I Have $10k to Invest in Real Estate. Where Do I Begin?

One of the more common questions I see or hear. “I don’t have a lot of money and by that I mean, I have approx. $10k and I want to invest in Real Estate. Where do I begin?” Some people will tell you to wait until you have more money, $100k even. I’m not that patient and I see how our net worth has exponentially grown since purchasing our first buy and hold property. So what do you do?

First…You give it all to me! Bwhahahaha, BWhahahahAA, BWHAHAHAHA <- my attempt at an evil laugh (think Dr. Evil / Austin Powers).

Seriously, first, you have to decide what type of investor you want to be. There are many ways to invest in real estate (flipping, wholesaling, buy & hold, notes, etc.). For the sake of this post, we’re going to focus on Buy & Hold, because, quite simply, I focus on buy & hold :).  Here are a few options to get started in Buy & Hold REI if you have just $10k to invest:

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Option 1 : FHA a Small MFR

Find a small multi-family (2-4 units) and get approved for a FHA loan. At the time this article originally published, down payment requirements are 3.5%, as long as you meet the criteria (i.e. you have to live in one of the units for a certain period of time). At 3.5% down payment you can purchase a $100,000 property and still have money to pay all closing costs. This is also known as House Hacking.

Option 2 : Buy an Inexpensive SFR

To obtain a conventional loan for an investment property typically requires 20-25% down payment. With only $10k to invest you will target a $50k single family residence, however, banks typically won’t provide a mortgage for less than $50k. With a $10k down payment, loan would be for $40k and if you find a lender willing to do this, please send me their contact info (I’m at jay@helmsREI.com). But if you can convince the seller to owner finance 10% on a 2nd position mortgage (or seller carry back), then your $10k is now 10% of the down payment, meaning your now looking at properties with a price of $100k. Which leads me to Option 3…

Option 3 – Buy a Property with Owner Financing

One of the best strategies to leverage your money!  In this scenario the seller becomes the bank or provides part of your down payment by what’s called a seller carry back. Best case scenario is the seller owns the property outright and y’all come to terms. No silver bullet here in deal structure, just up to you and the seller to create a win-win scenario using whatever terms y’all agree to. Always have a lawyer review these terms and represent you at closing.

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Option 4 – Partnership

Partnerships are great and here again there is no silver bullet to structure them. Find a deal that meets all of your criteria and find a partner or partners to make it happen.

We did this when we Purchased Our First Apartment Complex. We had $25k to invest and needed THREE HUNDRED THIRTY THOUSAND to close. Partnerships made it happen.

Speaking of, Option 4B is partner with someone on a larger multi-family. When we were raising money for our apartment complex, we had a minimum investment of $25k. But if you and 4 of your buddies each had $10k to invest, bringing $50k of capital to the table, I would certainly take a hard look at it.

So if you want to invest and you think “I don’t have that much money”, there are options. You just have to be creative. Happy to talk through any of these with you. I’m at jay@helmsREI.com or 850-610-0966.

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How We Used Our IRA to Invest in Real Estate [6 Month Follow-Up]

Not really even month 1, weeks 1 & 2 we received our first service calls. Broken A/C in unit B and leaky sink in Unit A. I initially thought...Fun Times Ahead! but quickly reminded myself we bought these units knowing repairs and deferred maintenance were on the forefront. 
real estate investing pensacola fl

In April of this year, I wrote the article How We Used Our IRA to Invest in Real Estate. Now that we’re 6 months into owning this asset, time for a little follow-up.

Quick Recap: the Pensacola property we purchased with our SDIRA, had 2 trailers on it, both occupied, both with one year lease agreements with a record of paying on-time tenants. At such a low purchase price and high cash flow, I went in expecting $5-10k of deferred maintenance. Six months into it, I was dead on. Thanks to my awesome wife for taking this photo at closing and our little man for making sure we signed in all the right places.

Month 1 (April): Not really even month 1, weeks 1 & 2 we received our first service calls. Broken A/C in unit B and leaky sink in Unit A. I initially thought...Fun Times Ahead! but quickly reminded myself we bought these units knowing repairs and deferred maintenance were on the forefront.

Month 2 (May): no issues!

Month 3 (June): Unit B’s AC goes out again. Upon further inspection a leaky coil resulted in replacing the entire unit. A home inspection by my Pensacola property management company revealed a faulty breaker box also on Unit B. Total costs for repairs = $4,100. That should be it for Unit B, as Unit A needs the real work.

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Month 4 (July): Stove repair in Unit B: $104. Crickets on Unit A.

Month 5: (August): Oh boy, where to begin. A failed eviction on Unit A, charlie foxtrot of a situation. Nonetheless, I turned this thing around which resulted in me taking on managing the property myself, signing the existing tenant to a new lease – a lease that was mutually beneficial for the both of us. A great time to reiterate how important it is to have the right team members, especially a quality property manager.

Month 6 (Sept): Unit B, no issues. Finished up deferred repairs on Unit A (roof, bathroom floor, plumbing, windows, A/C…yea, a lot not done by the PM group): $2,293.

Before we get started on the #s, a few reminders:

  • Last year (2015) my traditional IRA returned a whopping -10% (that’s a negative, as in going the wrong way, ten percent) and my 401K returned 1.4%.
  • Cash-on-cash return for this asset was projected to be >20%
  • Even though these units were occupied, major repairs (>$500) were expected to bring these units up to code and thus added to the acquisition costs below.

Six months into our first SDIRA Pensacola Real Estate investment, here’s how the #s breakdown:

  • Total Acquisition Costs: (purchase price, closing costs, major repairs): $38,293
    • Purchase Price + Closing Costs: $31,900
    • Major Repairs: $6,393
  • 6 Months of Operating Expenses: $2,001
    • Minor Maintenance & Repairs (6 months): $1,115
    • Property Management Fees (6 months): $231
    • Eviction Costs (6 months): $400
    • Insurance (6 months): $255
  • Rent Revenue (6 months): $4,989
Cash-on-Cash Return (the return I’m comparing to my other investments) is calculated by dividing the annual before-tax cash flow by the acquisition costs. Since we don’t have a year of expenses and revenues yet, I’m doubling what has transpired over the last 6 months for minor repairs, fees, insurance, and revenue to obtain the estimated annual cash flow.
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  • Expected Annualized Operating Expenses: $4,002
  • Expected Annualized Revenue: $9,978
  • Expected Annualized Cash Flow: $5,976
  • Cash-on-Cash Return = $5,976 / $38,293 = 15.6% 

So, not the expected >20% that we estimated, but a helluva lot better than a negative 10%! We’ll see how all the #’s shake out in another 6 months when we can put estimates behind us and put a year of real world #s in our calculations.


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