Real estate investing is one of the best ways to create long-term success and build wealth. However, it does have the significant downside of being a business with a high capital threshold needed for entry. For potential investors with only moderate amounts of capital to invest, the options are somewhat limited, especially when it comes to building equity in properties.
There are, however, still ways to break into the real estate investment business without having hundreds of thousands of dollars to invest. One of these methods, usually pursued by investors who do not want the risk of borrowing larger amounts of capital, is to build wealth in equity by acquiring lower-cost rental properties.
How Can You Build Equity With Cheaper Properties?
Unless you live in a large urban area, there’s a good chance that the houses in your town or city fall into a wide range of different sizes and values, including within neighborhoods. Even in a neighborhood filled with medium- to large-sized houses, you can usually still find smaller homes.
If you plan to build equity with low-cost rentals, these are the homes that you should target. Say, for example, a given neighborhood is filled with three-bedroom houses that retail for an average of $75,000. Now suppose that one home in that neighborhood, perhaps one that was built before the others nearby, is a one-bedroom ranch worth only $20,000. A house like this, though it may be difficult to find, represents an opportunity for the real estate investor starting out with limited funds. At a low price but in a good neighborhood, such homes can retain a stable market value, allowing investors to slowly build smaller amounts of equity without spending more money than they are comfortable with.
The kind of home just described also has significant potential as a source of a small rental income. Provided that the home is in a good neighborhood (which it should always be if you plan to use it as an investment), you can easily market it as an opportunity for someone who otherwise could not afford to live in that area to reside there at a lower cost.
Don’t be afraid to rent at a low rate. But make sure your mortgage payment, property taxes and maintenance are paid for by the rental income with at least some positive cash flow left over for yourself. Keep in mind that the kind of renters you will attract with such offers will often be younger people who are preparing to live on their own for the first time. Despite what many real estate investors think, however, younger renters, especially young professionals or college students, can be excellent tenants.
Building A Portfolio
With such lower-cost properties, it is obvious that one or two properties will not be enough to build up wealth in the long run or to create a livable rental income. In order to build on this model, you will need a portfolio of several such properties. Keep in mind with any additional properties to, again, produce at least some positive cash flow. As long as these properties can pay for themselves and yield some income with their own rentals, they are good mechanisms for building wealth through real estate equity.
Also keep in mind that you can, over time, begin to build toward larger and higher-paying properties with the wealth you accumulate in smaller properties. Using the positive cash flow from these properties or by selling one or more to liquidate the accrued value in equity, you can substantially offset the cost of buying a property that will be more profitable either as a rental or as a flipping opportunity. Whether you choose to move up to such properties or simply wish to maintain a portfolio of lower-cost rentals, always have a growth strategy in mind as you continue to build up your real estate investment business.
Although they will not make you rich overnight, small, low-cost rental properties are an excellent opportunity for the first-time real estate investor with a limited budget or an aversion to excessive financial risk. Over time, a portfolio of these properties can turn into an appreciable wealth of equity and can even be used to move up to larger real estate deals. Always remember, even with such low-cost rental properties, to carefully inspect the home and evaluate the cost of any maintenance or renovations that may need to be done.