If you are getting started in real estate investing for the first time, then there are a few possibilities about your position in life. Either you are starting with little money, or a lot of money.
You might think to yourself, “I am middle class, isn’t there an intermediate amount of money?” No. There is not. You either have enough money to buy a property, develop it, and profit off of it without any sort of loan, or you do not. That is the dividing line between “a little” and “a lot”.
But whether you have a little or a lot of money, there are always things you can do with that money. Some real estate investments start at $500. Some essentially boil down to $100 investments (with extra steps). And of course, you can take those bets multiple times.
Today, we are going to go through the best ways to decide which positions are the best to take for a beginner in the real estate market. But in order to understand how to work with a little money, it is important to understand how people invest a lot of money.
Investing with a lot of Money
The reason why we are starting by talking about “big money” investments is that these are the investments the real estate industry is built around. Small investments are a relatively recent invention. For most of history, only the wealthy could afford to get into the real estate business.
And that is because the whole process is mind-bogglingly expensive.
How to Extract Value from a Property
The usual method of getting into real estate goes like this: First, you buy a property. Then, you develop it. This can mean demolishing the building that is there and having another one built. It can also mean renovating an existing building to serve a different purpose.
It can even mean exploiting the land itself to harvest a natural resource.
Once the land is purchased and a business is built on top of it, you will start earning money off of it. Ideally, you can finance every step of this project yourself. You pay for the land, you pay to have the building on it demolished, and you pay to have another building built on the land.
Then, you pay to move a business in (though you might also take bids on businesses that will pay you to move in). You will either make money by paying the business to be there while you take a portion of their profits, you make money by the business paying you to rent the space.
How Much do you Need to Know About the Business You Set Up?
This is a common concern for people first getting into real estate. If you go through the trouble of demolishing a home to build a restaurant in its place, then you better know a lot about building and running a restaurant, right? Well, not exactly.
You don’t need to know how to build a restaurant. You can pay an architect for that. You do not need to have the resources to construct one. You can pay a construction company for that. And you certainly do not need to know how to run the business. You can hire a manager for that.
This is what makes real estate so unique—it is the gateway to owning whatever business you want. Just be sure not to dictate how these businesses operate too much for that reason.
Investing with a Little Money
Now that you know how to invest with a lot of money, it will be far easier to understand what goes one when you are investing with a little money. As you can tell by the number of things you could possibly spend your money on, most people have “little money” by real estate standards.
The thing about real estate is that even people with a lot of money will operate as if they have a little money. How? Well, it all starts with working off of loaned money.
Working with Loans
Jump back to when we were imagining you buying land to demolish the existing building off of it and building a new building on it. At basically every stage of the game, you can get a loan to cover the cost of the operation. A loan for buying the land, a loan for the demolition, a loan for the design, a loan for the construction, and even a loan for starting the business in the building.
Even when people have the money for these steps, they might choose to finance them with loans. The reason is because their business plan will forecast that their earnings extracted from that real estate will outpace the cost of getting that loan, making it basically free money.
Get a Loan or Be the Loan
But if you have a little money, then you might not feel comfortable saddling yourself with a huge amount of debt. More to the point, debtors might not feel confident in your ability to use that loan. If you want to invest in real estate, then the better option might be contributing to loans.
Since loans are so commonplace, it is easy to find loans offered by groups that essentially crowdfund their loans. Doing this will mean that you get a portion of the interest off of that loan as passive income. Contribute a small amount and you get a little interest. Contribute a lot…
You can imagine how scalable this is. You can go on to make money primarily off of contributing to the right loans. Just be warned that the highest interest rate loans will also be the riskiest.
Getting started in real estate is not easy. Either you are spending tons of money, getting tons of loans, or trying to balance risk and reward by offering up your money as loans. If you want some advice of how to strike that balance, then you can get it from here.