How To Start Investing in Property Rentals With Less Than 10K?

Start saving for your next rental property

Many people have thought about getting into rental property investing, but feel that they don’t have the kind of money needed to actually purchase their first rental home. However, contrary to popular belief, it’s possible to get started as a rental property investor, even if you have just $10k in savings (or less, in some cases).

If you’re starting out with a smaller amount of cash when buying your first buy and hold real estate investment, you might have to assume more risk or use a more creative approach to your rental business strategy than an investor with more capital. But while it may not be the best option for the faint of heart, it’s still possible to get started owning your own rental properties with a lot less cash than most people think.

Here are a few ways you can become a rental property investor with less than $10k down:

Get a mortgage with a low down payment

Traditional lenders typically ask for a down payment of 20% when purchasing a rental property, but it is also possible to find banks which will accept as low as 10% down, depending on your credit history.

In some popular rental investment markets, like Metro Detroit, where the price of a 2-bedroom SFR is around $100,000, and the average rent-to-price ratio is 1.18%, you could therefore buy a healthy rental property with as little as $10k down. Just make sure that you run the numbers to check that a rental property will produce a profit, after your mortgage payments and other expenses are accounted for - you can use Bigger Pockets’ Buy and Hold Calculator to work this out easily.

However, if you rely on more leverage to purchase a rental property, you’ll also be assuming more risk - both the risk of taking on more debt and higher repayments, and the risk of ending up with negative equity in your property if house prices drop significantly.

Buy Rehab Rent Refinance Repeat (BRRRR)

The BRRRR strategy involves getting a low-down owner occupancy mortgage or a purchase-rehab loan.

Once you’re pre-approved for a mortgage, you buy a home in need of cosmetic or minor renovations, carry out the necessary repairs, refinance to pull your money back out and find a tenant. . Once you’re ready to keep growing your rental portfolio, you repeat the process all over again.

Note that most lenders require that the house be rented out owner-occupied for a minimum period before you’ll be allowed to do a cash-out refinance. Always make sure you check the terms of your loan first, and account for this “seasoning period” when analyzing the financials on a BRRRR investment opportunity.

House Hacking

House hacking is a great option for those who are willing to buy a multi-family home and live in one of its units for at least one year, while renting out the others. By living in your rental investment property, you can qualify for a Federal Housing Administration (FHA) loan with a down payment of only 3.5%. Assuming a down payment of $10,000, this means you could buy a small, 2-4 unit MFR for up to $285,000 and negotiate with the seller to pay your closing costs.

Read Bigger Pockets’ article on house hacking to find out more about how you can use this strategy to get started with your first property rental, even with only a small amount of startup capital.

If you use one of these investment strategies, it may not take you as long as you thought to save up for your first rental property - maybe you even have enough to get started now.

That being said, you should always maintain a healthy amount of “dry powder” cash reserves when investing in buy and hold real estate, so that you’ll have capital on hand should any major maintenance issues arise with the property, or if a tenant fails to pay rent for an extended period, or both. If you’re starting out your rental investment journey with $10k or less, you probably won’t have room for much cash reserves left over after purchase, so this also adds to the level of risk you’ll be assuming.

Make sure you limit that risk by setting as much dry powder aside as possible when acquiring your first rental property, and start adding to these reserves as soon as you start receiving rental income.

Then you can start saving for your next rental property!

Image Courtesy of Lukas