Starting any business is tough, and the biggest challenge for most people is the ability to accumulate enough starting capital. That’s why it’s so refreshing to find that there are businesses out there which you can start with just $10 000 in your bank account.
Investing in real estate is one such business, and if you do it right it can really take you far, and there’s no limit to how big you can make it.
The best part about a real estate business is that it appreciates considerably over time while providing you with a positive cash flow, passive income and lesser tax reductions. Of course, these benefits are balanced out by the amount of risk involved which is the up-front costs, but that’s a small price to pay when you consider the upside.
Now, if you’re thinking of going into real estate and have $10, 000 to invest, read on for some helpful tips on how to do it right.
Your First Purchase
As any real estate expert will tell you, purchasing your first property is by far the most difficult acquisition you will make during the course of owning your business. This is why it’s often advised to keep things simple by purchasing something small like a single family home that you can sustainably live in while you pay off the mortgage.
Here are some tips to consider when you’re shopping around for your first real estate property:
- Consider real estate trends:
One of the things you’ll have to consider as you shop around for that property is whether or not the area you’re buying from is moving up or down.
Real estate trends are easy to follow because unlike normal market trends, they move really slowly. So if a city has high growth now then you can bet that it had high growth the previous year and will probably experience the same thing next year. This makes it really easy for you as an investor to figure out which cities, suburbs and clusters of streets within the suburbs, are likely to do well in the future just by watching the past.
Another strategy to consider would be to look at an area that has been down for years because chances are, it will suddenly come back to life again. The trick here is to find an area that is bottoming out because at that stage, it’s more likely to start moving up in value.
Also, if you’re going to find an area, make sure it’s close to home so that you won’t have to spend money travelling in order to see the property. It would be even better if you can walk or jog to that area, or drive by the property on your way to work.
Once you’ve identified the area that you’re going to invest in, you can start looking at the actual properties themselves. Contrary to popular belief, properties that have perceived problems are usually valued very lowly, so it might be a good idea to look at the ugliest houses in the best areas, without it being too broken or too bad.
What you’re looking for is a gem of a property that will come to life and massively increase in value with light refurbishments.
- Shop around:
Be sure to look at a lot of properties before you buy (50 to 100) and never make a decision to buy based on two or three properties.
For example, when you buy property in Malta, it’s important to really look around so that you can increase your chances of finding a property that’s not even listed because it’s being sold by the owner. Or you might get a hot tip from someone in the neighborhood who has a cousin or friend that’s looking to sell. Either way, you’ll have a better chance of finding a really good property if you widen your net and keep your options open for as long as possible.
- Find the right broker:
As you’re going through the area and looking at different projects, you’ll soon find that not all brokers are the same. There are brokers that work with investors and some who work with home buyers.
Ideally, you want to find a broker that understands what you’re looking for as an investor. Typically this is a broker who is an investor themselves and thus has the same mentality as you do.
- Put down your deposit:
When you’re ready to buy make sure that the property is within the $100, 000 mark, as that’ll enable you put down a 10% deposit of $10, 000 upfront.
The good news is that it’s not uncommon to find 1,200 to 1,500 sq ft. homes in the $100, 000 mark, and with insurance, taxes and 4% interest added, you should pay about $540, 00 or so per month in mortgage costs.
Now, if the value of the property goes up to say $150, 000 while you still own it and you decide to sell, the bank still only gets $90, 000 and you’ll make a profit of $50, 000 on your first property.
Start Paying Off Your Mortgage
Once you’ve signed on the dotted line and the property is officially “owner occupied’ by you, now is the time to pay the mortgage off in record time. This means committing any extra cash that you make to the mortgage, including bonuses, tax refund checks and even the income you get from your side hustle.
After you’ve paid about 30% of your mortgage you’ll qualify for a 70% loan to value which means that you only owe $70, 000 on the house instead of its original $100, 000 value.
This qualifies you for a 90% refinancing of your home so that you can cash out and get $20, 000 and perhaps an opportunity to get an even better deal on your interest rate for the rest of your mortgage payment.
Your Second and Third Properties
Now that you’ve cashed out $20, 000 from your first property, you can use that money to purchase two additional rental properties at $100, 000 each. However, keep in mind that the bank will treat these new properties as an investment, which means that your monthly mortgage payment will jump up to at least $600, 00.
We highly recommend that you save a portion of the income you receive from your renters in an emergency fund that should ideally reach $5, 000 for each house. This is based on the assumption that you’ll be renting out each house for about $1, 200 per month, so that when you take out the $600, 00 monthly mortgage payment, you’ll have plenty of positive cash flow left over to reinvest into your business.
Once you’ve reached that milestone, you can then start saving for the next property’s down payment and start your journey to becoming a real estate property mogul.
- Your next 10 properties:
As you continue to invest in more and more houses, you won’t have to take as long to save up for the next property’s down payment deposit.
Once you have 10 rental homes that produce a positive cash flow of $500, 00 each, you’ll be able to easily save $10, 000 every two months to purchase another property, and pretty soon you’ll be purchasing 6 properties per year!
- Put a team together:
Of course, as your property portfolio increases, so will the administrative and managerial tasks associated with maintaining them, which is why you’ll have to build a strong team to meet the needs of your growing business.
As part of your team, be sure to have a property manager to take care of the leasing and marketing side of things, as well as a licenced contractor who will take care of all the repairs associated with your properties.
Over time, you’ll also need an accountant and attorney to maintain your business records while ensuring that your business is operating according to the right policies and legislation.
According to Rich Dad, Poor Dad author and renowned real estate investor Robert Kiyosaki, “real estate is the best investment of them all… because it allows you to make millions of dollars while paying very little or no tax legally.” This is true whether your initial investment is $10, 000 or $100, 000.
Another great advantage of being a real estate investor is that you’ll have income every month, so you can soon quit your job if you want. You’ll also enjoy tax advantages that other businesses don’t have access to and your capital gains will remain somewhat tax-free. And while banks are not so keen on investing in businesses, they won’t hesitate to lend you money for a real estate purchase.