Wednesday, February 15, 2017 / by Teresa DiPeso
No Cash To Invest In Real Estate? Try Sweat Equity
True or false: To invest in real estate like a big shot, you need boatloads of cash and large lines of credit.
False! Those who don’t have the salary to crack the top 1% (or even top 25%) can indeed become players in the world of home flipping and rental properties—but they’ll have to put in a lot of extra work, otherwise known as sweat equity.
This may appeal to the legions of cash-strapped wannabe investors, inspired by visions of big-time housing success, propagated by hugely popular reality TV shows like “Flip or Flop” and “Flipping Out,” or even the real estate career of our 45th president.
Here’s what it comes down to: forming a partnership with others (the ones with the cash) and trading some of your valuable labor involved in finding a place and nailing the deal for ownership shares in the property. It’s becoming an increasingly popular way to get into the game without needing to bankroll it.
That means instead of plunking down their own money on various deals, they’re scouring online real estate listings, driving through neighborhoods looking for “For Sale” signs, and attending auctions on behalf of their wealthy partners in search of a good deal. They may have to gather documentation on properties, compile reports on the pros and cons of investing in various neighborhoods, or even get their hands dirty cleaning out neglected houses.
“You don’t need money or even a real estate license, because that’s not what you’re bringing to the table,” says Sue Nelson, CEO of REO Note Profits, a real estate academy in Burlington, CT. “What you need is time to scout potential property acquisitions and connections to wealthy investors who will trust you with their investment money.”
The former teacher’s first acquisition was a Nashville, TN–based 104-unit apartment complex which she bought in 2006 with a group of 12 investors who included doctors and lawyers. To become a partial owner without putting any money down, Nelson had to find the property, hire the management company, coordinate the investors, produce a summary on the investment, and collect the investors’ signatures by email and FedEx.
Today, she and her partners own 12 apartment complexes in eight states, including Texas, Louisiana, Tennessee, Mississippi, Ohio, and Georgia.
So here’s how to do it:
Step No. 1: Finding investment partners
The first step to becoming an investor without any cash is hooking up with those who have loads of it. Preferably investors should have a net worth of at least $1 million or an income of more than $200,000 a year for two years. And that’s just for starters.
Potential sweat equity partners meet more established investors by attending real estate networking events, sometimes held at a local chamber of commerce, joining a local real estate investors club, or even taking real estate classes.
The best option: “Find a wealthy person who has worked in real estate for more than 10 years,” says Scott Whaley, CEO and founder of the Real Estate Investment Funding Association, a nonprofit based in Phoenix.
But since all that glitters is not gold, newcomers are advised to carefully vet potential partners. Start by making sure the investor is accredited, and therefore legally enabled to invest their funds. Ask for a proof-of-funds letter from a potential partner’s bank or accountant.
Step No. 2: Become a real estate expert
To ensure they’re getting a good deal—and just know what they’re doing—newbies can take classes in property management, investing, and how to set up individual transaction business partnerships properly on behalf of their business entity, says Bruce Kirsch. He is the founder and CEO of Real Estate Financial Modeling, a commercial real estate financial analysis and marketing platform in Atlanta.
Newcomers need to know enough about the market to know what they don’t know. Before closing on a sale, new investors need full due diligence—for example, always making sure to have properties inspected by a professional to make sure they’re really getting a good deal.
Step No. 3: Protect yourself in real estate deals
Another pitfall for newcomers is lack of legal protection—sweat equity rookies are easily taken advantage of. That means they need to dot their i’s, cross their t’s, and have an attorney pore over any contracts before they sign anything they might regret.
Aspiring investors must also figure out at what percentage they want to be cut in to make all the hard work worth their while. Starting out with 50% may be the dream, but earning a share of 10% or lower of the total project is more realistic, according to experts.
But those seeking to get into the real estate investment game who don’t have buckets of cash don’t need to be discouraged. Although it may not be as easy as seen on TV, making a profit is possible with some good old-fashioned hard work.
We hope you found this information helpful. Please contact The DiPeso Group for all your Jersey Shore real estate needs!
Courtesy of realtor.com
