Get Money to Buy Houses Without Being Rich

TLDR
Most of you tell yourselves you need a pile of cash to start. You do not. Five strategies work: FHA plus DIY, FHA plus 203k, hard money, private equity, and partnerships. For a first deal, FHA or a partnership is the answer.

Table of Contents

The Five Metrics

Every funding strategy gets rated on the same five things:

  1. Cash needed. How much out of pocket.
  2. Bankability. Credit, debt to income, and what a bank wants to see.
  3. Skills required. Sales, sourcing, project management, or construction.
  4. Risk. How bad it hurts if things go wrong.
  5. Work ethic. How much sweat it takes.

I started buying houses in 2011 in my early twenties with very little money. Since then I have bought hundreds. I have personally used all five of these. Here is how they stack up.

1. FHA Plus DIY

This is how I bought my first house. An FHA loan from a bank, 3.5% down, and I did the renovation work myself.

  • Cash: 3 of 10. On a $200,000 house, 3.5% down is $7,000. You still need a little reserve on top.
  • Bankability: 7 of 10. FHA requires a credit score, a debt to income ratio under about 40%, and the house has to be livable the day you close. It has to be your primary residence for at least a year.
  • Skills: 2 to 3 of 10. You buy a livable 80s-finish house and DIY floors, paint, hardware, cabinets, landscaping.
  • Risk: 2 to 3 of 10. You already pay rent somewhere. Living in your own investment is paying yourself instead of a landlord.
  • Work ethic: High. You are swinging the hammer.
Pro Tip
FHA will not lend on a bombed-out house. Pick something livable today with 80s or 90s finishes. Your job is to freshen it, not rebuild it.

2. FHA Plus 203k

Same FHA loan, with a 203k rehab piece bolted on. The bank gives you money to do the renovation on top of the purchase price. I did this on my second house.

  • Cash: A little higher because 3.5% is now on acquisition plus rehab. On a $200,000 buy plus $50,000 rehab, you bring about $8,750 instead of $7,000.
  • Bankability: 7 of 10. Same credit and debt to income requirements, a slightly higher payment means you need a slightly higher income.
  • Skills: 4 to 5 of 10. You are managing a contractor now. You cannot DIY. 203k requires you to hire an FHA-approved contractor off an approved list.
  • Risk: Still low. It is your primary residence.
  • Work ethic: Medium. You are not swinging the hammer, but you are project managing for the first time.

The 203k loophole: people think FHA is one-and-done. The fine print says otherwise. I got my second FHA loan when a job move qualified me. Read the rules. There are paths.

3. Hard Money

This is where the bank does not care about you. They only care about the deal. No credit test, no debt to income, nothing about your paychecks. They lend against the after repair value.

  • Cash: 2 of 10. Hard money usually funds 70% of ARV. Buy a $150,000 house that needs $50,000 of rehab and will be worth $300,000, and 70% of ARV is $210,000. Your all-in cost is $200,000, so the loan covers it. You still bring 2 points up front, which is $4,000 on a $200,000 loan.
  • Bankability: 1 to 2 of 10. They basically do not care.
  • Skills: High. You need a real deal at a real number. You need to write a scope of work. You need to manage contractors. Hard money is a fire hose. It does not turn off until you sell or refinance.
  • Risk: High. Interest rates run 12 to 15%. Monthly payments are big and they do not stop.
  • Work ethic: 7 to 8 of 10. You have to source a real deal off market, because MLS deals do not have room for hard money math.
Do not lead with hard money. The monthly payment on a $200,000 hard money loan at 13% is around $2,100 of interest alone. If the project runs six months over because you did not know what you were doing, that is $12,000 of extra interest. Fire hose.

Hard money lenders are everywhere. Google “hard money lender” in your city. They want to lend. That is how they make money.

4. Private Equity

Raising money from accredited investors. I have done this, but only after a decade of flipping and a pile of rentals under me.

  • Cash: 1 of 10. You raise everything.
  • Bankability: None required. You are not getting a loan.
  • Skills: Very high. You are selling a vision to people putting real money in.
  • Risk: Low in cash. Very high in relationship capital. You are risking your reputation and other people’s money.
  • Work ethic: 10 of 10. You better be earning every dollar.
Dumb Mistake
Raising money before you have a body of work. Friends and family will say yes because they trust you. If you lose their money because you are not ready, you lose the relationship too. Build experience first. Ten years is not a bad wait.

Some people try this without experience. I have seen it go badly. If you are going to do it, get legal counsel. The contracts matter. This article is not legal advice.

5. Partnerships

This is my favorite strategy for beginners if you cannot do one of the FHA plays.

The partner is not your buddy who also wants to flip. Partnerships work best when they are opposites. Find someone who has done this for a long time, owns a lot of real estate, and is tired of doing the hard stuff. Tired of sourcing comps, tired of walking houses, tired of chasing contractors who do not answer the phone, tired of listing and babysitting a sale.

You bring the work. They bring the money.

  • Cash: 1 of 10. You bring very little.
  • Bankability: 1 of 10. Your reputation is your bankability.
  • Skills: Starts low. This partner is probably also a mentor. Over time your skills grow and eventually you bring the deal-finding knife and they bring the butter.
  • Risk: Low financially. High on reputation. Real estate communities are small.
  • Work ethic: 10 of 10. Whatever it takes, with a smile.

How to find these partners: real estate meetups, Facebook investor groups, local networking. Be patient. You are building a reputation first.

You Still Need Reserves

Low cash does not mean no cash. I still use these strategies today because my goal is to keep my own cash out of deals. That lowers my risk and lets me do more deals.

It does not mean empty bank account. Reserves should be as high as you can get them. Things come up. A contingency fund is what keeps a bad surprise from becoming a catastrophe.

Skills are the real currency. Skills are knowledge times experience. You get knowledge from videos, books, and articles like this one. You get experience by taking action before you feel ready. You are not going to feel ready. Do it anyway.

Skills compound. Cash does not. Focus on the thing that keeps growing.

FAQ

I have no cash, bad credit, and no experience. Where do I start?

Partnerships. Find one experienced investor locally who is tired of running projects and offer to do the work. Not your cousin who also wants to flip. Someone twenty years ahead of you.

Is FHA only for first-time buyers?

The label says so. The fine print has loopholes. Job relocations, changes in family size, and other life events can qualify you for a second FHA. Read the rules for your lender.

How much cash should I have in reserve on my first flip?

Enough to cover three to six months of every cost. Loan interest, taxes, insurance, utilities, living expenses. A project that was supposed to take three months can turn into nine. Your reserve is what lets you finish without panicking.

Should I borrow more than I need?

Yes. Your lender wants to lend. Ask for a real number that includes a contingency. The extra interest is cheap compared to running out of money mid-project and selling your truck to buy lumber. That happened to me. Do not let it happen to you.

When’s the right time to take on private money from people I know?

Later than you think. A minimum of a few successful flips and a real track record. You are not just risking your own reputation. You are risking the relationship. Earn it first.