The following is a guest post from my friend Eric Moorman, who has made a killing in small-town real estate investments.
I have been a full-time Real Estate Investor for many years now. I got started with a mix of desperate needs (a Masters’s degree, no job, and no money), and the promise of huge profits with no experience or start-up money needed.
I had never taken a Real Estate class and had no idea how to fix anything. I didn’t even have or know how to invest $1000! The one advantage I had was a father who was an amazing mentor, the quintessential entrepreneur.
Of course, now there are way easier ways to start investing in real estate. Online real estate investing sites like Fundrise allows you to invest a small amount of money to get exposure to real estate investments across the country. Online real estate investing is now a top way to make money in real estate and build long-term, passive wealth.
But when you hear you can buy houses with no money, believe it. Today I want to share the four best ways you can make money in real estate, with the positives and negatives to each.
Table of Contents
4 Ways To Make Money In Real Estate Investing
Before I get started, let me say I am only going to give an extremely basic explanation of these ideas.
I could easily write a book on each one alone, but here are the bare bones to investing with no money or credit. Here’s another great read from Jeff on the best short-term investments out there, so check it out as well!
1. Online Real Estate Investing Sites
Online investing sites have changed the game in recent years. With these sites, you can own fractional shares of real estate projects. What this means is that you can get exposure to real estate, but you don’t need to come up with huge sums of capital or deal with tenants. This is a strictly passive income strategy.
For other sites, you must certify that you have a net worth over a certain amount or make a certain amount of money per year.
How It Works
With Fundrise, you can start with as little as $500. You open an account and select from a number of portfolio options. Fundrise charges a management fee of around 1% per year, which is fairly low compared with other options, and its 2021 annualized return was 22.99%! You can see how my Fundrise account has performed here.
What You Gain
Investing this way, you gain a ton of freedom and you gain exposure to the real estate asset class with very little money or effort.
What You Risk
You don’t get to really use any local expertise you may have, and you don’t necessarily get the pride that comes from visiting a real estate project that you wholly own, improve, and can see easily. For some people, that’s a big draw to investing the old-fashioned way!
2. Lease With an Option to Buy
The second way I make money in real estate that I want to break down for you is acquiring a property using a “Lease with an Option to Buy.”
How It Works
This is where you lease a property from a seller for a set amount of money each month, with the exclusive right to purchase the property within a certain time frame.
There is no closing at the onset of this transaction, simply a contract stating the agreement.
Now that you have a contract with your seller, you find a “tenant-buyer” to move into the property. You sign a Lease with an Option to Buy with them, and hence, you have a sandwich Lease Option.
Your tenant-buyer will give you a Non-Refundable deposit for their exclusive right to Option the property at a set price for a set amount of time and pay you a monthly lease while they are living in the property.
As a side note, I never sign anything or conduct any Real Estate transactions without my attorney reviewing the documents. It’s worth the extra money, trust me. We’ll talk more about the importance of attorneys in another post.
As I stated, there is much more that goes into putting a Lease Option transaction together, but that is basically how it works. There are several positives and negatives to this type of transaction. Let’s take a minute to look at a few. First, let’s look at the positive.
What You Gain
You have acquired a property with no money and made money from your tenant-buyer with their Non-Refundable deposit, as well as their monthly payment (You should always make money on the monthly spread between your buyer and seller.)
| Pro Tip: I have a rule of at least $200 positive cash flow a month per property. I have some as high as $600, but as a rule, I like to have at least $200 per house each month. In theory, your tenant-buyer will at some point go to a bank and cash you out, and you will make a big chunk of money when he/she does that! |
What You Risk
Here is the reality, and something you will not hear at a majority of Real Estate Investing seminars, where the individual speaking is attempting to sell you his/her program.
Ninety percent of the time, your tenant buyers are B & C credit buyers. They are attracted to your “Rent to Own” program because no bank would EVER loan them money.
In this economy and market, these buyers are everywhere.
The reality is, few of them (only 10% in my experience) actually clean up their credit and end up buying the house. Also, you will have a huge number that you will be forced to evict who will tear up the property. I say this not to scare you, but to prepare you if this is the Real Estate vehicle you choose to pursue.
If you do this, make sure you get a huge Option deposit to cover lost rent, attorney’s fees and damage done to the property.
Is It Worth It?
Is there money to be made with Lease Options? Yes.
If you find the right tenant buyer, regardless if he/she buys the house, you will make money on the Option deposit, and the monthly rent spread. If you are not forced to evict this person, and he/she does not tear up the house when they leave, consider yourself lucky.
Is Real Estate investing with Lease Options easy? No way. I have had more headaches from Lease Options than any other type of transaction.
On the one hand, you have a seller yelling at you to sell their house and get the loan out of their name; regardless of how long a time frame you have to get it done. On the other hand, you have a B/C credit buyer who is far less than motivated to do what he/she needs to actually finance the house.
If you engage in this type of transaction, you MUST have a thick skin and be ready to deal with lawsuits, headaches and nowhere near the profit potential you have been promised by the “Gurus.”
I have over twenty Lease Options going on at this very moment. I still pursue them, but I am very cautious and semi-reluctant to pursue more. The main reason? There is easier money to be made in Real Estate, and I will show you not only what it is, but how to do it….. the right way.
3. Option a Property
A third way to make money in Real Estate investing without money or credit is to “Option” a property.
How It Works
This type of transaction is similar to a Lease Option, but very different as well. Consider it a Lease Option’s cousin, who is much hotter and more fun.
Here is the simple difference between the two:
- Lease Option: the seller has agreed to take a monthly payment for a specific amount of time, with a set purchase price to come at some point in the future. I do not accept any less than 5 years for these transactions and try to get ten years.
- Option to Buy: the seller is not accepting monthly payments. They have simply given you the exclusive right to buy a property at a certain price for a certain period of time.
Why would a seller choose one over the other?
Let’s look at a few circumstances and reasons that may persuade a seller to decide one way or another.
- With an Option, the seller can continue to live in the house. At the same time, he/she will continue to make the monthly payment and take care of all maintenance and repairs. The seller may not want to accept monthly payments, with the idea of someone else is living in their house. While they may be motivated to sell, the thought of someone else eating dinner and walking around naked where they raised their children may be too much for them to handle.
- They may not have the time required for a Lease Option. If a seller is ten months behind on their payments with foreclosure knocking on the door, and you (the investor) don’t want to make up those payments and there is still a TON of equity in the house, an Option may be your only choice, short of paying cash.
- With a straight “Option” the seller has nothing to lose. You have a set amount of time to buy their house, which you will only do if and when you find a buyer at a higher price than you have an Option for. In this type of transaction, your target audience is not the B/C credit buyer, but rather the individual with cash or the ability to go to a bank and get a loan.
Why You Should (or Shouldn’t) Invest
The positives for you the investor, are as follows: You are not dealing with tenant buyers, repairs left by tenant buyers, angry sellers, evictions, lawsuits, monthly payments with no tenant-buyer… the list goes on and on.
The negatives are you do not make any money at all unless you successfully find a qualified buyer within the time allotted in your Option to buy. The seller benefits because they pay no Real Estate commission, and they have the privilege of living in the house while you are trying to sell it.
4. Sell Wholesale
A fourth way to make money in Real Estate actually can require the investor to have cash, although it is not required.
This technique is by far the best and easiest way for new, inexperienced investors to make “quick” money in Real Estate. In fact, this is by far the best and easiest way for veteran and seasoned investors to make “quick” money in Real Estate.
Wholesaling is the art, and I use that word on purpose, of being able to accurately appraise the potential value of a property and buy it so low, you can quickly sell it for cash to another rehabber or end user who will make it their dream home, without EVER fixing a thing, regardless of how good or poor the condition of the property.
Now, you may say, I do not need cash for this strategy. I can simply Option the property for a wholesale price and then sell it to a rehabber or end-user. You are absolutely correct, but getting an owner to accept a wholesale price is rare.
Where you will have much better luck is buying foreclosures from banks.
While a majority of your initial offers will still be rejected by banks, they are much more likely to accept a wholesale offer. They also will never allow you to Option the property. They only accept cash and will even require you to have Proof of Funds before they even look at your offer.
What’s the Best Way to Make Money in Real Estate?
If you can stomach hearing no several times a day and maintain a constant follow-up file with all wholesale offers made, you will make more money in Real Estate than most “house flippers” you see on TV.
Money can be made in Real Estate in several different ways. I will never claim a particular technique is not worthy of your time. They all work, some just better than others.
The smartest and best investors do not focus their time solely on rentals or rehabs, and they never swing a hammer or do rehab work themselves.
The best and most successful Real Estate investors are the ones who focus on being transaction engineers and becoming masters of negotiation, relationships with other investors and accepting the fact that the real money is made in pushing paper, not hammering nails.
As you grow in your Real Estate investing career, you will always want a constant portfolio of different types of transactions going on at the same time. Some investors focus on one particular strategy and make a lot of money.
However, I would rather have the knowledge to take any deal that came my way and turn it into cash. I constantly have a steady stream of wholesales, lease options, rehabs, new construction, and anything else I can get my hands on.
As previously stated; all of these strategies (and many more I have not mentioned in this article) have their place and can make money fast. However, for the new investor, dead set to make the millions of dollars promised by the “Gurus,” focus on Options and Wholesale deals.
Bottom Line
Having cash is not necessary to make money in Real Estate investing, but it does make the process easier.
As you advance in your career, you will want to find a way to acquire some cash, whether it be from private money lenders or banks.
The transactions are cleaner and with experience, your confidence to properly manage a deal and the money at risk will increase. But for now, make a mess with as little risk as possible and keep the faith that there is a check at the end of the tunnel.
For me, the first check I earned was small, but it gave me the confidence to keep going. It was nice to see the bigger checks follow suit. I promise, they were not easy to come by, but with the proper training, hard work, and a little luck, it can easily be your name on these checks.
Let me show you how to get there.
Good stuff, thank you
“can require the investor to have cash, although it is not required” seems like it could be stated more clearly.
Read your article… an eye opener….
Would like more info
Big thanks!
I would like to learn Kore about investing in foreclosure homes to flip.
Just show me how or text me info on learning the business I want to learn how please
I like the blunt but positive attitude.
I would like to speak with personally if possible about making money through real estate to understand better or through email. Thanks
Very amazing and informative content! Appreciate you for spending time to share! Look forward to more.
I’d like to learn more from you as a new investor
I want to learn about .real estate. I would like to try risk free. I have no money. I would like also to help a investor part time and make some money.
Im 27 years old and very interested in the knowledge you have to offer.
Really enjoyed the article. I’ve been reading tons of RE investing articles, books for the past year. I have not pulled the trigger yet. Your article was very easy to understand and have he done confidence.
Hey Jeff,
Loved the article. I just graduated from Clemson University and I am getting my real estate license online right now. Ive been looking into investing a lot here recently and would love to talk further if you have the time.
Thanks and I hope to hear from you,
Jacob
Looking to buy 6 or 8 properties all under 20000 to keep and rent just need someone to loan the money I have a good job that ai Have had for 7 years now making 60000 a year looking to do better for myself
I found the information very educational.
Thanks for sharing
Hello Jeff! I am 24 years old and I found your article because i was doing some research on how to get started. It gives a lot of great information that I have to put to work. I was reading the comments above and I would like to ask for an example to “buy where prices are low then sell where they are high”.
Hi Gisella – Maybe the best example is where you buy a dilapidated property at below market, fix it up, and sell it at a profit.
Thank you for taking your time to reply Jeff! I appreciate it. My best wishes to you.
Thank you Jeff,
It is something new, though interesting I must admit.
Thank you very much for your help. I will definitely be needing more of your great knowledge and skills! I look forward to more of your work! ????????????????
Thank you for the information. I am a active duty Marine with four years until retirement. I am looking for a second career and Real Estate has always fascinated me. I have never purchased any before and wont until I retire (which will be 100% cash offer) but afterwards I want to purchase and rent to local college kids. If you have any suggested reading for that I would greatly appreciate it.
Hi Brandun – I’ve heard that’s a potentially lucrative market, especially if you can buy properties in less than perfect condition (meaning at low prices), fix them up and rent them out. If you live in a college town, try to partner with an investor who’s doing that right now, at least for the first couple of properties. But you should also be able to find information on the web. It’s a very specific real estate niche.
It is easy to say “pay seller a wholesale price and then sell it at full price to somebody else”. Well, no shit. Sellers are not stupid, and if they are willing to sell it at a wholesale price it is because they could not find a buyer. I guarantee all of the sellers have been scouring the internet looking for potential buyers. When they are finally defeated they decide to sell at wholesale. I promise that buyers are not going to magically appear all of sudden, so the investor won’t be able to find a buyer any easier.
There’s some truth to that Charles. But the real secret is to find sources that are selling below wholesale, since they couldn’t sell at wholesale. Maybe the best source are overseas providers who can produce at a much lower cost. Buy where prices are low, then sell where they’re high. It’s the most basic way to make money.
i am 15 years old and my family is making minimum wage and i’m trying to be the one in the family who is the go to man if they need anything, i really want to do real estate cause i really love to sell stuff but i recently got into a car accident and got hit by a government vehicle and i will be getting 20,000 cash and i want to ask you were should i start step by step cause i want to be the new generation i want to be the youngest real estate agent out right now and be all over the news buy yea if you get this email please contact me threw my email i would appreciate it very much p.s. Qualeq Daily
Hi Qualeq – I admire your determination. But at 15 you don’t have the legal capacity to invest in real estate, or most anything else. You’ll need to discuss how to keep the money safe with your parents (I strongly recommend CDs at a bank), so that you’ll have the money available for real estate investing when you turn 18.
22 years old, and interested in real estate investing. I have little to no money but I have the drive of a horse to make it. If you could please email me back I’d greatly appreciate it thank you.
Hi Robert – At 22 and having no money, the best strategy will be to find an experienced investor to partner with. Maybe you can offer to do the let work finding properties, or in some other capacity.
Hello
Great article ! I was wondering if you have invested in Canada at all ? I am a 28 year old Canadian. I own my own townhouse . I have really good credit. I just have no money to put down . Do you have any advice for me ? or any courses you can recommend ? Any advice would be helpful . Thank you so much .
Hi Richard – I have no experience in Canada, but I’d imagine it’s roughly the same as in the US. But google real estate investment books, guides, programs and websites in Canada to get the specific information you’re looking for.
Good Day Jeff, My Name is Lisa; It was great to hear your story. Yes, I am starting from the beginning without cash — this is all new to me. I have paid for courses, but unfortunately I have not found a good coach. I am looking forward to obtaining rental property in a nice area, I Prefer Class B property that I can upgrade to a Class A; or, if possible — a Class C that I can upgrade to a Class B. Also, as a newbie, I cannot decide if I should go after a lease option on a building with working class white collar and blue collar; or should I go for Section 8? Then sell it after a year with a profit? What do you think? Am I over zealous?
Hi Lisa – I’m not the “expert” in this article, so I can’t give you a solid answer. I do know real estate investors who have made money with both types of tenants, so you may be best to find someone who is working with each and set up an interview, or even a mentor arrangement. Real estate can make you a lot of money, but it’s a tougher business than most people think. Having a coach could make a real difference, especially since you’re completely new.
I have bad credit. Can i still get into flipping houses?
Hi Rickey – You won’t be able to qualify for traditional financing, so you’ll have to look for owner financing. That’s very rare these days. A better approach will be to partner with someone who has funds or the ability to get financing, while you supply the expertise and labor.
Interesting information
Southern Illinois Represent!
Interested in investing in Real Estate. Enjoyed Jeff’s interview with Eric.
I have considered getting my real estate brokers license in Colorado as I am new to the state and the various laws. I am primarily getting it for educational reasons, albeit there are some pros and cons that come along with it as many writers have written about.
My question is relating to the Option to Buy the property outlined in this article. I assume that I may have to get a lawyer to handle a separate type of document than what a Realtor is allowed to use regarding this option. However, am I legally allowed to enter into these types of arrangements (Option to Buy) as a licensed Realtor? Also, seems with this option having a licenses and access to Realtor perks could assist in selling the property agreed upon in an Option to Buy. My only question is do I have the legal right to perform this type of transaction as a licensed agent and would I be able to list the house on MLS listings or any other types of services to assist in selling it?
The age old question remains if the licensed Realtor benefits limit or benefit someone wanting to solely be an investor.
Hi Michael – To my knowledge you must disclose that you are a real estate agent when you make an offer. But you’d do well to drop a couple of hundred on a consultation with a real estate attorney (who you will want to maintain an ongoing relationship with). Eric does make it clear that he makes extensive use of attorneys in his business dealings, and you should too. In addition, laws are different in each state, and you will need an attorney in your home state.
If you had no experience are money to put down on real estate where would you start first?
Hi Kisha – I’d first save up some money for the initial down payment. But I’d also find a successful person to partner with. You don’t even want to attempt real estate investing if you’ve never done it before, certainly not alone.
I like the information in this article specially about lease to buy option in expensive areas like san jose where buyer may not have all the down payment and lease to own option come handy.
Hey eric, great info. I spoke with your attorney in marion he told me to connect with you…glad i found you here…can you contact me please, im in so.il also. Jeff thx so much for this interview…means alot to me, i thought i was all alone in my area, great to see proof that there are guys like eric doing well. God bless
Any resources for learning more? I would love to work this on the side of my day job, and potentially turn it into something full time. I’ve always been fascinated by real estate investing.
Thanks for sharing Jeff, it is nice to hear from someone who has actually done it rather than the infomercials.
This is very inspirational. I’ve always wanted to get into Real Estate investing, but it does seem like there is a moderate learning curve. I’ve got too many things on my plate right now to take on another project, but this is definitely on my bucket list.