Source: Blockworks —
Traditional real estate has been the “safe” investment of choice for decades. Because of the simple fact everyone needs a home, this need has long-provided stability against sharp declines in value that investors find indispensable. Because of these fundamentals, real estate saw some of the sharpest appreciation in its history of the last few years. While it has slowed a bit, it was still the major relative outperformer in 2022. Combine this with the rampant housing shortages and the prospects of buying a house for both Millennials and Zoomers seem pretty bleak.
Real estate experts suggest workarounds such as house hacking or equity partnerships to get exposure to these markets. But for most millennials who don’t even have a credit line and struggle to clear their student debt, these methods are often neither feasible nor smart.
In this article, we’ll go through traditional “low investment” methods for real estate, and how crypto natives can gain exposure to the real estate market without breaking the bank.
Traditional ways to invest in real estate with little to no money
FHA loan
It’s no secret that the US Government wants its citizens to own their own homes. While it’s never been more difficult to do so, the government-backed FHA loan program is one that puts a home in reach for many. As long as you agree to live in the home as a primary residence, the program offers favorable loan terms and lighter eligibility requirements for buyers. And this couldn’t come at a better time. For many prospective buyers who could qualify for a conventional mortgage, the next hurdle is having enough capital for a down payment.
This is really where the FHA loan shines. Contrary to the commonly held believe that you need a 20% down payment to get into a home, you only have to put down 3.5% with an FHA loan. For the Q4 2022 median home price of almost $470,000, that’s the difference between putting down $94,000 and $16,450. While there are downsides the to FHA like agreeing to live in the home for a certain amount of time and paying a monthly mortgage insurance for the life of the loan, this difference in down payment requirements is more than worth it for those who would otherwise be unable to afford a home.
Equity partnerships
An equity partnership is a business deal between two or more investors who pool their funds, resources, and respective skills to purchase, develop, or lease property. Both the risk and the profits are divided depending on each partner’s level of contribution to the business.
Just like in normal business deals, there is potential for conflict between the partners, especially if there’s a disproportionate distribution of responsibilities. On one hand, usually the person with less capital in the deal will offer more sweat equity on the property, often leading to the aforementioned conflict over feelings of one party pulling more weight than the other for less profit. On the other hand, if things go south with the partnership, the investors who own the most equity have the most to lose. Because of these reasons, entering an equity partnership must be made carefully with these dynamics in mind.
House hacking
The house hacking trend emerged out of a desire to live rent-free. The hacker’s real estate strategy is to acquire a house for a low downpayment and offset their mortgage payments by renting out parts of their property — essentially covering living expenses.
The issue with house hacking? You’re legally required to live in the same house as others, so if you’re not used to having roommates, it can get uncomfortable. Plus this operation is impossible to scale. So, while this might be a good strategy if you don’t have enough upfront cash for a starter home, it’s not for everyone.
Rental arbitrage
Rental arbitrage is a way to make rental income without owning property. Instead of utilizing low down payment options, this close cousin to house hacking provides rental income through signing long term lease agreements that let the leasee list the property as a vacation rental.
While this strategy may offer an additional income stream, it doesn’t provide full real estate exposure. If done successfully though, the rental income can provide enough of a down payment to make a purchase. There are regulatory risks since zoning laws differ across the country. For example, in California, the person listing the rental is required to live in the unit for a majority of the year.
Microloans
Microloans are small-scale loans, typically under $50,000, financed by individuals instead of traditional financing sources such as banks.
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