Active investing may become a part- or even full-time job for the investor. They usually share ownership with few (or no) other people and thus bears a lot of responsibility for the success of the investment.
Passive investing, on the other hand, allows the investor to reap the benefits of investing without taking on the pressure and responsibility of full ownership of a tangible property. In most cases, passive investing involves supplying capital to a larger investment pool. You earn capital gains on loan interest through dividends paid to shareholders.
We’ll go into it all of this in more detail, including specific ways you can invest in real estate, both active and passive.
How Real Estate Investing Can Help You Earn
Before we break down the specific ways you can get started investing in real estate, let’s talk about how it can help you make money. (After all, that’s the whole point!)
You can invest in real estate in several ways, depending on what type of investing you’re participating in.
Equity and appreciation
Purchasing real estate equips the owner with a “hard asset”; the tangible property or building. Owning this kind of asset confers equity, or value. It isn’t as vulnerable to the fluctuations of the market as stocks, bonds, and other securities. Furthermore, property has a longstanding history of increasing in value over time, or appreciating.
On the contrary, other types of purchases (like automobiles) depreciate, or lose value. Thus, purchasing a property may allow you to earn income passively simply through the process of appreciation. It more or less ensures that the cash value of your home is a safe and stable part of your overall net worth.
Rental income
Chances are, you’ve had to pay rent to a landlord at some point in your life. Well, if you become the landlord, someone’s paying you the rent. And as long as that rental price eclipses your total expenses, including your mortgage and maintenance costs, the rest is profit!
Aside from managing the investment property, you can also collect rental income by sharing your space on platforms like Airbnb or house hacking, which we’ll explain below.
Sale profit
This happens when you buy a home with the intention to fix it up and sell it down the line (also known as “house flipping”.) It’s the difference between your sale cost and your purchase cost (minus all the expenses put into maintenance and improvements) is pure profit.
Loan interest
The interest charged on home and property loans can increase the value of real estate investments made through REITs, investment platforms, and private equity firms.
Ways to Invest in Real Estate
Now we know a bit about the different types of properties available to investors and how those real estate investments stand to help you earn cash.
So, what are the specific ways to go about real estate investing? There are several in both the “active” and “passive” categories.
Active:
House flipping, or rehabbing, is when an investor purchases a property with the sole intent of fixing it up to sell it later on.
Wholesaling is similar to flipping houses, but less work intensive. Wholesaling occurs when an investor purchases a property they believe is underpriced, so they can quickly sell it to another investor at a profit.
Rental properties give investors a long-term way to draw profit from their investments, though they do require lots of hands-on management and maintenance over time.
Airbnb, Vrbo, and other vacation rentals can often be listed for substantial per-night prices. They can be especially lucrative in high-demand travel destinations.
Passive:
Private equity funds pool the assets of many investors, which creates a larger, more powerful investment fund. These funds are usually overseen and allocated by a dedicated manager. They may have high minimum investment thresholds and requirements to join.
Opportunity funds also pool investors’ assets, but with the specific purpose of making investments in qualified Opportunity Zones. These are low-income, up-and-coming communities that would benefit from private investments and economic development.
REITs are companies that invest in commercial properties. Private investors can purchase shares of the company and earn income on capital gains in the form of dividends.
Online REIT platforms can make real estate investing accessible to beginning investors, often carrying no net worth or accreditation restrictions. They may allow you to invest in specific properties or in pre-built, diversified portfolios of real estate.
We’re going to break down these different investment options in even more detail below. But first, let’s start a bit closer to home—literally.
Starting with Your Own Home
One of the most straightforward ways to invest in real estate is probably already on your financial to-do list, anyway: purchasing your own home.
Purchasing a home of your own allows you to kill two birds with one stone. You’re taking care of the basic need of shelter, while also leveraging the purchase to reap a host of financial benefits.
Here are just a few ways that owning a home can help you save and earn money.
Build equity: As discussed above, property ownership confers relatively immutable equity to the purchaser—that is, your home is a fairly safe, tangible asset to add to your overall investment portfolio.
Receive tax benefits: Certain homeowners’ expenses, including real estate taxes and home mortgage interest, are tax-deductible. And if you sell your home, you may exclude up to $250,000 of capital gains (or $500,000 if filing jointly) from your taxes.
Take advantage of appreciation: Even accounting for the 2008 crisis, the cost of homes and other properties have steadily increased over time for the past 50 years. So, the home you purchase today will likely be worth more than the price you paid for it in the future.
Stop paying rent: Although you’ll likely still have a mortgage payment and other expenses to cover as a homeowner, you won’t be paying rent to live in another person’s property. It’s a cost that is essentially entirely wasted, since you aren’t building home equity in the rental property.
Keep the value of your home improvements: When you own a home of your own, any improvements you make will add to the property’s total value, beefing up your asset as well as beautifying your living space.
House Hacking
Another way to make money by purchasing your own home is known as “house hacking“. It’s a real estate investment strategy wherein you leverage rental income from your primary residence to live there cost-free.
The term was originally coined by entrepreneur and author Brandon Turner, who wrote “The Book on Investing in Real Estate with No (and Low) Money Down” and “The Book on Rental Property Investing.”
House hacking may be done, for example, by purchasing a duplex. The investor rents out one unit at a price that covers the mortgage cost while living in the second unit. Some homeowners have also used space-share platforms like Airbnb to offset their housing costs in the same manner.
Real estate investors can use this strategy to pay off the property and even create a profit margin. This will eventually allow them to invest in more rental properties. Thus, house hacking is a great way to combine the personal financial benefits of homeownership with the long-term earning potential of other types of property investment.
Buying a Home Without a Huge Down Payment
Given the recent trends in the housing market, you may feel daunted by the prospect of becoming a homeowner. In 2023, the U.S. housing market experienced significant challenges, with home prices rising to near-record highs.
But there are many incentives and programs designed to make this large investment more feasible for first-time home buyers.
FHA (Federal Housing Administration) Loans may allow borrowers to purchase a home with a down payment as small as 3.5% of the purchase price and with credit scores as low as 580. (You may also be approved for an FHA loan with a lower credit score, but your minimum down payment may be higher.)
The USDA also offers low-cost loans to low- and moderate-income households purchasing homes in qualified rural areas.
Down Payment Assistance Programs offered by local governments and private firms can provide grants, loans, and educational materials to prospective home buyers
Many other financial institutions and organizations also have special incentives for those purchasing their first homes or low-income families in the housing market. Make sure you check with your local housing authority to learn more about what’s available in your area.
Active Investment Opportunities
Want to get hands-on? Here are the details on some of the most popular and accessible active real estate investment opportunities.
House Flipping
If you’ve ever watched more than thirty minutes of HGTV, chances are you’re at least passingly familiar with the idea of flipping houses. It’s basically where you purchase a home with the express intent of fixing it up and selling it (at a higher cost) later.
House flipping is a great way for investors to earn a significant profit. However, they do need to know how to complete the flip successfully without incurring too many costs. Expenses can quickly eat into the investment’s return.
Finding a Home to Flip
House flippers have to be able to recognize a home that may be slightly undervalued but would be able to sell well given the proper upgrades. This involves both an understanding of the area’s desirability and the types of improvements that generate increased home value.
House flippers are responsible for the entire cost of the home purchase. They must also pay for all the upgrades, which they may either do themselves or hire out to professionals.
Either way, flipping houses incurs a hefty up-front cost, and it does come at a risk. Even after you make all the improvements, it’s possible that the house will languish on the market.
This can mean racking up maintenance, taxes, and other expenses for the real estate investor. However, a properly executed, short-term flip can create a substantial profit margin in a relatively small period of time.
Wholesaling
Like house flippers, wholesalers purchase homes with the intent of selling them quickly. But, they aren’t planning to do any heavy lifting along the way.
Instead, wholesalers find properties that are undervalued for their market. They scoop them up and resell them to other investors at a price closer to their true value. Thus, earning the difference as a profit.
Rental Properties
While managing rental properties may seem like a straightforward and reliable way to earn income, it’s one of the most work-intensive approaches on this list. It does require enough up-front capital to purchase the property (or properties) in the first place. However, landlords do stand to see substantial and steady returns in exchange for the work and effort they put into their properties.
After purchasing a viable property, which needs to be well-maintained, in a desirable location, and well-advertised, landlords are responsible for filling that property with qualified tenants. This can involve a time-consuming and labor-intensive screening process.
After all, as a landlord, you’re giving your renters the keys to your investment—literally! It can be a very risky move if you don’t take the time to ensure your tenants are well-qualified.
Finding & Qualifying Tenants
Along with running a standard background check, landlords may also conduct interviews with and request credit reports from prospective renters, all of which takes time. And don’t forget: every month your rental property is unfilled is a waste of potential income.
Once you do find qualified tenants, you’ll be responsible for a host of obligations unless you hire a property management company. You’ll need to provide maintenance and repairs. You’ll also need to stay on top of rent collection and record-keeping. It can quickly become unwieldy once you have several properties.
You’ll also need to be sure you’re in compliance with all the renters’ rights that exist in your jurisdiction, including laws that regulate the eviction process. Of course, you’ll need to put in the work to find good renters and a well-maintained property in the first place. When done so, managing rentals can provide a smooth and steady source of income for relatively little active work.
Seller Financing
Want to buy an investment property with no money down? Look into seller financing or a land contract. This is where the seller acts as the bank. You make your mortgage payments, including interest, to the seller.
After a few years or so, you will have enough equity in the home to get a bank loan. You can then make a lump sum payment to the seller.
Private & Hard Money Lenders
Private money lenders generally charge between 6% to 12% on the money borrowed. Hard money lenders usually charge 10% to 18%. Hard money loans are not from banks. They are from individuals or businesses aimed at financing real estate investments for a return on their money.
Hard money loans are used by investors who don’t qualify for conventional financing. They are typically used to fund renovations. Once the house is finished or has some equity in it, the borrower then refinances to a conventional mortgage with a lower interest rate.
Airbnb, Vacation Rentals, and Space Sharing
Managing a traditional property, wherein renters sign a multi-month lease, is not the only way to make money from an investment property. Platforms like Airbnb have revolutionized the real estate market. They allow homeowners (and sometimes even renters) to make money by renting out their space on a temporary, per-night basis as a vacation rental.
What’s more, you don’t necessarily have to rent out an entire home or unit to participate. A private room, or even a couch in a shared living room, is acceptable for some travelers using these services.
Airbnb and other vacation rental platforms make it simple for a novice renter. You don’t need to have a huge amount of know-how to start earning money this way. In fact, you don’t even necessarily have to “invest” in any property at all. Some landlords may allow their renters to list their housing on Airbnb as a sublet.
Airbnb Laws
However, as this new form of investment property has expanded, it’s created housing crunches in some cities. It’s resulting in “Airbnb laws,” or short-term rental legislation. These laws may limit your ability to use your housing in this way.
Always check your local regulations before you list your space on Airbnb or another of these types of platforms. If you don’t own the space, ensure that short-term sublets are allowed. Check your lease or ask your landlord directly.
Real Estate Investing Groups and Passive Investing
You may have noticed that many of the active real estate investment opportunities listed above do require substantial upfront capital to get started. You can’t wholesale or flip a house if you can’t purchase the house in the first place!
Furthermore, these active strategies generally involve a high level of skill, effort, and responsibility. It may not be feasible for those committed to other full-time careers.
Fortunately, there are still other ways to get involved with real estate investing, even if you don’t want to own or manage tangible property. (Or if doing so is out of financial reach for you right now). These passive investment tactics can help you glean the benefits of real estate investing without taking on quite as much of a fiscal and physical burden.
Private Equity Funds
A private equity, or PE fund, pools contributions from various investors to make larger investments. They’re often limited liability partnerships. That means there are fixed periods during which investors do not have access to their holdings.
Instead, PE funds allow investors to earn gains on debt and equity assets passively, without putting in much active work or research. Asset allocation and investments are managed by a dedicated individual or group. They earn money through annual fees as well as profit sharing.
PE funds come in various types, including the following:
Core equity funds generally invest in established commercial properties. They don’t carry risks like needing major improvements or experiencing losses for lack of consumer demand. The core strategy is simultaneously the least risky among PE funds and, typically, the least gainful.
Core plus equity funds generally follow the core strategy, but take a few more risks on properties that may require minor upgrades. This leads to a higher risk-return ratio on average.
Value added equity funds may invest in commercial properties that require substantial upgrades or new management to operate at their full potential. They may also seek to sell the property after improvements are made to create an additional profit margin.
Opportunistic equity funds offer the highest potential rewards, along with the highest risk. Investment properties purchased via these funds may need new construction or even land acquisitions. The payoff of such a new business venture is all but guaranteed. Furthermore, these developments take time, which means your investment capital may be tied up for longer. However, when they pay off, opportunistic equity funds see some of the best returns of the bunch.
Although PE funds are powerful real estate investment engines, they do often have high minimum investment requirements, generally not less than $100,000. Some funds may also be limited to accredited or institutional investors who can demonstrate available means.
Opportunity Funds
Opportunity funds operate on a similar model to private equity funds but are specifically used to make investments in qualified Opportunity Zones. These are economically distressed areas designated by the state and certified by the Secretary of the U.S. Treasury. Opportunity funds are legally required to invest 90% of their assets into properties in these Opportunity Zones.
Because these areas tend to be up-and-coming (and because tax benefits can incentivize investors to support them), opportunity funds often see substantial capital gains for their investors. And taxes incurred on those gains can be deferred until December 26, 2026.
That means the longer the investment is held before that date, the lower your overall tax liability will be. And opportunity fund investments held for at least ten years prior can expect their capital returns to be permanently excluded from capital gains taxes.
Of course, this strategy requires parting with your investment capital for a significant period of time. It’s best for those who can afford to put down the money to play the long game. If you can, however, investing in one is a great way to see substantial returns for almost zero effort.
Real Estate Investment Trusts (REITs)
A real estate investment trust(REIT) is a company that invests in commercial properties. As an investor, you purchase shares of this company just as you would any other. You earn income through its debt and equity assets in the form of shareholder dividends.
REITs operate similarly to mutual funds. They provide an excellent way for the average earner to experience the benefits of real estate investing. You don’t have to have a huge amount of capital to get started, as minimum investment requirements may be quite low.
However, they may carry high investment fees, especially in the case of private REITs (i.e., those not publicly traded on the stock market). Fees at these companies may run as high as 15%. REITs may also be illiquid and keep your money locked up for longer periods of time.
Online Real Estate Investment Platforms
In this digital, all-sharing-all-the-time age, most of us have already heard of crowdfunding. Real estate investments are no exception to the rules of the new millennium.
Online real estate investment platforms have begun springing up. They can make real estate gains achievable for average investors who may not have the towering net worth or accreditation status necessary to buy into more formal funds. Depending on the specific company, you might be able to choose specific investment properties to fund or buy into a diversified portfolio of investments.
Fees and minimum investment requirements are relatively low on real estate crowdfunding platforms. For instance, Fundrise lets you get started with just $500. That is much less than you’d have to pay to get in on most types of active investments! Check out our full review of Fundrise here.
Ready to Get Started Investing in Real Estate?
As you can see, there are several ways to start investing without saving up a five- or six-figure sum. And if you do it right, your investments can actually help you reach those high savings goals. You can then fund other types of investment projects!
However, as with any financial objective, planning and strategizing is key. Saving up as much capital as possible will help you get the best return on your investment once you’re ready.
You can’t allocate your assets without first keeping track of them, and to achieve that, you need to create a budget. If you’re in debt, aggressively paying it off will free you of a weighty financial anchor, so check out these powerful debt relief options.
Finally, if you intend to purchase property either to live in or as an investment opportunity, your credit score matters. It’s as simple as that. If your credit score isn’t quite where you want it to be, take these steps to raise it. Doing so will allow you to get the best interest rate once you’re ready to make the big purchase.
Many people are lured into the world of real estate investing by stories of millionaires who started their journey with no money down or no steady employment. But the reality is that making money in real estate isn’t easy; a good credit score, investment capital and steady income can help in the beginning.
You’ll also need to grasp the nuances of the local real estate market and learn how to manage financial aspects such as cash flow and property taxes. While real estate buying, selling, and renting may not be much like a game of Monopoly, it is possible to earn steady side income, supplement your retirement, or even build a full-time real estate investment business with the right tools, knowledge, and patience.
Unlike mutual funds, the stock market, cryptocurrency or many other investments, real estate is tangible. Real estate is a concrete asset—one can see, touch, and even reside in. That gives investors a sense of security. However, it also creates unique challenges.
Managed well, the stability and passive income from rental properties can be a safety net against more volatile investments.
This guide is here to clarify the process for beginners. It aims to empower you to make informed decisions, reduce risks, and lay a strong foundation for your real estate investing journey.
Benefits of Investing in Real Estate
The allure of real estate goes beyond the mere ownership of tangible assets. It presents a robust suite of financial benefits that have the potential to amplify wealth and provide stability in uncertain times. As we navigate the advantages, it becomes evident why many seasoned investors prioritize real estate in their portfolios.
Steady and Passive Income
Real estate investing, especially in rental properties, stands out for its potential to provide a consistent revenue stream. When you own a rental property, the monthly or quarterly distributions from tenants contribute to steady income, which can safeguard your finances against unexpected events or economic downturns.
This consistency contrasts with the often erratic nature of the stock market, which can fluctuate daily based on global events, company performances, and other factors. Additionally, for those aiming to attain financial freedom, the passive income generated from real estate can be a step closer to achieving that goal. Over time, as the mortgage payment decreases or remains static, rental rates may rise, increasing your monthly cash flow.
Appreciation Potential
Every investor dreams of their assets appreciating, and real estate often doesn’t disappoint. While there can be periodic downturns in the real estate market, historical trends suggest that properties generally gain value over the long run.
This means that not only can investors benefit from rental income, but they can also potentially see substantial gains when they choose to sell the property.
Tax Benefits
Navigating the world of taxes can be intricate, but real estate investors often find several advantages here. The ability to deduct mortgage interest and property taxes from taxable income can be a significant financial boon.
Furthermore, strategies like depreciation allow real estate investors to offset rental income, reducing their tax burden. Consulting with a financial advisor can help investors maximize these benefits and understand other potential tax advantages, such as 1031 exchanges or deductions related to property management.
Diversification
The saying “don’t put all your eggs in one basket” is sound investment advice. Diversification is a fundamental strategy to mitigate risks. By adding real estate to an investment portfolio, investors introduce a separate asset class that doesn’t directly correlate with the stock market or mutual funds. This can provide a buffer, ensuring that a downturn in one sector doesn’t wholly derail an investor’s financial trajectory.
Leverage
Leverage, in the context of real estate investing, refers to the ability to use borrowed capital to increase the potential return on an investment. When you purchase property with a mortgage loan, you’re often putting down only a fraction of the property’s total cost, while still reaping the benefits of its entire value in terms of appreciation and rental income.
This magnifies the return on investment, as the gains and income generated are based on the property’s total value, not just the down payment. It’s a powerful tool but should be used wisely. Over-leveraging or not accounting for potential rental vacancies can turn leverage into a double-edged sword.
Types of Real Estate Investments
As one dives deeper into the world of real estate, it becomes evident that this asset class is multifaceted, with various avenues to explore and invest in. The right choice often depends on an investor’s goals, risk tolerance, budget, and expertise. Here’s a closer look at some prominent types of real estate investments:
Residential Properties
Residential properties cater to individuals or families. They range from single-family homes to duplexes, triplexes, high-rise buildings with apartments, and other multi-unit properties. You may encounter the term “MDU” or “MUD,” which stand for multi-dwelling unit or multi-unit dwelling, to describe anything more than a single family home, or SFR (single family real estate).
Investing in residential real estate, especially the SFR market, is often a beginner’s first step due to its familiarity and the perpetual demand for housing. While these properties can be a reliable source of rental income, investors should be prepared for the challenges tied to property management, tenant turnover, and ongoing maintenance.
Commercial Real Estate
When one thinks of skyscrapers lining city horizons or sprawling office parks in suburban locales, that’s commercial real estate. These properties are tailored to businesses, and can include complete corporate headquarters or individual offices.
Commercial leases often run longer than residential ones, offering the potential for stable, long-term rental income. However, the entry point can be higher, with larger down payments and a more extensive due diligence process. Additionally, commercial real estate values can be closely tied to the business environment of the locality.
Industrial
Industrial real estate encompasses properties like warehouses, distribution centers, and manufacturing facilities. They’re integral to business operations, ensuring products move efficiently from manufacturers to consumers.
Investing in this sector can offer substantial rental yields, especially if the property is strategically located near transportation hubs. However, the nuances of industrial real estate, such as zoning laws and environmental concerns, necessitate a more in-depth understanding than residential or commercial sectors.
Retail
This sector includes shopping malls, strip malls, and standalone stores. What’s unique about retail real estate is that leases sometimes include a provision where the landlord gets a percentage of the store’s profits, termed as “percentage rent.”
In a thriving commercial area, retail properties can be quite profitable, with long-term leases and the potential for appreciating property values. However, investors should be mindful of shifts in consumer behavior and the evolving retail landscape, especially with the rise of e-commerce.
Multi-Purpose Commercial
A new breed of commercial real estate has emerged to compete with the growth of e-commerce. Multi-purpose commercial spaces blend housing units with office space and retail, often adding hospitality and entertainment venues.
Typically, these spaces are the domain of large real estate investment and property management firms. But if you invest in commercial office space or retail, you will be competing with these multi-purpose properties for tenants, so they are worth acknowledging.
Real Estate Investment Trusts (REITs)
For those not keen on direct property ownership, REITs present an attractive alternative. These are companies that own, operate, or finance income-producing real estate across various sectors. What makes REITs distinctive is that they’re traded on stock exchanges, similar to stocks.
By investing in a REIT, you’re buying shares of a company that manages a portfolio of properties, thus gaining exposure to real estate without the hassles of property management. Moreover, by law, REITs are required to distribute at least 90% of their taxable income to shareholders, leading to potentially attractive dividend yields. However, it’s essential to remember that like all publicly traded entities, REITs can be subject to market volatility.
9 Ways to Invest in Real Estate
Investing in real estate can seem tricky for beginners. But, with time and patience, anyone can master it. Focus on simple investment methods first to get to know your local property scene, meet experienced investors, and learn how to handle money wisely. As you learn and grow, you can dive into more complex investment options.
Here are some great ways for beginners to start in real estate:
1. Wholesaling
Acting as the bridge between property sellers and eager buyers, this method primarily focuses on securing properties at a rate below the prevailing market value. The secured contract is then transferred to an interested buyer, ensuring a margin for the wholesaler.
2. Prehabbing
Unlike intensive property renovations, prehabbing is about amplifying a property’s appeal through minimalistic enhancements. These properties, once given their facelift, usually attract investors with a keen eye for larger renovation projects.
3. Purchasing Rental Properties
An avenue promising consistent returns, this involves acquiring properties to lease them out. For those not inclined towards the intricacies of landlord duties, there’s always the option of hiring seasoned property management professionals.
4. House Flipping
A strategy that has garnered significant attention, house flipping involves a cycle of purchasing, upgrading, and promptly reselling properties, aiming for a profit. The emphasis is on swift transactions and keen market acumen.
5. Real Estate Syndication
Envision a collective where like-minded investors come together, pooling both resources and expertise. Such collectives venture into large-scale property acquisitions, and the ensuing profits or rental incomes are distributed among the participants.
6. Real Estate Investment Groups (REIG)
Primarily, these are conglomerates that steer their operations around real estate investments. By amassing capital from a plethora of investors, they dive into acquisitions of sizeable multi-unit residences or commercial holdings.
7. Investing in REITs
Real Estate Investment Trusts (REITs) revolve around the ownership and meticulous management of properties that yield income. However, investors don’t have to handle the management themselves. Instead, participants can relish the benefits of the real estate sector without the responsibilities of direct property ownership.
8. Online Real Estate Platforms
A fusion of technology with real estate, these platforms seamlessly connect potential investors with vetted property developers. This synergy enables backers to finance promising property ventures and, in exchange, enjoy periodic returns that encompass interest.
9. House Hacking
A blend of homeownership and investment, house hacking is about maximizing the potential of a multi-unit property or a single-family home. Investors live in one segment while leasing out the remaining portions. This dual approach can significantly reduce or even negate monthly housing expenses, serving as an excellent introduction to the world of property management for novice investors.
6 Steps to Get Started in Real Estate Investing
Starting on the path of real estate investing requires careful planning, due diligence, and a methodical approach to ensure that your investments are sound and have the potential for fruitful returns. Whether you’re dreaming of becoming a millionaire real estate investor or merely looking to diversify your investment portfolio, following a structured process can be the key to success. Here’s a step-by-step breakdown:
1. Assess Your Financial Health
Every investment journey should begin with introspection. As an aspiring real estate investor, it’s essential to have a clear understanding of your current financial standing. Ask yourself questions like:
How much capital am I willing to invest?
What are my short-term and long-term financial goals?
Do I have an emergency fund set aside?
Evaluating your risk tolerance is equally crucial. Some might be comfortable flipping houses, while others might prefer the steadiness of rental properties. Consulting a financial advisor at this stage can provide insights tailored to your financial health, enabling you to make informed decisions as you proceed.
2. Dive Deep into Market Research
Knowledge is power in the world of real estate. The local market can be significantly different from national or even statewide trends. Delve deep into understanding:
The demand for rental properties in your target area.
The average property values and rental rates.
The historical appreciation rates.
Any upcoming infrastructure projects or urban development initiatives.
Furthermore, familiarize yourself with real estate terminology. Phrases like “cap rate,” “loan-to-value,” and “operating expenses” will become a regular part of your vocabulary. The better informed you are, the more confidently you can navigate your investments.
3. Assemble Your Real Estate Team
No investor is an island. Success in the real estate business often hinges on the strength and expertise of your team. Look for professionals with a proven track record and positive reviews. Your team might include:
Real estate agents who understand the investor’s perspective.
Property managers to streamline tenant interactions and maintenance.
Lawyers specializing in real estate transactions.
Accountants familiar with the tax implications of real estate investments.
4. Explore Financing Options
The path to acquiring a property is paved with various financing methods. Traditional mortgages are common, but the real estate industry offers other mechanisms like:
Hard money loans.
Private money loans.
Real estate syndication where multiple investors pool resources.
Seller financing.
Each of these has different pros and cons, interest rates, and repayment terms. Understand each deeply to determine which aligns best with your financial strategy.
5. Analyze Potential Properties
The crux of real estate investing is ensuring that the numbers make sense. Before purchasing, assess the property’s potential for generating rental income. Break down:
Monthly mortgage payments
Property taxes
Maintenance costs
Potential vacancy rates
Your goal should be a positive cash flow, where the monthly income from the property (rent) exceeds all these expenses.
6. Negotiate and Close the Deal
Once you’ve zeroed in on a property, the negotiation phase begins. Here, understanding the property’s market value, any existing damages or repair needs, and the local real estate market dynamics can give you an edge.
When it comes to closing, be aware of all associated costs. These might include inspection fees, title insurance, and escrow fees. Being well-informed can help you negotiate these fees and ensure that you’re not overpaying.
Risks and How to Mitigate Them
Like any investment, real estate comes with its set of challenges and uncertainties. The difference between successful real estate investors and those who falter is often the ability to anticipate risks and prepare for them. Here’s an exploration of some prevalent risks in real estate and actionable steps to manage them:
1. Market Fluctuations
Real estate markets can be volatile, with property values rising and falling based on a myriad of factors.
Mitigation: To protect against market downturns, it’s essential to buy properties below their market value. Conducting comprehensive research and seeking expert investment advice can help investors make informed decisions. Remember, real estate is often a long-term game, so a short-term dip can be offset by long-term appreciation.
2. Unexpected Repairs and Maintenance
Properties can often come with surprises, from plumbing issues to roof repairs.
Mitigation: Regular property inspections can catch potential problems before they become major expenses. Setting aside a buffer fund specifically for maintenance can also cushion the financial blow of unforeseen repairs.
3. Vacancy Periods
There might be periods where your property remains unoccupied, leading to loss of rental income.
Mitigation: Properly vetting and building a good relationship with tenants can lead to longer lease periods. Diversifying your investment properties across different areas can also help, as vacancy rates might vary from one location to another.
4. Legal and Tax Implications
Real estate investors can sometimes find themselves entangled in legal disputes or facing unexpected tax bills.
Mitigation: Regular consultations with a tax professional or attorney familiar with the real estate industry can keep investors informed and protected.
Long-term Strategy and Growth
Real estate investing is not just about making a quick buck; it’s about building lasting wealth. Adopting a long-term perspective and continuously refining your strategy can pave the way for consistent growth in the real estate industry. Here’s how:
1. Define Your Real Estate Identity
Are you more comfortable with a buy-and-hold strategy, where properties are retained for long-term growth and steady rental income? Or do you thrive on the excitement of flipping houses, where properties are bought, renovated, and sold for profit? Understanding your preference can help tailor your investment strategy.
2. Reinvestment is Key
For those adopting a buy-and-hold strategy, reinvesting the rental income can substantially grow your real estate portfolio. By channeling profits into purchasing additional properties, investors can benefit from compounded growth.
3. Diversify Your Portfolio
As you gain experience, consider diversifying across various real estate sectors. Branching out into commercial real estate or exploring real estate investment trusts (REITs) can provide additional avenues for income and growth.
4. Continue Your Education
The real estate industry is continually evolving. By staying updated on market trends, attending seminars, and networking with other real estate professionals, you can adapt your strategy and seize new opportunities as they arise.
5. Scale Strategically
A real estate empire begins with just one property. With time, dedication, and a sound strategy, it’s possible to grow your holdings into a substantial full-time income. As you scale, ensure you’re not overextending; always prioritize the quality of investments over quantity.
Key Tips for Beginners
Embarking on a journey into real estate investing can be thrilling, yet the complexities of the industry can sometimes overwhelm beginners. Simplifying the learning curve is essential for novice investors to make informed decisions and find success. Here are some pivotal tips to guide those just starting out:
1. Start Small and Scale Gradually
Many millionaire real estate investors began their journey with a modest property. Purchasing a smaller, more manageable property as your first investment can help you navigate the nuances of the real estate business without being overwhelmed. As you gain confidence and experience, you can then venture into bigger and more diverse properties to scale your portfolio.
2. Prioritize Education
The world of real estate is vast and ever-evolving. Leverage online real estate platforms to learn about market trends, investment strategies, and financing options. Additionally, joining real estate investment groups can be invaluable. These groups not only provide mentorship but also offer opportunities to share resources, insights, and deals with other investors.
3. Location is Crucial
In the real estate realm, location often takes precedence over the type or condition of a property. A mediocre house in a prime location can fetch better returns than a grand mansion in a less desirable area. Research local market dynamics, neighborhood amenities, future development plans, and other location-specific factors before making an investment decision.
4. Networking is Key
Surrounding yourself with knowledgeable people can fast-track your learning process. By connecting with seasoned real estate investors, you can gain insights from their experiences, avoid common pitfalls, and even discover potential partnership opportunities. Attend local real estate seminars, join investor forums online, and participate actively in real estate conferences to grow your network.
5. Stay Updated and Adapt
The real estate industry is not static. Market conditions, property values, and investment strategies can change. Being adaptable and staying updated on industry trends will ensure you remain ahead of the curve and can capitalize on new opportunities.
6. Always Conduct Due Diligence
Before diving into any real estate transaction, thorough due diligence is imperative. From understanding property taxes and zoning laws to estimating potential repair costs and evaluating tenant profiles, leaving no stone unturned will protect you from potential setbacks.
8 Terms Beginner Real Estate Investors Should Know
Venturing into real estate can feel like you’ve entered a world with its own language. Don’t worry; everyone feels this way at the start. Knowing basic real estate terms can help you communicate confidently and make informed decisions.
Dive into these essential terms every beginner should grasp:
Appreciation: Appreciation is the increase in the value of a property over time. It’s one of the primary ways real estate investors make money, especially in growing markets. Appreciation can result from factors like inflation, increased demand, or improvements made to the property.
Capitalization rate (cap rate): Think of the cap rate as a tool to gauge the potential return on a property. It’s a percentage derived from comparing a property’s net operating income to its current market price.
Cash flow: This term captures the money dance – what’s coming in and what’s going out. In the context of rental properties, it means the rental earnings minus all the costs. Positive cash flow indicates you’re earning more than you’re spending.
Equity: Equity represents the value of ownership in a property. It’s calculated by taking the market value of the property and subtracting any outstanding mortgage or loans against it. As an investor pays down their mortgage or if the property appreciates in value, their equity in the property increases. This equity can be tapped into for various financial needs or reinvested.
Leverage: This term refers to the concept of using borrowed money, often in the form of a mortgage, to invest in real estate. It allows investors to purchase properties with a small down payment and finance the remainder. When used correctly, leverage can amplify returns, but it can also increase the risk if property values decline.
Net operating income (NOI): Simplified, NOI is the profit made from a property after deducting all operational costs. It’s your rental income minus all the expenses, showing the true earning potential of a property.
Real estate owned (REO): An REO property is one that didn’t sell at a foreclosure auction and is now owned by the bank. These properties are often sold at a lower price because banks aim to sell them quickly, making them attractive to investors.
Return on investment (ROI): In simple terms, ROI measures the bang you get for your buck. It’s calculated by comparing the profit you made to the amount you invested. The higher the ROI, the better your investment performed.
Conclusion
Real estate investing offers an avenue to diversify your portfolio, generate steady income, and potentially achieve long-term growth. With due diligence, a clear strategy, and the right team, beginners can successfully navigate the complexities of the real estate industry and lay the foundation for a prosperous investment journey. Remember, every millionaire real estate investor started with their first property. Your journey is just beginning.
PARSIPPANY, N.J., September 19, 2023–(BUSINESS WIRE)–In an ever-evolving mortgage lending landscape, NON-QM mortgage loans are emerging as the industry’s future, providing opportunities for a wider range of borrowers to achieve their homeownership and investment goals. Stratton Equities, the Leading Nationwide Private Money and NON-QM Mortgage Lender, has been at the forefront of this revolution for the past six years, setting the pace for other companies to follow.
NON-QM mortgage loans, short for non-qualified mortgage loans, have gained significant traction in recent years as a viable alternative to traditional QM (qualified mortgage) mortgage loans, which come with stringent government regulations and eligibility criteria. Recent statistics reveal that only a small percentage of Americans qualify for QM loans due to these stringent requirements.
According to industry data, the demand for NON-QM mortgage loans has steadily increased yearly, with a notable surge in the past few years. In 2022 alone, NON-QM loans accounted for a significant portion of the mortgage market, surpassing expectations. It has been estimated that one in four loans will go NON-QM in the near future.
Stratton Equities recognized the potential of NON-QM loans six years ago, positioning themselves as pioneers in private money lending, specifically NON-QM mortgage loans. This early recognition of market trends has been the cornerstone of their continued success.
Michael Mikhail, CEO and Founder of Stratton Equities, emphasized their focus on generating NON-QM leads and their commitment to offering a wide range of lending programs, including NON-QM, DSCR, Hard Money, and No-Doc Loans. He stated, “Our aim has always been to provide solutions that cater to a broader spectrum of borrowers. Stratton Equities had the foresight six years ago to recognize the market’s direction, which is why we were at the forefront of NON-QM mortgage lending. This serves as a foundation for our continued success.”
NON-QM mortgage loans are designed to serve most Americans who do not meet the strict eligibility criteria of QM loans. These loans facilitate home ownership, second home ownership, and investment properties, allowing income generation and wealth building for a more diverse range of borrowers. Contrary to misconceptions, NON-QM mortgage loans often offer competitive rates, making them attractive.
Traditional lenders like banks and credit unions primarily offer QM loans for one-to-four-family investment properties. However, these loans have heavy documentation requirements and lower loan-to-value (LTV) ratios, typically capping at 70%. Stratton Equities stands out by providing NON-QM mortgage loans for such properties with easier qualifications, lower documentation requirements, and higher LTV ratios, currently at 80%.
Stratton Equities also recommends closing within an LLC for investment properties due to tax and security advantages. Despite some lingering stigma associated with NON-QM mortgage loans, they often result in lower rates, higher LTVs, and streamlined documentation, making them a practical choice for borrowers.
Educating borrowers about the advantages of NON-QM mortgage loans and dispelling misconceptions is vital. Stratton Equities is committed to leading the way in providing these beneficial lending options and believes in the potential for growth and success in this market. Their loan officers benefit from the advantages offered by the company, including a consistent stream of leads, as exemplified by recent hires who have quickly achieved success within the organization.
Stratton Equities invites individuals and investors to explore the world of NON-QM mortgage loans and discover the possibilities for achieving their financial goals. For more information, please visit www.strattonequities.com.
For more information about Stratton Equities, please visit their website at https://www.strattonequities.com. Follow Stratton Equities on social media on Instagram, Facebook, and YouTube @StrattonEquities, LinkedIn @stratton-equities, and Twitter @Strattonequity.
View source version on businesswire.com: https://www.businesswire.com/news/home/20230918013297/en/
Contacts
Kelly Bennett, Director of PR Stratton Equities [email protected] (949) 463-6383
It has been about five years since the so-called subprime mortgage crisis rattled Wall Street (and America), and led to scores of layoffs and bank failures.
In the years that followed, thousands of mortgage companies that were turning major profits disappeared seemingly overnight.
To celebrate, or rather mark that anniversary, the Center for Public Integrity is publishing a three-part series on what has happened since. Or more accurately, what the major players are up to now.
It reads more like an exposé than anything else, singling out the bad players that ostensibly caused the crisis, who are now back in the game working for new companies.
They focus on the top 25 subprime lenders of days past, which collectively dished out nearly $1 trillion in high-risk mortgage loans between 2005 and 2007.
These companies, which include big names like Countrywide, IndyMac and Ameriquest, accounted for nearly three-quarters of high-priced loans during the subprime peak.
And now their old executives run new businesses that will shape the mortgage market (and housing market) of the future.
This is rather scary, given the fact that they didn’t do a great job in the last decade, and probably won’t do too much better in coming years when competition heats up and desperation kicks in.
Already Bad Signs of Lessons Not Learned
In fact, we’re already seeing some bad signs of loose lending resurfacing, what with CashCall offering 125% second mortgages and Suze Orman telling viewers that it’s okay to put less down on a home.
As time goes on, I’m sure more and more high-risk loan products will emerge, used to combat higher mortgage rates and home prices that will soon be out of reach to more borrowers.
The top of the list (see larger version) is of course a former Countrywide Executive, Stanford L. Kurland to be precise. He served as Chief Operating Officer during the golden years of the housing boom and later as President.
After the dust settled, he founded PennyMac, which first invested in distressed mortgages and now originates new mortgages. Many envision PennyMac Mortgage being another major residential mortgage lender in the not-too-distant future.
In fact, PennyMac already made the top 10 lender list in the fourth quarter of 2012 thanks to its correspondent lending business.
Next up is Paul Lyons, a former director at Ameriquest, probably the definition of subprime, who now works as COO for CS Financial, which is starting to dabble in some “Alt Income” lending.
There’s also Scott Van Dellen, former CEO of IndyMac’s homebuilder division, which a jury said, “had negligently approved risky loans after they knew the bubble had burst.”
He now runs Yale Street Mortgage, which provides bridge loans and hard money to investors looking to flip properties, among other things.
The list goes on and on, and it’s actually quite an interesting read if you’ve got a few minutes.
If anything, it appears to be business as usual, and it won’t be long before this supposed real estate boom we’re in goes sour again.
In the mortgage industry, new rules are created all the time, but with each new rule that surfaces, a smarter mortgage executive comes up with a way to circumvent it, and fast. That will never, ever change.
Paul: [00:00:08] Hello, everyone, and welcome to the latest edition of NPA TV, one in which we are shining the spotlight on the Non-QM landscape. And it’s been quite the year for the mortgage industry at large. Of course, after a relative feast over the last couple of years, it’s been fanning for some … [Read more…]
This article originally appeared on Spark Rental and has been republished here with permission.
The views and opinions expressed in this article are those of the author only and are not endorsed by Credit.com.
What Is the Purpose of Bonds in Your Portfolio?
Bonds have historically served as a counterweight to stocks, as investors approach retirement.
For all their advantages, stocks come with one enormous disadvantage: volatility. When you first retire, you face something called sequence risk: the risk of a stock market crash early in your retirement, before your stock portfolio has compounded enough to withstand a deep drop.
Here’s how bonds protect you from sequence risk, and the role they play in your retirement portfolio.
1. Low Risk
Bonds are interest-only debts. When you buy a bond, the issuer (the borrower) agrees to pay you interest at a set rate for a certain period of time. At the end of that period, the bond matures and you get your principal investment back.
Bonds come with two risks. First, and most relevantly to retirees, the bond issuer could default. That rarely happens, at least outside of the junk bond market. The other risk is that interest rates rise, so the value of your existing bonds goes down on the secondary market. But this risk doesn’t really apply to retirees simply looking for ongoing interest income rather than looking to trade bonds.
The low risk of bond default counterbalances the real risk of stock market corrections and crashes. Retirees can lean on their bond income if the stock market crashes, and (hopefully) avoid selling while stock prices are low.
2. Low Correlation with Stocks
Bonds provide diversification for investors. Bond returns have a low correlation with stock returns: they rarely crash at the same time as stock markets. In fact, bond prices normally rise when stocks crash, as investors flee stocks for the safety of bonds.
Once again, this protects retirees from the risk of a stock market crash.
3. Stable Income
Retirees need passive income to live on, in the absence of a paycheck. Interest payments from bonds can provide that steady income.
The same can’t be said for stocks. Not all stocks pay dividends, and even those that do can change their dividend payment at any time. They could lower or eliminate their dividend entirely, leaving retirees without income. The retiree could sell their stocks to generate income of course, but that reduces their net worth.
Can Real Estate Fill the Role of Bonds in Your Portfolio?
The short answer: yes, if you know what you’re doing. Which, of course, not everyone does.
Real estate investments can earn you ongoing income, with low risk and low correlation to the stock market. So they can serve the same purpose as bonds in your retirement portfolio, at a higher return. In fact, one study reviewing all asset classes for the last 145 years found that rental properties offered higher returns than stocks, with far lower risk.
Still, some types of real estate investments require work on your part. You could invest in publicly-traded REITs, bought and sold on stock exchanges and just as passive as stocks, but they tend to share a high correlation with stock markets. That gives them little diversification value.
But there are many types of real estate investments, each with their own pros and cons. Real estate will never be completely risk-free like Treasury bonds, but it can offer strong returns at low risk, especially if you diversify.
Ways to Invest in Real Estate as a Bond Alternative
The permanent environment of low interest rates in the 21st century have made bonds unappealing and real estate far more appealing. Investors can use leverage to buy real estate with other people’s money, at low interest.
Or not–many of the real estate investing options below don’t involve leverage at all.
Consider the following ways to invest in real estate as options to replace bonds in your investment portfolio.
1. Crowdfunded Private REITs
Publicly-traded REITs come with several downsides, beyond high correlation with stock markets. They’re volatile, with prices bouncing up and down similarly to stocks. But they’re also required by the SEC to distribute at least 90% of their profits each to shareholders, in the form of dividends. That gives them high dividend yields, but it also makes it hard for REITs to invest money in new properties to grow their share price.
Private, crowdfunded REITs such as Fundrise, Streitwise, and Diversyfund don’t have the same restriction. They can grow the value of their fund share prices by reinvesting profits into new properties.
Even so, many do still offer high dividend yields that rival or even beat public REITs. Fundrise pays dividend yields in the 4-7% range, while Streitwise pays dividends in the 8-9% range.
Crowdfunded REITs represent one of the easiest and most passive ways to invest in real estate. No mailings or labor to find good deals on properties, no tenant screening or rent collection hassles, just buy shares and sit back.
2. Crowdfunded Investment Property Loans
Hard money lenders issue short-term loans to investors who fix and flip properties, or refinance them after renovating them (the BRRRR method). But where do hard money lenders get their funds to lend?
From you, in some cases. For example, GroundFloor lends short-term investment property loans for buying and renovating, and they raise the money from retail investors.
You get to pick and choose which loans you want to fund, and you can lend as little as $10 per loan. Which means anyone with $10 in their pocket can invest in real estate, at least indirectly through property-secured loans.
If the borrower defaults, the lender forecloses, and you get your money back that way. Since hard money lenders fund at a relatively low LTV, that provides strong protection against default. Read: relatively low risk.
Related Read: Thinking of Getting into Retail Investing? Here Are 7 Things to Consider
3. Rental Properties
You can also buy rental properties, of course.
Direct real estate investing comes with plenty of advantages. You can leverage other people’s money by using an investment property loan to fund 75-80% of the cost. Investors get spectacular tax benefits, from rental property tax deductions to property depreciation. And rental income in retirement doesn’t expire or diminish — quite the opposite. Rental cash flow rises over time, as rents rise and provide a hedge against inflation.
Is rental income good for retirement? Absolutely, but it does come with a few caveats. As noted above, buying and managing rental properties takes work. Even if you hire a property manager, you still have to manage the manager.
Rental income is predictable as a long-term average, so you can forecast returns with a rental income calculator. But net rental cash flow each month varies wildly, as you experience vacancies, turnover, or repairs. That means retirees need to budget accordingly with an emergency fund, and not depend on a steady paycheck from every property, every month.
4. House Hacking
Want free housing? Explore options for house hacking, or finding ways for other people to cover your housing expenses.
The traditional model involved multifamily house hacking: typically buying a duplex or triplex, moving into one unit, and renting out the neighboring unit(s). The rents from your neighbors cover your mortgage payment and ideally your maintenance costs as well.
But that’s not the only way to house hack. You can also bring in housemates, or rent rooms or units on Airbnb, or rent out storage space on Neighbor.com.
By eliminating–or at least greatly reducing–your housing payment, you don’t require nearly as much passive income from your investments to live on in retirement.
5. Private Notes
A “note” is the legal document that you sign when you borrow money. For example, when you took out your last mortgage, the most important document you signed was the promissory note.
You can lend money privately to other real estate investors, having them sign a private note. You set the terms of the loan, including the interest rate, any fees, loan term, and any other factors.
Beware, however, that lending money to other investors largely comes down to trust. Unless you file a lien against their property, you have little recourse if they default on you. Only lend money to experienced investors you know well and trust implicitly to pay you back.
Get it right, and you can earn high returns completely passively.
6. Land Notes
There’s a lot to love about land investing.
To begin with, land offers low risk and high returns. It also doesn’t necessarily require much cash to invest. Best of all, you don’t have to hassle with contractors or tenants, which means low stress and far fewer complications. No repairs or renovations, no chasing tenants for rent collection, no property damage by uncaring renters.
For all that, land investing requires you to approach it like a business. You can eventually automate that business to run in the background with only an hour or so required each week from you, but it takes time and labor to get to that point. Many retirees (and employees for that matter) don’t want to launch a side hustle.
7. Real Estate Syndications
Syndications offer another way to invest in real estate for high potential returns. But unlike land investing or rental properties, syndications are largely passive investments.
They work like this: an experienced real estate investor goes out and finds a (hopefully) great deal that costs more than they can afford to buy on their own. So they bring in outside investors to partner with them on the deal, on exchange for a deal-finder fee or bonus.
The outside investors become partial owners of the property and share in its cash flow and profits upon sale. But we surrender most management decisions to the syndicator, the person who found and continues to oversee the deal.
We get to invest fractionally in a large real estate project, such as an apartment building, that we would never be able to buy individually. And an experienced real estate investor does all the work for us.
Of course, no investment is perfect. To begin with, most syndication deals only allow accredited investors to participate. The SEC makes the regulation too onerous to allow retail investors to partner on these deals. Along similar lines, syndications typically require a high minimum investment, often in the $50,000-$100,000 range.
And like any managed investment, you place your trust in the manager–in this case, the syndicator. You need to do your due diligence on both the property and the syndicator if you want peace of mind in your investments.