How to Invest in Real Estate with Little Money

Can You Invest In Real Estate With Bad Credit?

No cash or credit? No problem. For beginners seeking how to invest in real estate with no money down and bad credit, the first step is understanding your credit score. This number, which is essentially a statistical method for lenders to determine the probability of you paying back the money borrowed, is critical when acquiring financing for real estate. Quality scores equal better mortgage rates, resulting in long-term savings and ultimately benefiting you — the investor.

Credit scores are almost always based on a scoring model, with the most popular model being FICO. These scores range from 300 to 850, and ultimately determine a person’s creditworthiness. It looks somewhat like this:

  • Bad Credit: 300 – 600

  • Poor Credit: 600 – 649

  • Fair Credit: 650 – 699

  • Good Credit: 700 – 749

  • Excellent Credit: 750 – 850

Although each credit agency will have its own evaluation systems, which are based on different factors, the most common credit score calculations are based on five major factors:

  1. Payment History = 35 percent

  2. Outstanding Balances = 30 percent

  3. Length of Credit History = 15 percent

  4. Types of Accounts = 10 percent

  5. Credit Inquiries = 10 percent

The first step is knowing your credit score and understanding how it impacts your investment strategy moving forward. Depending on your score, you may qualify for a traditional loan and be eligible to secure down payment assistance. Comprehending where you stand in the financial realm of credit will only enhance your real estate investment strategies, as well as your financing options. Learning to invest in real estate with no money down is important as an investor, but it’s not always your only option.


Active vs. Passive Investing

Understanding the difference between active and passive investing is an essential part of learning how to invest in real estate. 

Here’s a quick explanation of active and passive investing, including the pros and cons of each type of investment.


When you hear the term “real estate investing”, you probably picture purchasing and selling or renting a property. These types of real estate investments are known as active real estate investing. They involve hands-on real estate purchases, active property management, and market knowledge. 

Active real estate investing demands a wealth of real estate and financial acumen.


If you’re not ready to buy a house, you can still reap the rewards of supplemental income and asset appreciation through passive investing. Plus, passive investors can benefit from greater real estate diversification without the ongoing responsibilities of landlording or the significant risk of flipping. 

If you aren’t ready to commit to a large down payment for a single property, a passive investment can lower the financial barrier. Where properties can range from tens of thousands to millions of dollars in acquisition and operation fees, passive investments are more accessible. Plus, they allow you to make money in your sleep. 

In addition to requiring less capital, a passive investment also requires significantly less maintenance from an investor. The responsibilities, and ultimately the success of a property, fall on the shoulders of the investor in an active investment. In a passive investment, an investor only provides capital and lets the investment professionals take it from there. 

Getting started with real estate investing

If you’re brand new to the world of real estate investing, you’ll find that there are many possible paths to take.

The simplest form of real estate investing is buying a home for yourself to live in. While many don’t think of this strategy as ‘investing,’ a primary home is actually a great investment in that it will generally increase in value and boost your net worth substantially over time.

Buying your own home is a great way to invest in real estate with relatively little money because you can often purchase with as little as 0-3% down. Plus, when you’re ready to move or upsize later on, you can either sell your house — typically for a profit — or keep it and rent it out, earning yourself passive income.

Jon Meyer, licensed loan officer and The Mortgage Reports loan expert, says that this is potentially the best way to get into rental property ownership, adding “you can get better rates and terms, and potentially make more money in the long run.”

But let’s assume you’ve already explored primary homeownership. Now you’re looking for different ways to invest in real estate and grow your net worth. In that case, here are a few strategies worth looking into.

Invest for cash flow

Cash flow is the amount of money you receive from rent and other income. It’s a key indicator of whether or not a property is a good investment, because it shows how well a property is generating income. If the cash flow isn’t there, you might not be able to afford mortgage payments and maintenance costs.

While many investors focus on home-price appreciation—how much their house has increased in value since they bought it—you should consider cash flow as your primary concern when deciding whether or not to buy real estate for retirement.

Your goal is to have enough money left over after paying all your bills that you can live comfortably without having to work again!

4. Invest in Rental Properties

If you’re looking to make a major commitment to investing in real estate, consider purchasing rental properties. Rentals can offer steady cash flow as well as the possibility of appreciation over time, but they are one of the most labor-intensive methods of real estate investing.

There are two main ways to make money with rental properties:

  • Long-term rentals. These properties are generally designed to be rented for at least a year and in theory provide a steady monthly cash flow, though this depends on your tenants being reliable. You might buy a multi-unit property or a single-family home that you rent to others.
  • Short-term rentals. These properties cater to rotating tenants whose stays might be as short as one night, like Airbnb. You might list your entire home or apartment when you’re away, or you could invest in a separate property meant only for short-term rentals.

While investing in real estate with rental properties offers greater profit potential, it also requires a great deal of effort on your part. You need to find and vet tenants, pay for ongoing maintenance, take care of repairs and deal with any other problems that arise.

You can reduce some of these headaches by hiring a property management company, but this will cut into your returns. When it comes to financing rental properties, the resources and low interest rates available to primary residences may not be available. This can make buying rental property more expensive.

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Top tax benefits of real estate investing

The tax benefits on real estate vary widely, depending on how you invest, but investing in real estate can offer some sizable tax advantages. Let’s run through them based on the investment type:

Your own residence

  • You may be able to deduct any interest expenses from your mortgage, depending on your specific financial situation.
  • If you itemize your tax return, you can deduct up to $10,000 in property taxes.
  • When you sell your residence, you can also receive $250,000 in capital gains (or $500,000 for married filing jointly) tax-free, if you’ve lived in the house for two years and two of the last five years.

Your rental property

  • You can deduct property taxes from any rental revenue, reducing any taxable gains.
  • You can also deduct your interest expense and depreciation, reducing your taxable income still further, even as you continue to collect the cash flow.
  • When you sell the investment property later, the taxes are assessed on its lower depreciated value. However, if you move the proceeds of a sale into a new house and follow the 1031 rules, you can defer the taxes on the gain.


  • By rolling their proceeds into their next deal and following the rules on 1031 exchanges, investors can keep deferring any taxes on gains — as long as they can keep finding good property deals.


  • REITs offer an attractive tax profile — you won’t incur any capital gains taxes until you sell shares, and you can hold shares literally for decades to avoid the tax man.
  • In fact, you can pass the shares on to your heirs and they won’t owe any taxes on your gains.
  • REITs are tax-efficient because they don’t pay taxes at the corporate level, meaning any money that is paid out to you has been taxed only once.

Online real estate deals

  • The taxes incurred by these investments can vary depending on exactly the kind of investment you make.
  • Some investments are technically REITs and so will be treated according to that tax setup (with no taxes at the corporate level), while others may be debt or equity investments.
  • In general, any income such as a cash distribution from these will be taxable in the year it’s received, while any tax on capital gains will be deferred until it’s realized.

8. Rent Out Space in Your Home or on Your Property

This is probably the easiest way to make money in real estate through direct participation. If you already own a home, you can pick up some extra income by renting out space.

I’m saying “space” for a reason. Most people think in terms of renting out a room to a border. That’s one way to do it.

You can also rent out part or all of any of the following:

  • Your basement
  • Garage
  • Attic
  • An outbuilding on your property
  • Driveway
  • A corner of your land

Any of these rental arrangements can provide an extra income source, in the same way as renting a room to a border. People and businesses have all kinds of space needs. In a lot of cases, they just need extra space to store their stuff or vehicles.

This is easier to do in some locations than in others.

If your home is located in a rural area, an older downtown area, or in a community that has lax property use restrictions, this can be a real alternative.

But if you live in a suburban area, with tight property use restrictions, you’ll run into legal obstacles. And if you live in a neighborhood with a homeowner’s association (HOA), don’t even think about it.

But if your house is located in the right area, and you have extra space, this is a pretty easy way to make extra money in real estate. Knowing where to invest in real estate is key to success in your real estate ventures.

Related Resources

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What Is A REIT (Real Estate Investment Trust) And Should You Invest In One? Home Buying – 7-minute read Victoria Araj – July 14, 2022 A real estate investment trust (REIT) is a company that owns or finances real estate for an investor. Learn more about what REITs are and how they work. Read More

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6. Invest in your own home

Finally, if you want to invest in real estate, look closer to home — your own home. Homeownership is a goal many Americans strive to achieve, and rightfully so. Residential real estate has had its ups and downs over the years, but it generally appreciates in the long-term.

Most folks don’t buy a home outright, but take out a mortgage. Working to paying it off, and owning your home outright, is a long-term investment that can protect against the volatility of the real estate market. It’s often seen as the step that precedes investing in other types of real estate and has the added benefit of boosting your net worth, since you now own a major asset.

3. Live-in House Flips

If you’re the handy type and don’t mind living in a construction zone, you can purchase a fixer-upper. You move in, make repairs and improvements, and sell the home for top dollar.

This strategy does require money: you’ll need a down payment and renovation funds. But since you’re living in the home, you’re “investing” what you would spend on rent to build equity in the property. Your hard work can build up a lot of sweat equity.

Of course, you also need skills to do some of the renovation yourself (or you’ll pay too much). You should also educate yourself about the market to ensure that the updates and improvements you make will pay off. The idea is to improve the house to sell, not put in top-of-the-line upgrades that appeal to you personally. With this in mind, you set yourself up to pull the maximum amount of equity out when you sell your property.

2. Do the math

Not all real estate automatically makes money. Mehta says every investor needs to "become an expert at calculating cash flow and realizing equity potential," which he learned about at his job at Sotheby's.

Cash flow in real estate is the difference between a property's income and any expenses. You might think of this as rent minus the mortgage payment, but that is not the only cost you need to account for in a rental property, for example. There are also operating expenses and savings for future improvements and emergency repairs, Mehta says.

Mehta also considers how much more value he can add to a property through physical improvements. That could include updating the kitchen or remodeling the bathroom. Mehta and his brother are currently adding a second story and unit in the backyard of one of their properties, which he estimates will add around $1.5 million to the total value of the property.

6. Borrow Your Down Payment, But Be Cautious 

Borrowing 100% of the money you need to buy a home is risky, as anyone who lived through the aftermath of the housing bubble a decade ago may recall. Lenders will say you cannot borrow your down payment.

Still, there are ways to do it. You can tap into your 401(k) and borrow against your own retirement savings. Because you are essentially acting as the creditor when borrowing from yourself, most lenders don’t count the payment against your overall debt burden when qualifying you for a mortgage. Of course, borrowing from your 401(k) reduces your retirement savings and if you leave your employer, you may have to pay off the loan in full and/or face tax penalties.

With advance planning, you may be able to get around the lender’s requirements and borrow your down payment. You could, for example, take out a personal loan for emergency cash and drop it into your checking account. Let it sit in your account for a few months and then apply for your mortgage. The lender is going to consider what’s in your account as “yours” if it’s had time to “season.” Those borrowed funds could become your down payment.

The Challenges Of Investing In Real Estate

While investing in real estate brings the potential for a large payday, it also comes with some challenges and risks.


Real estate is not a liquid investment. Once you invest your money in a single-family home, apartment or commercial property, you’ll have to sell that property – or the portion of it that you own – to get your money. Other investments, such as stocks and bonds, are far more liquid. It’s easy to sell stocks to get access to your money.

Starting Capital

You’ll also need more money to get started in real estate investing. Homes and commercial properties aren’t cheap. You might need to apply for mortgage loans to purchase these properties. Investing in mutual funds, CDs and stocks typically requires far less starting capital.


The profits usually don’t come quickly with real estate investments. Yes, you might charge rent to commercial or residential tenants. But often these payments only cover the cost of your mortgage payments or the other costs associated with maintaining an investment property. The big profits come when you sell the property for more than what you paid for it. To hit that goal, though, you usually must wait several years for your properties to increase in value.


Location is key when investing in real estate. Your property probably won’t increase in value if it isn’t located in a community where real estate prices are on the rise. This means you’ll have to do plenty of research to find the right investment property in the right location.

11. Real Estate ETFs and Mutual Funds

Investing in funds is an indirect way to invest in real estate. You actually own shares of the ETF or mutual fund, but you do not have direct ownership of the real estate itself. The funds invest in the shares of companies that are in the real estate business.

Why invest in real estate using ETFs and Mutual Funds?

The funds invest in the stock of builders and developers, building material suppliers, or even in REITs. They have the advantage of the highly liquid and are perfect for investment portfolios of all types, including retirement plans.

“The downside of real estate ETF’s and mutual funds – which is true of nearly all real estate related investments – is that they run with real estate cycles. When the real estate market is doing very well, they can be incredibly profitable. But when real estate is in one of its bust cycles, they can be one of the worst investments possible.”

2. Real estate investment trusts (REITs)

If you want to wade into real estate, investing in a real estate investment trust (REIT) will provide exposure to the market without the time and cost commitment of buying your own property. 

REITs are companies that own, operate, or finance properties and real estate ventures. Like mutual funds or exchange-traded funds, they own not just one, but a basket of assets. Investors purchase shares of a REIT and earn a proportionate share of the income produced by those assets.

Equity REITs, the most common type of REIT, allow investors to pool their money to fund the purchase, development, and management of real estate properties. A REIT focuses on a specific type of real estate, such as apartment complexes, hospitals, hotels, or malls. Ninety percent of its annual earnings must be distributed to the investors as dividends.

One big selling point of REITs: Most of them trade on public stock exchanges. So that means REITs combine the opportunity to own, and profit from, real estate with the ease and liquidity of investing in stocks. 

Geared towards generating income, usually from rent and leases, REITs offer regular returns and high dividends. They also appeal to investors because of the unique way that they are taxed: REITs are structured as pass-through entities, meaning they don’t pay corporate tax. This effectively means higher returns for their investors. 

If you want to keep your investment liquid, stick to publicly traded REITs (a few REITs are private ventures). You can buy shares through a brokerage firm, IRA, or 401(k). 

Risks and rewards of investing in real estate

Of course, all investments carry risks. And investing in real estate is no exception. A recession or depression may see tenants in financial trouble and unable to pay their rent. And there are times when home prices fall, though rarely for long, as this graph from the Federal Reserve Bank of St. Louis shows:

Source: Federal Reserve Bank of St. Louis

Source: Federal Reserve Bank of St. Louis

If you’d bought a home at the median price nationwide in the depths of the last dip (February 2012), you’d have more than doubled your money over the next decade. And that’s just in home price appreciation. The profits you’d have received as rent on an investment property or vacation home would be on top of that.

Know your market

But be aware that those are nationwide averages. Just as there are many hot spots where home price appreciation is much higher than across the country, there are plenty of cold spots where prices have been stagnant or have barely moved. Indeed, in some places, home prices have fallen.

That’s why one of the golden rules of investing in real estate is “location, location, location.”

Research the property market where you’re buying and make sure you thoroughly understand its dynamics. You certainly need to understand the market for homebuyers and sellers. But, if you plan to rent the property out, you must also fully grasp the rental market.

Why invest in real estate?

People invest in real estate for several reasons, including generating rental income, profiting from the potential appreciation in property value over the long term, and reducing taxable net income. 

One of the unique things about real estate as an investment asset class is that it may be possible to achieve all three of these things – income, long-term profit, and tax savings – at the same time while using other people’s money.

Use leverage to invest in real estate

People who invest in real estate directly by owning property such as a single-family rental (SFR) home often use leverage – also known as other people’s money – to finance the property purchase. 

To illustrate how leverage works, assume an investor purchases a SFR for $120,000. One option is to pay cash for the property, while another option is to leverage the property purchase by making a 25% down payment of $30,000 and financing the rest. 

Now assume that after 5 years, the home is worth $176,000. If an investor had paid all cash, the profit would be $56,000 and the cash on cash return would be 47% ($56,000 profit/$120,000 purchase price cash invested). 

However, if an investor had used leverage to purchase the home, the profit would still be $56,000 but the cash on cash return would be 187% ($56,000 profit/$30,000 down payment cash invested). In other words, by wisely using leverage by making a conservative down payment, an investor nearly doubled the cash on cash return in this example.

Generate income

Another reason people invest in real estate is to generate monthly cash flow. 

Depending on the type of real estate owned, an investor may earn income from dividend distributions from a REIT or crowdfund, or an annual cash return by directly owning a property. 

Profit from long-term appreciation

Housing prices historically increase in value when held for the long term, although there may also be times when home prices decline. 

According to the Federal Reserve, the median sales price of houses sold in the U.S. has increased by more than 25% since the 2nd quarter of 2020, and by over 94% since the end of the Global Financial Crisis (GFC) of 2007-2009. 

However, the median sales price of houses sold during the GFC declined by about 20%. During this 2-year period, millions of people lost their homes through foreclosure, allowing some buyers to purchase inexpensive homes and wait for the real estate market to rebound.

Save money on taxes

The IRS offers real estate investors numerous tax deductions to reduce taxable net income. For example, rental property owners can deduct ordinary expenses from rental income collected, including:

  • Property management fees
  • Leasing commissions
  • Repairs and maintenance
  • Mortgage interest
  • Property taxes
  • Insurance
  • HOA fees

Depreciation is another way that real estate investors lower pre-tax income. 

Residential real estate can be depreciated over a period of 27.5 years, excluding the land value. If an investor owns a home worth $120,000 net of the land value, the annual depreciation expense used to reduce a taxpayer’s taxable income would be $4,367. 

Credit Resources

Credit Resources