I Started with Just $3,500: How I Bought My First Rental Property

0:00Can you buy real estate with no money? Today, we're talking about how to invest without much savings. It is possible, and getting from your current financial starting point to buying your first investment property might actually be easier than you think.

0:19Hey everyone, I'm Dave Meyer. I've been investing in rental properties for more than 15 years, and I'm the head of real estate investing at BiggerPockets. When I started investing, I had almost no money. I was waiting tables and got my first deal by partnering with three other people and agreeing to manage the property, even though I had no idea what I was doing. So it is possible to invest without much cash, but it means you'll need to get creative and find other resources or skills that you can bring to the table. We're going to deep dive into all of that today and joining me to do it is DeAndra McDonald.

0:53DeAndra is an investor in Virginia and one of our most popular guests on this show. She also started when she was not making a lot of money, only$28 ,000 per year and had thousands in credit card debt before starting in real estate and growing a life-changing portfolio. DeAndra and I are going to talk about how she was eventually able to get funding for properties after getting denied by multiple lenders, the best investing strategies for people without much starting cash, and what types of strategies people in this position should consider. Deandra, welcome to the show. Thanks for being here.

1:29Thanks for having me. It's great to have you back. If you all have not listened to Deandra's full story, definitely go listen to it. It's one of the most fun interviews we've done this year, episode 1105 from April 7th. But maybe you could just provide us a brief recap, Deandra, before we get into today's topic. Tell us a little bit about your financial position when you first started investing, what you were doing, and maybe how you got to your first property. Yeah. So I started as a house hacker right after I graduated college. It took me a while to get a job. I finally got one as a lab tech making$28 ,000 a year.

2:05And what really pushed me into homeownership wasn't that I wasn't making a lot of money. It was my first rent increase notification. And getting that was really like, wow, no matter how low I get my rent, no matter how small I live, I'm forever going to be threatened with this increase in rent. And I just don't want to do it. And I decided, well, if I bought a property, then I wouldn't have to do that anymore. And the first time I tried, I got denied. But after a year and a half of like really going at it, I was able to find a property that fit a budget that got pre-approved. And from then on, haven't looked back.

2:41So tell me, how did you make that work? Because your blueprint is a good example of how other people can also go about this with low savings. Yeah. So I can tell you how I made it work and also tell you how I should have made it work. The first way I made it work was that I didn't. I really, truly didn't. When I went to get that first approval, they told me no. So what I was doing actually was not working. I thought if I just like, oh, I'll just put some essentials on my credit card and I will get a low car payment and I'll take the standard repayment for my student loan debt, it wasn't working.

3:15I could not even get approved for a little bit outright denied. There was nothing they were willing to do for me at all. And so I had to go back with the list that that lender gave me and say, okay, if I'm not going to make more money, what I have to at minimum do is pay down my credit card debt. If I can't make more money, what I at minimum have to do is save a little bit more because I was still trying to get a loan. I was still trying to get a conventional loan at that point. I could have qualified for an FHA. My conventional was 3%. And the FHA wasn't for a multifamily. So I said, well, I'll leave that for my next property.

3:49Dreams, right? I'm getting denied for the very first one. I'm already like, well, the second or third, let me have a plan for that one. And then I went to work. I did not have the skills or the education to do much more than what I was doing. So in order to make more money, I had to work more. And so I had to get a second job and a third and a fourth. And so I worked throughout the day at the lab. At night, I would work at the bar. I was a bartender. On the weekends, I was working as a lifeguard and I was a swim instructor. And for 18 months, I hustled and I cut all expenses in my house. And that might seem extreme, but that's how I was feeling at that moment, right?

4:23I didn't have internet. I didn't have cable. So after 18 months, I had managed to pay off my credit card debt and save$3 ,500. So big money. That's awesome, though. But how much credit card debt did you have? I had about$5 ,000 in credit card debt. So in total, it was like$8 ,500 basically. Yeah, that's incredibly good. And then I was finally able to qualify for a$85 ,000 loan. But I told you what I did, what I should have done, was look up down payment assistance programs. I would have qualified for those in a heartbeat. You know what? It's so funny that no one knows about these things. Yeah.

5:02Because almost every city and almost every state has them. And you can stack them. You can add it to other loans. The biggest qualification or need you have to do is just live in the property for a period of time. Right. But sometimes they'll say like three years. Yeah. Five years. There's a program right now that was available then because I asked them because I needed to hurt myself. I need to hurt myself sometimes to learn. They're offering 20 percent down. You just have to live there five years. And I'm so frustrated because I didn't look at duplexes and quads in 2014 because I didn't have the money.

5:35And you're telling me you would have given me 20 % for the quads if I just lived there? Unbelievable. Just so everyone understands what we're talking about here is a lot of states and local governments have programs especially designed to help people who have low savings or low income or both to achieve homeownership. That can come in the form of down payment assistance like DeAndra just mentioned. There's also closing credits to reduce your closing costs. Sometimes there's tax credits. There's all sorts of things. All you got to do is Google them. And actually, this is pretty cool. We actually had an economist from Zillow on the other day, and she mentioned they're starting to put this on Zillow, which is really cool.

6:20Based on your zip code, they're aggregating assistance programs that you might be eligible for. Or the other thing I should say is like your agent or your lender should know about these things. They don't always. But like if you're working with a good investor friendly agent, they should know about this stuff as well. Absolutely. I love that Zillow is starting to add that to that. It's cool. Yeah, because you can access it. I'm trying to do more on my YouTube where I'm like, hey, guys, please, please look up this free money, especially may or may not be here in a couple of years. If we're also 100 percent honest, right?

6:54If those funds dry up, you're going to be very upset that you didn't take advantage of them when they were still there because you're kind of operating like it's always going to be there. It's not. That is a very good point. All these things change all the time. And so you need to just jump on them if they're available to you. And it's not always this huge like, oh, you have to apply and wait 18 months like a lot of things with the government. It's actually some of these things are designed to move pretty quickly. I have a client who just closed on a house in South Carolina. Brand new construction, full warranty.

7:23she paid$800 out of pocket. That's amazing. And it'll be a fantastic rental also when she leaves. So we're house-taking for the future, please. So given what you're saying, I like these two approaches. I'll just mention, this is your show, but I'll just mention that I got started a third way, which was partnering with people. Not everyone has access to that. I'm fortunate to have people in my life who are interested to doing this, had no desire to actually do all the work. So I volunteered to do it, but that's another way you can get into this as well. with low savings. I'm curious if you think there's sort of a minimum number that people need to get to in terms of savings to make a real estate investment happen in a responsible way.

8:07Because I really don't want people spending every last dollar they have on real estate. You should have emergency funds depending on your job, your family situation, that kind of varies. But what do you think is like the minimum amount of investable capital that you need to get started? I think if you were going to invest with no money out of pocket, so you were trying to get trying to get the deed with as little money as possible, I would love for you to have enough to replace the most expensive repair in that property that insurance is not going to cover, right? Because like if it's a hailstorm, you're not responsible for fixing the windows and the roof and the HVAC that's been dented.

8:46So if we have enough to cover our literally our worst case scenario, and I think that gives you some space to take on ownership of this person's property. So for a condo, right, that might just be$3 ,000 for a mini split, right? Because you're not responsible for the roof and you're not responsible for the grounds. But if you're going to get a quad and that roof is not new, right? The things that I would want you to be to have some money on. Or it's like a$20 ,000 furnace, you know, sometimes like super expensive stuff in some of these older homes with four units. That is not new and not under any sort of warranty.

9:24So that would be those caveats too, right? That's that insurance. If it's under warranty, then in theory, you should be able to call up the warranty people and have them fix it. Look at what your deductible to is on that insurance too, because if you have a$5 ,000 deductible, you gotta be able to cover that. And a lot of people make that mistake and think insurance, they just pay. You pay the first deductible, you pay a little bit first. And so make sure you have that covered. This way of thinking about it, though, is specifically for a house hack, right? This is for an owner-occupied property.

9:54I would say even for an investment property. Like if you were to partner, I would say, hey, Dave, I'm glad they gave you this money up front. Let's make sure we have an empty credit card somewhere just in case you mess something up, just in case a tenant doesn't pay. do you have some plan to come up with the difference? What's your partner? Cause you gave them this great presentation. Yeah. You don't want to go back to the well, especially not right away on the first property ever. The first payment, you want to dip back in the well where you're like, Hey, we can throw an ADU on the back of this.

10:25This is a great thing we could do, but not because, Hey, I underwrote this deal wrong and now I need more money. That's a good point. Uh, I think that's true for, for partnering. So I think we kind of have like three categories here if you're following along here and you want to know how much money you need to invest. Like if you are going to do a house hack and use the down payment assistance, like you may be able to get away with just basically your cash reserves. Like that's what you need. Depending on where you live, you might need money for closing costs and maybe for some part of the down payment.

10:56But I think reasonably in a lot of places, 10 grand would do that. Yeah. Even with expensive markets. I'd say the same way if you're going to partner with people because you can structure a partnership anyway. And so there's no absolute number, but you can think about it that way. If you're going to go buy a property, not owner-occupy, you're going to probably have to put 25 % down on that kind of property. Then realistically, you probably need like 35 or 40 grand is probably about the number. And even then you're buying a cheaper deal. So I just want to to put that spectrum out there for people, because I know some people knock on house hacking, but I just want to show you how dramatically the amount of cash that you need goes up.

11:41If you're not house hacking or partnering and you're just doing this yourself, it's literally probably four times the amount of money. Absolutely. And if I can add on top of the cash flow, something else I'd like people who want to invest with no money down to have is space, is financial space in their regular budgets. because for like they've said, for that bigger property, having 35 ,000, maybe that feels a little inaccessible on top of the 25 % down payment. But if I have great credit, I can access a credit card for 0 % interest for 18 months, for 24 months. Right. I'm in the middle of some big stuff for my social media business.

12:18And the first thing I did was like, oh, let me just open a credit card. Yeah. Because it's 18 months interest free and I can make that money back for sure in 18 months. But that only works because I have great credit. You don't need it. You're just using this as a financing tool. This is like a financial arbitrage move more than it's leveraging yourself as much as possible and putting yourself in a bad financial position. That is great advice. I have a follow-up question for you. I'm curious your answer on, but we got to take a quick break. We'll be right back. They say real estate investing is passive, but if you've spent a Sunday night buried in spreadsheets, you know better.

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17:12Welcome back to the BiggerPockets podcast. I'm here with investor DeAndre McDonald talking about how to invest with little savings. We've talked about really the relatively modest, compared to what you think you might need to spend on real estate, ways that you can get into this. DeAndra, you started as a house hacker. I started as a house hacker. Here's my question to you. People have very different opinions about this. Is there ever an instance where house hacking is not a good option to get started? No. Yes. I love how definitively you answered that. So let me give you right now. I just bought my dream home.

17:47And you know what it has in the basement? A full apartment. And you know why it has a full apartment? Because house hacking isn't only to make money. Sometimes house hacking allows your parents to live with you. and be able to retain their independence, but also you can keep an eye on your people. Sometimes house hacking allows your children to practice in a way that they couldn't do in a safer space and not be out here paying money to all these people. Sometimes house hacking allows you to support your friends in their times of need. I always think it's a great idea. That's such a good perspective on it too.

18:19Like, I love how you presented it as flexibility. It's not, you know, if you want to rent it out full-time, do it. If you want to rent out as a short-term rental, do it. If you want to do it with your family, do it. Like it just gives you an option or just like unlock the door and live in that space some of the time. Like it's like, there's so many different ways to do it. So I I'm full on board with house hacking. I think, especially in today's day and age, rent is so expensive and so are homes. Like, don't get me wrong. They are very expensive, but rent is so expensive that this ability to lower your living expenses and to like you started the show with control that living expense and know that it's going to be fixed instead of variable where your your landlord could change your rent at any point as they probably will because that's just how the business works that like you can get control of that so i i love that so what other options you think for folks who have little to no savings that are worthy of considering you had mentioned partnering I think of my larger multifamily buildings where one of the things I've started doing if I have a 10 unit or larger is hiring a living handyman.

19:31And one of the things I've started to play around with is a split, a profit split and not just a payment, not just like an income. And I think of partnering is not just I live in the home, but like I take care of it. Right. Like I'm I'm not just oh, I'm down the street if they need me. No, I'm in it. I think that gives investors with a little more capital, a little more safe feeling about what's going on with their property, knowing you're sleeping in it. You're running the water. You're hearing that dog upstairs is not supposed to be there. I can see how I for sure will be much more willing to invest with you in a different state if I knew you were on site and not just in the city.

20:11That is the challenge with partnering, right, is I get approached frequently. And it's not that they're bad people. It's not that they have no savings. It's usually that they have no experience is the thing that would make me not want to invest with them. And so I think you just have to be realistic. If you're looking for a partnership, you're going to have to put in something, some sweat equity. I wrote like a whole chapter in my book about this because I think it's so important. It's like people think that they can create a portfolio out of nothing. You're the scientist here. It is literally a rule of physics that you cannot create something out of nothing.

20:48You have to put some input into it. And so if you don't have savings, that's okay. I started in a similar situation, but I basically worked for free to earn my equity for several years as a property manager. So you can do something like that. The idea that you're going to find a partner who's going to give you some sweet deal with huge upside when you have no experience and no capital is probably not going to happen. Like maybe friends and family. There might be like if you have like a friend or someone who wants to help you out. But if you're going to someone who's viewing it as an investment, you're not going to get that.

21:23And so I think that you just need to sort of figure out in a partner, like you're not going to have any leverage. I'll just be honest with you. Like you're not going to be able to negotiate anything because the other partner is going to have 100 different operators who that they can choose to invest with. So I really just recommend figuring out ways that you are going to do it. But DeAndra just provided a good example. Like, are you willing to live in the property and be the handyman for a couple of years? That's essentially what I did. First five years of my career, I essentially did that. That was a terrible handyman.

21:54But don't tell my, my partners don't listen to this podcast. So it's fine. But I just think that that's just an important like expectation setting. And that's okay because the whole point is just to get in the game, to learn, to move on to the next one. But I think you need to know that if you're coming into a little savings that like you're going to have to find the thing that you can contribute to a partnership. One of those things can be exposure. You said you were in that for five years. Remember the down payment assistance we talked about. If you got a multifamily and then showed people for the next three years how you take care of that multifamily.

22:28That's right. You now have experience and they have trust that you commit to this thing. So that's a way to get that exposure to these private lenders so they can come to you and say, oh, I've been watching you do this thing. Can you do it again now with me? Instead of, again, you showing up day one, zero money, zero experience, and maybe zero desire to put anything on the table. That would be a way to convince them and convince yourself that you should take on these bigger projects. What do you make of creative finance or seller finance as options for folks with little savings? Anytime someone doesn't have money, my first question before we get creative is why?

23:09Why don't you have any money? And I mean that as a teacher, because you're going to repeat whatever got you into this space again. So if you overspend on your regular life, you're overspending on that flip. I promise you, you are. You're not checking Kyle prices. You're not checking what that carpet costs, because that's not how you live your regular life. If you like to bet it all, you're going to get that property that's been on the market forever and think that foundation work is just a few paint and it's going to be terrible. So if you have no money because your habits are bad, I don't want to talk to you about creative nothing.

23:45That's I don't want to engage with you about this. And you said something earlier, too, about borrowing money from friends and family. It starts to get a little predatory if you are in your mind saying, I don't know what I'm doing, but I'm going to lean on the love of my people in order to gamble. And I don't think that's it. If you don't want to spend your money, then yeah, we can talk creatively, right? You've got some money. You don't want to spend it. I like seller financing, especially now with interest rates so high, right? At least for us to pay interest in the loans. This is an opportunity for the seller to get a 6%, 7 % return where they are not getting that at least the low level, low risk markets, right?