How much capital do you need to start real-estate investing?

Rick is keen to start his real-estate investment career and is worried about two main subjects – I would say THE two main subjects – Time and Money.

I answered Rick’s ‘time’ question here, but now he asks the key question about ‘money’:

What is the minimum practical amount of capitol to start real-estate investing?

The answer is $0.

That’s right …. ZERO: the world of No Money Down is not dead, and is not even a dirty word (or, phrase to be precise).

No Money Down has lived and died a thousand times and will continue to do so; to prove it, here is the best book that I have found on the subject – and, it was written in 2001 by two of the best-credentialed real-estate investors that I could find: Richard Powelson and Albert Lowry, who purport to have used these techniques since the 60′s or 70′s.

But, that is the ‘minimum’ as asked by Rick – and the book reference is to prove that it also meets Rick’s ‘practical’ requirement (not that I’m so sure that the bond strategy that Richard Powelson gets so worked up about in the latter parts of his book count as ‘practical’).

Now, if Rick had asked what I ‘recommend’ that might be a little different:

While it’s true that No-Money-Down probably provides the best Return on Investment (and Internal rate of Return, as well), I would rather avoid asking the seller to carry a note (the number one ‘no money down’ technique) and screw them down to a better price in the current market …

… equally, I would like to avoid taking on a partner (the number two ‘no money down’ technique).

Therefore, what I would recommend instead is that you look to the type of property and market that you want to invest in (I usually recommend finding the neighborhood next to the new ‘hip’ neighborhood, and buying a property in the median-to-just-under-median price range for that area … with some potential for easy cosmetic fix-up) and having enough money under your belt to:

1. Put up a 15% to 20% deposit, and

2. Pay the likely closing costs (nothing wrong with financing these, if the lender will let you), and

3. Hold at least 25% of the first year’s expected rents as a contingency against vacancies, repairs & maintenance, and other costs that might come up just when the property is vacant.

That could mean $10,000 or $100,000 depending upon the area and property type …

… if you can’t afford that, time to dust off the old Formulas For Wealth book, after all

… but, if you don’t want to practice any of the creative funding techniques recommended in this older (but, still excellent) book, you want to target properties in the median-to-just-below-median price range in your target area and have 15% for your first deposit + enough for closing costs + 25% of the expected value of your first years rent as a buffer (minimum).

8 Responses to “ How much capital do you need to start real-estate investing? ”

1. Scott says:

   September 23, 2008 at 1:35 pm

   Good post! What I took from the whole post that is key on this subject is pretty much in your last paragraph: “you want to target properties in the median-to-just-below-median price range in your target area and have 15% for your first deposit + enough for closing costs + 25% of the expected value of your first years rent as a buffer (minimum).”
   Oh, and also to find a neighborhood next to the new hip neighborhood.

   Thanks for the tips Adrian!
2. AJC says:

   September 23, 2008 at 1:50 pm

   @ Scott – Thanks, Scott. I should mention that this “median-to-just-below” price range is based on single family homes/condos/apartments.
3. Rick Francis says:

   September 25, 2008 at 9:41 am

   Thank you for the answer! I’m very wary of no money down deals; I would think that you would get a better interest rate and avoid PMI with 20% down.

   Do you have a formula that you use to determine the amount of cash you need when buying a property at price X?
   Using very approximate numbers I get the following:

   Cash required = closing costs – X (0.2 (deposit) + 0.02 (3months mortgage payments 8% 30 year fixed mortgage) + 0.01 (3 months property taxes + ins) +???)

   It also seems that there should be a minimum market rent/property price ratio to insure that the property can be cash flow positive.

   -Rick Francis
4. AJC says:

   September 25, 2008 at 11:13 am

   @ Rick – For those who like formulas, Rick’s is as good as any. Thanks, Rick!
5. Skeptic says:

   September 28, 2008 at 4:17 am

   I have a minimum wage income, no cash, and bad credit. Can I start real estate investing?
6. AJC says:

   September 28, 2008 at 5:12 pm

   @ Skeptic – no , sorry … it’s a skeptic’s job to remain poor and, well, skeptical. Not to worry, though, cynicism has it’s own rewards

   As for me: I would get a part-time job, save at least 50% of that second income to create some cash and to help fix my credit … then find a partner to buy some real-estate with (I would do all the work to locate, fix up, rent, etc. … he could just sit on his fat a** as long as he put up the money).
7. Finding the next ‘hot’ real-estate market … « How to Make 7 Million in 7 Years™ says:

   November 10, 2008 at 10:40 am

   [...] November 10, 2008 Rich I hope that I stressed sufficiently in my recent post about How much capital do you need to start real-estate investing? that my “purchase in the median-to-just-below” price range recommendation is based on [...]
8. Diane says:

   November 10, 2008 at 12:35 pm

   AJC – one of the most intriguing ideas I found in the book is the use of trees. I LOVE trees and hate seeing any cut down, but after reading the book, I began to look at trees as replenishable assets. Oftentimes I see trees that have overgrown the property and better-sized trees would have more curb appeal as well as living appeal. I haven’t found the sources yet who would buy individual trees, but have suggested it for ways to pay for our son’s college tuition (replace with more size-appropriate trees, staggering the years of removal and replanting, so that future generations can also benefit from both the beauty, shade, and fruits of the trees, as well as enjoy the wood for more than kindling when the wind blows or the tree dies.)