Starting a Real Estate Investment Portfolio on a Shoestring Budget

If you think you need hundreds of thousands of dollars to start investing in Real Estate, read on and find out how you can start investing with little or no money, the legitimate way.

This is not a midnight infomercial style approach with dubious-looking characters in funny suits aboard luxury yachts! This is 100% above board and done every day across our nation.

The Opportunity Ahead in the New Economy

As we all can read on a daily basis, the Real Estate market is shifting. The change is happening rapidly in some areas and at a slower pace in others. This means opportunity for buyers that had been unable to buy recently due to bidding wars and unreasonable requests from the industry just to get a house.

As we close out the 3rd quarter of 2022, every real estate analyst is singing the same tune: the Real Estate market is on its way to a major correction.

If you have thought of investing in Real Estate and had given up on it, here are some strategies you can use now to get on the road to building an investment portfolio on the cheap.

Choosing the Right Financing for Your First Investment

It may surprise you that you can buy a 2-4 unit property with as little as ZERO down payment! It happens daily, but people usually don’t know that you can generate a nice income stream with this strategy. Let’s show you how.

Zero Down Payment Purchases

If you happen to qualify for a VA loan, you can buy up to four units using your VA loan with no down payment.

Consider making a purchase with your VA benefits to buy 3 or 4 units. Of course, you will have to buy it as owner-occupied and live in it for at least a year.

You may very well be able to live there and have no out-of-pocket housing expenses for yourself if you buy the right property. Rents across the nation have gone up significantly, as you may well know if you are currently renting. If you buy a 4-unit property where rents are 2K-3K a month, you could get from 9K to 12K in monthly rents and live there for free!! How is that for a first investment?!

And don’t worry, VA loans do not require you to live there forever. VA financing IS for the purchase of an owner-occupied property, but after 12 months, you can rent it out and keep the VA loan on it.

Low Down Payment Purchases

The next best thing to zero down is low down. FHA financing is your next alternative if you are not a Veteran of the armed forces.

FHA loans allow you to purchase up to 4-unit properties and still only put 3.5% down payment to finance the purchase. Compare that to a 25% down payment needed for investment property financing.

If we take a look at a $800,000 purchase, FHA financing downpayment=$28,000 vs Conventional investor loan downpayment=$200,000. I think we can see the huge advantage of using FHA.

Let’s be clear that FHA loans with 3.5% down are for owner-occupied purchases. However, as is the case with most owner-occupied financing, they will legally allow you to rent out the property after you have lived there 12 to 24 months. As we discussed previously with VA, if you buy the right property, you can collect enough rents from the rental units so you can live at the property for free!

Growing Your Investment Portfolio

This is a strategy that is not often talked about, but it is very effective. Let’s say you buy a 4-unit property, live in it for 5 years, and sell it. When you sell it, you can do an exchange into a higher-priced property AND exclude up to $500,000 of gain from the sale for IRS tax purposes.

We need to discuss this because of the tremendous advantage you get when you sell that property, and you used it as your primary residence for at least two of the five years before selling it.

If you didn’t know about this exclusion and just sell the property without the proper advice from a tax professional, you could be taxed for the entire profit when you sell it. That could be disastrous to your strategy to grow your investment portfolio. You need to structure the sale properly BEFORE you sell it. Once the title has been transferred on the property, it is too late, there are no re-do’s.

In 5 years, you should be able to have enough equity to sell your property and move up to larger unit buildings. There should be enough profit from the sale to put 20% down on the next property, and you can now be strictly an investor if you choose.

Here is a super advanced tip you may not read about anywhere else; if you decide to use part of the proceeds of the sale of that property, you can take up to $500,000 of profit from the sale to buy your own primary residence without incurring capital gains taxes.

You have to tread carefully here because you have to allocate the owner-occupied portion of the property and the investment portion of the property when you sell it. The Section 121 exclusion only applies to the owner-occupied portion.

The good news is that you can also defer capital gain taxes on the investment portion of the property if you do a 1031 Tax Deferred Exchange!

In Closing

So theoretically, and thousands of people just like you have done this, you can buy your first property with zero or no down, and in five years of living in it, potentially rent-free, profit enough to put a down payment on two other properties; your new primary residence, and your next investment property.

Up to $500,000 of the profit you make from the sale of your first property can be tax-free (not just tax deferred), and the remainder of your profit tax deferred. And that is a great strategy to start your investment portfolio with little or no money down.

Share Your Thoughts