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5 Financing Options to Jumpstart Your Real Estate Investing Career

Having several cash-flowing units is a sure way to achieve financial independence. However, many people find it difficult to get started. With interest rates rising, financing for home purchases and real estate investment is more difficult today than it was even a year ago.

However, if you're interested in investing in real estate, don't give up. There are simple ways for newcomers to get their feet on the real estate investment ladder that don't require much experience or money.

Apply for an FHA loan for a 2- to 4-unit property
An FHA loan is a type of government-backed financing for first-time homebuyers that enables them to start with as little as a 3.5 percent down payment and is tolerant of credit scores that are less than ideal. The benefit of FHA loans is that they are available for single-family and two to four-family homes, as long as the borrower intends to live from one of the units. The practice of living in one unit while renting the others is referred to as "house hacking" in the investor community and allows homeowners to live rent-free or nearly so by using the tenant's rent to offset their mortgage payment.

Refinance Your Personal Home and Rent It Out for Cash

If the value of your home rises significantly, you can refinance it rather than sell it. You can then use the funds to purchase an investment property or a new personal residence while renting out your former residence.

Sell your home after two years of occupancy
By residing in a home for two years, many people use this strategy to amass real estate wealth (or 2 of the previous 5 years). They renovate it during this time, then sell it. They are exempted from paying capital gains tax on the profit made when the house is sold because they have lived there for longer than two years.

Try the BRRRR Method

For new and seasoned real estate investors alike, this has emerged as the gold standard. The process is straightforward: You either use hard money or a private loan to purchase a fixer-upper. After finishing the renovations, you rent out the house. Once the property is rented out, you refinance it, taking your initial down payment out (hard money lenders typically require 10 to 20 percent) and repeating the process to reuse your funds. BRRRR means:
  • Buy

  • Rehab

  • Rent

  • Refinance

  • Repeat

Find private money

One of the simplest ways to get started in real estate is to avoid banks and hard money lenders and instead obtain private money.

Private money can come from a recognized lender (in which case the line between a recognized lender and a hard money lender blurs) or from a family member. The benefit of borrowing from a family member is that the loan terms are more flexible. You can try any of the methods listed above if you have cash on hand. Just make sure to immediately repay the original amount borrowed after refinancing or selling the property (even if it is from a family member). Building a reputation as an honest, trustworthy borrower is critical as you pursue a career in investing. As you progress, you may be able to borrow more money.

Bottom Line

Any investment, including real estate investment financing, carries some level of risk. Protecting the amount of money you invest and how you invest it will help to mitigate your liability. These tried-and-true methods reduce your initial investment and provide a way to quickly recoup it. However, before purchasing a property, you must thoroughly screen your tenants, select a good property to invest in, and plan your exit strategy.

It's also critical that you can pay the mortgage if, in the worst-case scenario, a tenant fails to pay their rent. That is why, before making any type of investment, you should have a slush fund of savings set aside to cover any potential hiccups.


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