115: How much Money do you Need to Invest in Real Estate?

One of the biggest roadblocks to investing in real estate is getting the money to buy houses. I get a lot of questions about finding money to invest with, but the first question you should ask is how much money will you need. Once you know exactly how much money you need, getting that money and actually buying a house becomes much easier. You will also need varying amounts of money depending on what kind of real estate investing you do.

Flipping, renting, and wholesaling will all take different amounts of money, and the type of property you buy will also make a difference. On this episode of the InvestFourMore Real Estate Podcast, I talk about how much money you will need to invest in different types of real estate using different strategies.

How much money do you need to buy a rental property?

I started this blog back in 2013 to talk about rental properties and why they are such an awesome investment. I still love rentals, even though I have not been buying nearly as many as I would like. Prices have increased in Colorado, making it tough to cash flow. When prices are higher, you also need much more money to invest. Here is the monetary breakdown of my past rental purchases:

  • Purchase price: $100,000
  • Down Payment: $20,000
  • Closing costs: $3,000
  • Rehab costs: $10,000
  • Carrying costs: $2,000

I would need about $35,000 to buy a rental property that I bought for $100,000 and did some work on. $35,000 seems like a lot of money, but I would expect the house to be worth $140,000 or more when I was done fixing it up. That would leave me with $60,000 in equity in the property, and I would make money every month. Here is how much money I would need with higher prices:

  • Purchase price:  $200,000
  • Down payment:  $40,000
  • Closing costs:      $5,000
  • Rehab costs:        $15,000
  • Carrying costs:    $3,000

I would need over $60,000 to buy the same rental property in my area now! That house would be worth about $250,000 once it was fixed up, leaving me with $90,000 in equity but much more cash invested and worse cash flow every month. The amount of money you will need varies greatly based on the price of the properties you are buying.

How much money do you need to flip houses?

Flipping houses also takes a lot of money. I use a mix of hard, private, bank, and my own money to buy and repair flips. When I use a bank to finance my flips, I have to put 20 percent down and pay for all the repairs and carrying costs. The costs might look like this:

  • Purchase price:  $100,000
  • Down payment: $20,000
  • Rehab:                 $30,000
  • Carrying costs:   $5,000

The total cash I would need to flip this house would be about $55,000 using bank financing. I could use hard money, which would have the following costs:

  • Purchase price: $100,000
  • Down payment: $10,000
  • Rehab:                 $0
  • Carrying costs:   $10,000

The total cash needed on hard money is much less because many lenders will require a smaller down payment and will finance the repairs. However, the hard-money lender will charge much higher interest and more fees. You also will need some cash to pay for the repairs until the hard-money lender reimburses you. While it looks like you only need $20,000 to flip a house with hard money, you will most likely need at least $25,000 to $30,000. When I use private money with the deal I have, the costs are similar because I can finance the entire purchase price but none of the repairs. How you structure private money can vary on each deal and with each investor. If you want to put the least amount of money down when flipping, you will need a partner or a private-money lender.

How much money do you need to wholesale houses?

Wholesaling is taught as a way to invest in real estate without much money. However, you still need money and a lot of time. Wholesaling involves an investor finding a great deal and then selling it to another investor. Wholesalers will assign contracts or use a double-close to complete the deal. You still need money to wholesale because you have to find houses that are great deals. You can find houses with direct marketing, driving for dollars, or networking, but they all take some money. A great direct marketing campaign can costs thousands of dollars per month. Wholesaling is the way to start investing in real estate with the least amount of money, but it is not easy. Finding deals and investors who will buy them takes a lot of time.

Most of the time, it takes money to make money in real estate. There are ways to get started with less, like buying as an owner occupant. If you want to buy a lot of houses, you will need to save money that you can invest in the business.


[0:00:13.9] MF: Welcome to the InvestFourMore Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper. I flip 10 to 15 houses a year, I own 13 rental properties, with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine and we sell close to 200 houses a year.


So on this show, we like to interview house flippers, landlords and the best real estate agents in the business. So stay tuned for some great shows, if you want more information on my rentals, on the numbers, how I buy properties, check out investfourmore.com.




[0:00:58.3] MF: Hey everyone. Mark Ferguson with InvestFourMore. Today is going to be just me, going to be talking about money and real estate investing. I get emails all the time from all types of different people all of the world asking about money. They don't have enough money. They want to know how much money they need. One reason why you’re investing in real estate is because you want to make more money, you want passive income, you want to become wealthy. It's a key point about how much do you actually need to start investing in real estate.


On this podcast I'm going to talk about the different types of investing, how much money you need. Different markets, you need different amounts of money. Different types of homes, you need different amounts of money. Different occupancy statuses, you need different amounts of money. There’s just so many variables that go into how much money you need to invest in real estate and there's no one answer and there's also a lot of things you can if you don't have money. You shouldn’t just give up and forget about it. There’s a lot of ways to fix that problem of actually having money as well.


I’m going to try and go through the basics on flipping rentals, even wholesaling, and even agencies, if you want to become a real estate agent. How much money you’ll need? How long it takes to make money? Then if you don't have money, what you can do to try and find that money and be successful in what I think is a really awesome business.


All right, before we get started, of course if you're interested at any more of these subjects, I’ve got paperback books on being a real estate agent, on buying rental properties, on flipping, on negotiating a real estate and planning an attitude which is a huge part of success in anything. Make sure you check those out on the book on negotiating real state which I wrote with Jay Scott. It’s out as an audiobook now. It’s doing fantastic. I am also working on turning my fix and flip book into an audiobook. Completely rewrote it. The new version will be out soon and the audio version will be out hopefully in a month or two. It takes them a long time to get it published, but we’ll see how soon it happens.


All right, the first thing I want to talk about, kind of what my website, what the blog was built on back in 2013 when I started, was rental properties. How much money do you need to invest in rental properties? When you say you want to invest in real estate, of course that’s the first thing you need to decide. Are you talking about buying rentals? Are you talking about flipping? Are you talking about wholesaling? What do you mean by investing? There’s so many different things that you can do to buy real estate or be involved in it.


That's the first step. We’ll talk about rentals, because that’s something I think many people come to this side for and they want to learn about. As an investor, if you're buying a house as an investor, you’re never going to live in it. Most banks will require at least 20% down to buy a rental property. Some banks will require more. If you're buying your first property, your first investment property, you should be able to find a bank that will let you put 20% down. If you go through the numbers, let's say you buy a $100,000 house. You would have to put $20,000 down as your down payment to buy the property.


However, that's not all the money you need. You would also need closing costs. It costs money to get the loan. The bank will charge origination fees or points as they’re sometimes called, which could be one point, two points, depending on the bank you’re using. If you end up using hard money, it can be up to four points, much more difficult. Usually, one or two points is common for regular banks. You might have an appraisal fee which could be $400 to 800 depending on the property in the area you are located in. It could be a closing fee with a title company, or if you have to use an attorney in your state, which could be a couple of hundred dollars up to $500, sometimes more. There's recording fees, flood certification fees, sometimes the banks have a doc processing fee.


Basically, the closing costs are going to be 2% to 4% of the loan in most cases, or 2% to 4% of the purchase price, really. If you're buying a $100,000 house, you're probably going to pay $2000 to $4000 in costs when you're getting a loan on the property.


You can ask the seller to pay some of those costs for you. Say, you’re buying a house for $100,000, you can say, “Hey, I’ll buy this house for $102,000 if the seller agrees to pay $2,000 for closing costs.” It’s the same thing as offering them $100,000. You can lower that, but sometimes it's easier, it’s quicker. You get your offer accepted more often if you don't ask the seller to pay closing costs. We’ll just assume that’s the cost on there. You're $100,000 property you're buying, you’re going to put $20,000 for down payment, maybe another $3,000 for closing costs. Up to $23,000 you need to buy the house.


That's not it either. There will be reserves you have to have with most banks. Most banks don't want you to use every single cent to buy this house. They want to have some money left in the bank to cover unexpected vacancies, repairs, things that might popup, and most banks will require six months in reserves for the house you're buying and any other mortgages you have. If you have a primary house and your mortgage payment is $1,000 a month and this mortgage payment on the new house is going to be $500 a month, it would amount six months in reserves to make sure you can pay the $1,500 a month, which would be $9,000. You’ve got to have an extra $9,000 in the bank on top of the down payment, usually on top of the closing costs to make sure you're safe in the bank size. I think that is a very good way to do things. I do not think you should be skipping by spending every single dime you have to buy a house with no money left over for vacancies, for repairs, because those do happen, those do come up.


We also have not talked about any repairs. If you buy a house, it's great condition immaculately, you can rent it right away. Great. Awesome. You might not have to spend much money in repairs. However, if you want to get a good deal, if you want to make instant money in real estate by buying below market value you might have to buy a house that needs repairs.


If it needs 5,000 and 10,000 and $15,000 for repairs, you’ve got to remember to calculate that as well into your figures for buying that rental property. That’s kind of the strategy I have used, is buying houses that need work. I’ll put 20% down, pay for the repairs out of pocket. Pay for the down payment out of pocket. That’s kind of my built-in equity into the property. I might buy a house for $100,000, put $10,000 of work into it. The house would be worth at least $130,000 when I do that. I want equity when I have to make repairs. Hopefully it’s worth 140 or 150,000, and now I’ve got a loan of $80,000 on a house that’s worth $150,000. A lot of equity right there. I put about 40,000 for the down payment, say, 3,000 for the closing cost, $10,000 for the repairs for the property. I put about $23,000, not counting any carrying cost into that property — Sorry, $33,000.


If you have to take a few months repair to the house, you might be paying taxes, insurance, mortgage payments while you hold it. You might have $35,000 of cash into that property. It seems like a lot, but you’ve got almost that much money in equity from buying the house as a good deal. You should be cash flowing every month if you do it right, making few hundred dollars a month at least. Eventually, you may be able to refinance and take that money out as well. It’s not like that money is stuck in the property forever.


That gives you the real basic, easy, simple way to buy rental property. That takes quite a bit of money. Not everybody has $35,000 laying around to invest, but it’s usually pretty safe. You have a lot of equity and banks will most likely lend to you if you’re in that financial situation. However, not everyone has that much money to buy a rental. What are some other ways that you can buy it for cheaper? Well, there is always the buying a rental with private money, or hard money, to begin with and refinancing it.


You can get a loan from a hard money lender or private investors, say, it’s a friend, a family member, another investor you know, and maybe you can finance 90%, maybe even 100% of the purchase price. It’s tough to do with hard money, but private money you might be able to finance 100% of the purchase price. Plus, you might be able to finance some of those repairs. Maybe you can finance $10,000 for repairs, or 5,000. What you end up doing is you have a loan for — Instead of $80,000 when you put 20% down, now you’ve got a loan, let’s just say, for $95,000 plus another 5,000 in repairs. You got a loan for $100,000.


Now, instead of spending 35,000 for the repairs, down payment, all of that, you are spending more like 10,000 to $15,000 for the repairs, the down payment, carrying costs, closing costs, but hard money and private money loans are usually short-term. You pay higher rates. You’re going to probably pay 8% to 12% instead of 4% to 6% you might get from a bank. You might be paying two points instead of one, or even three points or more on the hard money and private money loans. It’s going to be more expensive.


You can refinance those loans if you don't take cash out. You can usually refinance those loans right away with a conventional loan. You can pay off the full loan amount, but you can’t take cash out if you finance right away. That means you can get a conventional loan for $100,000 if that's what your private money loan was, your hard money loan was. Pay it off. Have a much lower interest rate and a long-term loan in place.


However, going this route saves you cash, but it cost you more money because you’re two loans, which have two origination fees. It’s going to cost you at least a few thousand dollars more to do that, because of the costs, the interest rates and the additional fees you incur.


Now, if you can get a private money loan or a hard money loan for six months or a year, you might be to refinance the property based on a new appraisal, which means you can get cash back out. If that house is worth 150,000 and the new lender might be willing to refinance you 80% or 70% of the value of the property, then you could get a loan for — Hold on a minute. I’m going to do the math real quick so I don’t mess it up. 80%, you can get a loan $120,000.


Now, all of a sudden you got all your costs paid, you’re getting all your money back, the repairs and the down payment. Everything is taken care of if you can wait those six months or a year to refinance the property. Again, you’re going to be paying more in interest. You’re going to be paying more costs to do the loans, but it's one way to buy a rental property without as much cash, without as much money. You can get your money back, go buy another property. Keep repeating the process over and over again, and that's a great way to buy rentals without as much money. You have to make sure you can still cash flow with a higher loan amount, but a lot of us don't have hundreds of thousands of dollars sitting around to buy rental property after rental property. You have to be creative. You have to find ways to buy them with less cash.


Another strategy to buy a property without as much money is to live in it. There are rules for owner occupants. Usually, the banks require you to live in a property for at least one year before you move out, before you rent it out, before you sell. You can usually sell it before that, but they frown upon it if you’re selling properties over and over again and not living there for at least one year.


When buy as an owner-occupant, the down payments are much lower. The down payment might be 3%, 5%. Sometimes even 0% if you qualify for a VA loan as supposed to the 20% you're paying as an investor. Now, you’re going to have mortgage insurance which could add $100 or $200 a month to your payment. That can really hurt you returns. However, if you're getting a really good deal, if that property still cash flows, it can be worth it to buy a house as an owner-occupant, live there a year, maybe you fix it up while you’re living there. After that year, rent it out, go do it again. Repeat the process over and over.


If you’re getting a conventional loan and you have the property for two or three years and it goes up in value or you bought it right and it's much more valuable than what you paid for it, you might be able to get that mortgage insurance removed, which is a huge help and can be a great advantage to increasing your cash flow.


There is another option for buying rentals when you don't have a lot of money. It’s not easy. It takes a lot of sacrifice and hard work to live in a house that you want to eventually rent out and move a lot, but if you don’t have any other options, sometimes you have to take the hardware. You have to make those sacrifices to get ahead in life.


Another thing to consider as well is if you live in a property for two years as an owner-occupant in the United States and you sell that house, you most likely will not pay any income taxes on the capital gains on the money you make. Another huge advantage of living in a house and using your owner-occupant status to your advantage to make money in real estate, and I’ll kind of use that transitioned to switch into fix and flipping, because if you're selling a house you’re not really holding as a rental, you're flipping it, but that can be a great way to get money, to make money, to start a flipping business is by living in a house for two years that you got an awesome deal on it. Doing some work to it and selling it. If you’re going to flip a house that you don't live in, it takes money as well.


What you'll find out is when you try and flip a house and you go talk to big banks, they’ll just tell you no. They’re like, “No. We’re not going to give you loan. We don't loan on flips.” It can be tough to get started because the big banks won’t loan to you. Some smaller banks might loan to you if you have some experience or a really good relationship to them, but a lot of the smaller banks loan to flippers want to see someone who’s flipped before, has experience doing it. That can make it tough as well.


What you will find is there are hard money lenders who will loan to flippers. These loans, again, more expensive, you’re going to pay a much higher interest rate, only a year in length usually. Sometimes a little longer, but most of the time you can only have them for a year. Although some will loan hundred percent of a deal, most hard money lenders will not loan 100% of a deal. You’re going to be looking at 90% of the purchase price, plus maybe 100% of the repairs, which is still a good deal. If you're flipping a house that you’re buying for $100,000, that means they’ll loan 90,000 on the purchase price. You’ll have to pay 10,000. 100% of the repairs, if it needs 30 grand of work, they’ll finance that 30 grand as well.


However, just because if the hard money lender will finance $10,000 does not mean that’s all the money you’re going to need. You’re going to need more money than that. They’ll want to see you have reserves. They want to see you have some backup money as well. You're probably going to need to have at least $25,000 in the bank to start flipping houses if you want to use a hard money lender. They’re going to want to see that you have money, you’ve got some skin in the game, you're not just financing all of it and can disappear and leave them with a property.


If you're flipping a house in that $100,000 price range, lower stuff, you're probably going to need, 20 $25,000 in the bank that is using a hard money lender, because not only do we have repair costs, but you’ll have carrying costs. You’ll have taxes to pay, insurance to pay, maintenance, utilities, plus the repairs as well. They don't always pay right away. When you finance repairs with a hard money loan, what usually happens is they’ll do draws. Once you get a certain amount of repairs done, they’ll go and inspect the property and they’ll pay you what’s called a draw. Maybe they’ll have four draws and they’ll pay you $10,000 once they think $10,000 of work is done. They’re not paying you all that money right away up front. You’ve got to have the work done, maybe possibly even pay your contractor first and then they’ll come back and reimburse you. That’s another reason why you need to have that money in the accounts to pay contractors even though technically the hard money loan is paying them.


If you don't have that money, how do you flip houses? How can you get started? What if you have to buy houses for $300,000 in your market, because that's the entry price point and it’s just really hard to find cheaper houses? There are options for that as well.


The first thing I would say is, I already mentioned, buys as an owner-occupant. Wait your two years. Wait your year. Flip a house the long slow way. It’s not a bad route to go if your only option is nothing or that. There are also the opportunities to invest with a partner. Maybe there is an investor who has money, or you have an uncle, a family member, a friend who has a lot of money who’s willing to partner with you.


A typical situation is the person flipping the house finds the deal, does the work either finding a contractor or works in the house themselves. Gets the house sold, takes care of the entire process. The person putting up the money gets 50% of the deal. The person who finds the deal and does the work gets 50% of the profits as well. That's very common. You give up a lot of money to have a partner, but that partners is also risking a lot of things by using someone to flip a house. They may not make as much as you think. There might not be that much profit in it compared to the risks they’re taking if something goes wrong. That's one way to invest when you don't have a lot of money. You could also try to find private investors who would lend you money, loan you purchase price repairs, which can be difficult but possible.


Usually, partner is the best way to go if you have no money to flip houses, and attracting a partner is not easy. Usually, if you have a really good deal and you know how to find those deals, you’re including all the costs, you can show them the numbers. That’s the best way to find a partner, is find those deals first. Once you found deals and prove you can make money in the business, it’s much easier to find money. If you're out there trying to find money first, you haven’t looked for a deal, you haven't figured out how to find a good deal, you just assume you'll find a good deal at some point, it’s going to be much, much harder to find that partner. Learn your market. Learn how to find those deals and then, later, find the money and how to actually buy them.


All right. You’ve got some kind of idea of what it takes to flip houses. Some kind of idea of what it takes to buy rental properties. The owner-occupant route is always there. What if you have no money, like nothing? You have no partners. There’s no way you can get started flipping or buying rentals. Well, there are options. Wholesaling is obviously taught all over the place as the way to get rich in real estate without much work, without any money, without any credit. I’m never that excited as others seem to be about teaching wholesaling. I think there’s a lot of opportunity there. You can make a lot of money, but it is a ton of work and you will need some money.


The basis behind wholesaling is that you find really good deals, you get them under contract, and you sell them to other investors who may buy them as rentals or flips. You have to work really hard to get those really good deals. They don't just fall in your lap. You have to be an expert at finding deals. You also have to have money for marketing. If you're driving for dollars, which is driving around looking for vacant houses, you need money for gas, you need money to send letters to people. You need money to call people, talk to them or at least time.


If you want to do direct mail campaign, which I've been doing recently. I actually have gotten two deals from my direct mail campaign. I just closed another one today. You need money. I'm spending a couple of thousand dollars a month on my direct mail campaign with no guarantees anything is going to happen. You need to have money to really be a super successful wholesaler, but you can start out slow. You can start out trying to do a deal here, a deal there and slowly move up, slowly increase your business. That’s one way. You have no money, no partners, no financial help, wholesaling is a way you can get started in real state.


Another thing to look at is becoming a real estate agent. Again, you'll need some money. You can't just jump into the business with zero dollars, and have to get your license, which can be a couple of hundred dollars to a thousand dollars depending on where you're at. You have to pay for licensing fees, MLS fees. It can easily cost a couple of thousand dollars to initially become an agent, and then there's a trick of — It may take a few months before you sell a house. You have to have living expenses saved up, or some other job. Something you can do to make money or have money saved up while you're first learning how to be an agent how to sell houses. It doesn't mean it's impossible, but just know there’s no easy solution. There’s no easy way out to get rich in real state without hard work or without having some money.


I would say that there are some ways to jumping to the real estate agent business without a lot of money. One is joining a team. Find a successful team. Find another successful agent. Convince them to start a team with you on it. Volunteer to help with paperwork, busy task, whatever you can do. Say, “Hey, hire me part time. Let me be your assistant. Pay me an hourly wage while learning the business. I’ll get my license. I’ll help you anyway I can. You don’t have to pay me a ton of money. I just need enough money to survive before I start selling houses.”


Another way is to have a part-time job that is flexible. I don't think being a part-time agent is easy if you have a full-time day job. You need to have a flexible schedule where you can meet people, talk to people, be available during the day and on weekends.


We have a new agent joining our team and what he does right now is he drives for Uber, and I was thinking about it. That is like the perfect job for a real estate agent. We drive around all the time. Anyway, you should have a decent car, and you're flexible. You can turn on Uber whenever you want. You can turn it off. If you have someone who calls you and wants to see house. If you have someone, a title company calls you. Turnoff Uber, talk to them, go to your business. When you're done, go back, drive for Uber again, or Lyft, or whoever you want to use. It’s really an interesting part-time job that I think would work really well for real estate agents.


If you're an investor, that might work too. You want to drive for dollars? Go drive for Uber. Get paid to drive around and you probably shouldn't be writing down addresses and scoping out stuff too obviously when you're carrying people in your car, but when you're on the way to see them, when you're waiting for fares, go drive around. Look for houses. Kind of like the perfect part-time gig for a real estate investor or a real estate agent.


There are ways to get involved in the business without a lot of money. The more you have, the better off you'll be. If you're struggling with saving money with rentals, for flips, whatever it is, it’s not all about finding ways to buy with less money. Sometimes it's about making more money. Like I said, ask yourself, “Hey, can I do better at my job? Can I get a promotion? Is there something else I could do that makes me more money, that I have more fun at? Do I want to become a real estate agent? Do I want to be a full-time investor? Do I want to add a second job?” It’s not the best option for everybody, but for some people it's worth it.


Look at your whole situation. How much money you need for what your ultimate goals are? How are you going to get to those goals? If you don't have much money now, what will you do to start making money now to get into a position where you’ll have money to invest it? Once you start making money to invest in properties, in flips, or rentals, how can you get more money? Are you going to take all of your profits and dump them back into the business? Are you going to become an agent to make commissions and make even more money? Are you going to start wholesaling properties to make more money that you can invest into the business? What are you going to do?


There's a lot of ways to make money in real estate. None of them are easy. None of them are a magic ticket that will work overnight without putting in the time, the effort, but it's a fantastic business to be in. A ton of opportunities out there, you just have to figure out a plan, write out your plan and then get to work at it. Just start doing it, taking action and hopefully soon you’ll get to where you want to be. It won’t happen overnight, but the sooner you start the sooner you will get there.


All right, that's all I've got for this episode. Hope you enjoyed it. As always, leave me a comment below. Let me know if there's anything I can help you out with, if you liked it, disliked it. Of course, I appreciate reviews as well.


All right, thanks for listening, and we’ll be back next week.



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