Last Updated on February 4, 2022 by Mark Ferguson
I recently wrote an article about how to make $10,000 a month with rental properties. I have personally surpassed that number and will keep going, but not everyone is at that stage in their investing life. What about those who do not have much money and are looking to get started investing in real estate? Can you do it with less than $10,000? Yes! You can definitely get started investing in real estate with less money than you think. A lot of people will say you need 20% down or 25% down, but there are many ways to get started with much less.
How much money do you usually need invest in real estate?
A lot of people will say you need 20 or 25% down to buy an investment property. They are right if you are buying a strict investment property and using a traditional bank to do it. However, that is not the only way to buy an investment. There are many different types of financing and so many different ways to get into the game without having a huge bankroll.
One easy trick to use is you don’t buy a strict investment property and that is the strategy we are going to talk about here. You can live in one part of a property and rent out the rest or live in a property and then turn the property into an investment after you move out.
Is it legal to rent out a house you live in?
A lot of people and even lenders will tell you that it is illegal to rent out a house you bought to live in. They are right if you never live in it or do not meet the guidelines in the loan documents. Almost all owner-occupied loans in the United States will require the borrower to live in the property for at least one year. That is what it says in the loan documents and that is what is required. I have had many arguments with people who say it is still illegal to rent out a home that you bought with an owner-occupied loan, but after repeated requests, they have not been able to provide proof or any documentation of it being illegal.
You also do not have to refinance the loan or sell the home to an LLC, after you have fulfilled the obligation in the contract you can move out and rent the home. If you buy a multiunit property you can rent out the other units while you live in one unit. Depending on the zoning laws in your area, you may even be able to rent out part of a single-family home that you are still living in as well. Some banks and lenders may not like it if you constantly buy new properties as an owner occupant and turn them into rentals but that does not make it illegal!
Why does buying a house to live in require less money?
Why would you go to the trouble of buying a house to live in and then turn it into an investment? The answer is simple, it takes less money! Owner occupant loans require less money down and are often easier to get than investor loans. Instead of putting 20 or 25% down to buy an investment property, you can put 3.5%, 5%, 3%, or even $0 down in some cases!
If you are looking to buy a $100,000 property that is a huge difference: $20,000 down versus $3,000 down. The more expensive the property is the bigger than difference becomes. On a $300,000 house, it would be $60,000 verse $9,000!
The reason that you can buy a house to live in for less money is the government wants people to buy houses. Real estate is a huge contributor to the economy. The government insures loans for banks that offer low money down loans for owner-occupants. Other banks know they must also offer low money down loans if they want to compete with government-backed loans.
How can you buy a house with $10,000 or less?
As you can see you can put very little money down when buying a house to live in and at a later date turn it into a rental property. You do not have to be a first-time homebuyer or not make too much money. Anyone can qualify for these loans with decent credit and a steady job.
If you do not have good credit or a steady job, you may have some issues getting these loans or any loan for that matter. There may be some other financing options available but work on your credit and get a steady income as it makes everything so much easier! If you think you have problems talk to a lender asap to see what they think and if there are problems they can help you figure out how to fix them.
You will need more than just the down payment to buy the house. You will also need to pay costing costs, which can add another 2 to 4% to the down payment. However, it is possible to ask the seller to pay these costs or even find grants in your area that will pay some or all of them. In many areas of the country, it is possible to buy a house with $1,000 or less!
What is the catch when putting so little money down?
There are some catches when you put little money down on a house. The banks will require mortgage insurance on most loans. Mortgage insurance is an extra monthly cost the buyer must pay. It makes the loan payments more expensive, but with the right property, it should be worth it to still buy with little money down.
There are some loans like VA and USDA that will offer low down payments for owner-occupants and have no mortgage insurance. It is also possible to get the mortgage insurance removed on some loans after a couple of years or to refinance the property into a new loan that will remove the mortgage insurance as well. You are not stuck with it for life.
When you buy a house with an owner-occupied loan, the house must be in livable condition as well. You cannot buy houses that have major problems unless you use an FHA 203k loan.
How do you turn the property into an investment?
The requirements of an owner-occupied loan usually say you must live in the home for one year. That does not mean you leave one room vacant and say you live in it, while you actually live somewhere else. You need to live in that house more than 50% of the time. If the house needs some work, most loans will give you time to make repairs and then move in. FHA gives you 90 days, but you may have more time with the FHA 203k loan. Make sure you talk to the lender and read the loan documents which will outline the requirements.
Once you have lived in the house for one year, you can move out and start renting it. Or, if you were house hacking (renting part of the house while living there) you can move out and rent the unit or part of the house you were living in. You do not have to tell the lender or refinance the property. You do want to tell your insurance agent so that you have the right policy in place. You might want to tell the lender to send your mortgage payments to the new address if you move.
If you do this over and over, the lender will see it. They may give you some trouble getting new loans but it is not illegal. If a lender does give you trouble getting a new loan, shop around and find a lender that does not have a problem with it. Usually, local banks and credit unions are great to work with.
Conclusion
Buying a house to live in can be a great investment in itself, but when you turn it into an investment property as well, it can be an even better investment and a great way to become a real estate investor with less money. I wish I would have used this strategy more when I was younger!
