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

Dave:Can 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. Hey 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 Deandre McDonald.Deandre 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. Deandre 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.

Deandra:Thanks for having me.

Dave:It’s great to have you back. If you all have not listened to Deandre’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. Deandre, 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.

Deandra: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, and what really pushed me into home ownership 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 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.

Dave:So 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.

Deandra: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. I 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.

Speaker 3:If

Deandra:I can’t make more money, what I at minimum have to do is save a little bit more

Speaker 3:Because

Deandra: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 dreams. 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. I 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.

Dave:That’s awesome though. But how much credit card debt did you have?

Deandra:I had about $5,000 in credit card debt.

Dave:So in total it was like 8,500 basically. Yeah, that’s incredibly good.

Deandra: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.

Dave:You know what? It’s so funny that no one knows about these things.

Deandra:Yeah,

Dave:Because almost every city in almost every state has them

Deandra: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, but sometimes they’ll say like three years, five years, there’s a program right now that was available. Then I asked them, I needed to hurt myself. I need to hurt myself sometimes to learn they’re offering 20% down. You just had to live there five years and I’m so frustrated I didn’t look at duplexes in quads in 2014. I didn’t have the money and you’re telling me you would’ve given me 20% for the quads if I just lived there?

Dave: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 home ownership.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 based on your zip code, they’re aggregating assistance programs that you might be eligible for. Or the other thing I should say is your agent or your lender should know about these things. They don’t always, but if you’re working with a good investor friendly agent, they should know about this stuff as well.

Deandra:Absolutely. I love that Zillow is starting to add that to that. It’s database. It’s cool. Yeah, I’m trying to do more on my YouTube where I’m like, Hey guys, please look up this free money, especially may or may not be here in a couple years. If we’re also being a hundred percent honest, if those funds dry up, you’re going to be very upset

Dave:That

Deandra:You didn’t take advantage of them when they were still there because you’re kind of operating. It’s always going to be there. Not

Dave: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. A lot of things with the government, it’s actually some of these things are designed to move pretty quickly.

Deandra:I have a client who just closed on her house of South Carolina, brand new construction, full warranty. She paid $800 out of pocket. That’s

Dave:Amazing.

Deandra:And it’ll be a fantastic rental also when she leaves. So we’re house second for the future, please.

Dave: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 were 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.

Speaker 3:Correct.

Dave: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 because 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 the minimum amount of investible capital that you need to get started?

Deandra:I think if you were going to invest with no money out of pocket, so you were 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. If it’s a hailstorm, you’re not responsible for fixing the windows and the roof and the HVAC that’s been dented. So if we have enough to cover literally our worst case scenario, then I think that gives you some space to take on ownership of this person’s property. So for a condo that might just be $3,000 for a mini split 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 or that things that I would want you to be have some money on

Dave:Or it’s like a $20,000 furnace, sometimes super expensive stuff in some of these older homes with four

Deandra:Units, yes, that is not new and not under any sort of warranty. So 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 ’em fix it.

Dave:Look at what your deductible too is on that insurance too, because if you have a $5,000 deductible, you got to 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.

Deandra:I would say even for an investment property, if you were to partner, I would say, Hey Dave, I’m glad they gave you this money upfront. 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

Speaker 3:To

Deandra:Come up with the difference what your partner, because you gave them this great presentation?

Dave:Yeah, you don’t want to go back to the, well, especially not right away

Deandra:On the first property

Dave:Ever,

Deandra:The first payment

Dave:You want to tip back in the well where you’re like, Hey, we can throw an A DU on the back of this. This 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. I think that’s true for partnering. So I think we kind have three categories here. If you’re following along here and you want to know how much money you need to invest, if you are going to do a house hack and use the down payment assistance, you may be able to get away with just basically your cash reserves. 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, but I think reasonably in a lot of places, 10 grand would do that. 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 wanted 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. If you’re not house hacking or partnering and you’re just doing this yourself, it’s literally probably four times the amount of money.

Deandra:Absolutely, and if I can add on top of the cashflow, 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 Dave 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. I’m in the middle of some big step for my social media business and the first thing I did was like, oh, lemme just open a credit card 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.

Dave: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. We hear it from investors all the time, spending hours every month sorting through receipts and bang transactions, trying to guess if you’re making any money, and when tax season hits, it’s like trying to solve a Rubik’s cube blindfolded. That’s where baseline comes in. BiggerPockets official banking platform. It tags every rent, payment and expense to the right property and schedule e category as you bank. So you get tax ready financial reports in real time, not at the end of the year. You can instantly see how each unit is performing, where you’re making money and losing money and make changes while it still counts. Head over to base lane.com/biggerpockets to start protecting your profits and get a special $100 bonus when you sign up. Thanks again to our sponsor base lane.Welcome 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. Deandre, you start 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. No. Yes, I love how definitively you answered that. So

Deandra:Lemme give you right now. I just bought my dream home and 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

Dave:Love that.

Deandra:Always think it’s a great

Dave:Idea. That’s such a good perspective on it too. I love how you presented it as flexibility. If you want to rent it out full time, do it. If you want to rent it out as a short-term rental, do it. If you want to do it with your family, do it. It just gives you an option or just unlock the door and live in that space some of the time. There’s so many different ways to do it. So I am full on board with house hacking. I think especially in today’s day and age, rent is so expensive and so are homes, don’t get me wrong, they’re 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 landlord could change your rent at any point as they probably will because that’s just how the business works, that you can get control of that. So I love that. What other options you think for folks who have little to no savings that are worthy of considering?

Deandra: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 live in handyman. One of the things I’ve started to play around with is a split, a profit split and not just a payment, not just an income. And I think of partnering is not just I live in the home but I take care of it. 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.

Dave:That 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 a whole chapter in my book about this. 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. You 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. Maybe friends and family, there might be if you have a friend, 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. And so I think that you just need to sort of figure out in the partner, you’re not going to have any leverage. I’ll just be honest with you. You’re not going to be able to negotiate anything because the other partner’s going to have a hundred 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. Deandre just provided a good example. 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. I was a terrible handyman, but don’t tell my partners, don’t listen to this podcast. So it’s fine. But I just think that’s just an important expectation settingAnd 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 little savings that you’re going to have to find the thing that you can contribute to a partnership.

Deandra: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.

Dave:That’s right.

Deandra: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.

Dave:What do you make of creative finance or seller finances options for folks with little savings?

Deandra:Anytime someone doesn’t have money, my first question before we get creative is why 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 not checking Kyle prices. You’re not checking what that carpet costs, 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

Dave:That’s really

Deandra:Interesting. I don’t to engage with you about this.

Dave:That’s such,

Deandra: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 and 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. You approve it, you have some money, you don’t want to spend it. I like seller financing, especially now with interest rates so high, at least for us to pay interest in the loans, this is an opportunity for the seller to get a six, 7% return where they’re not getting that, at least the low level, low risk markets in the CDs and the money market accounts. So I would say go for it.

Speaker 3:If

Deandra:The property for some reason there’s some upside that you want to delay getting a longer term loan absolutely offer if they got it. But in lower markets I’d say, oh

Speaker 3:Yeah,

Dave:Right. Probably

Deandra:Better to solidify with traditional financing and get creative.

Dave:Yeah, I’m not an expert in sub two. I do have some questions about it. I think if you really understand it and you do it legally, it’s a perfectly viable strategy. I think for new people it’s challenging and there’s risk that comes with it that I think you need to consider any investment.I just wanted to touch on a couple of things that you brought up earlier, which I loved what you were talking about how people, if you have bad habits, that you’re going to repeat them in real estate. I think that makes so much sense. I honestly never really thought of it that way and it made me want to bring anyone I consider lending money to Vegas and just watch them on the tables now let’s just give ’em a hundred bucks. See what they do with that money. You’re going to learn everything you need to know about that person. But I also think the thing you touched on about friends and family is super important to me. And I think I’ve unfortunately get a lot of people reaching out to me trying to untangle these situations where they’ve already done this and it has turned ugly and lemme just tell you it is not worth it.It is not worth getting your first investment if you are risking a relationship with friends or family. And I agree with you that it’s like, yeah, you want to get in on these things, but people get weird about money or they might be right to get weird about money with you if you’re not spending it reasonably. And if you’re going to do this and raise money with friends and family, I know it’s awkward, but just go through the effort of formalizing everything, write it all down, get an operating agreement, talk about what happens if things go wrong, talk about what happens if you run out of money and you need to ask them for more. Walk through every one of these situations because then sure if things go bad, it still sucks. It’s just going to suck, but it will suck less because at least everyone understood what they were getting themselves into.You have a protocol for dealing with this problem and you can move on from that hopefully in your relationship. So I totally agree with you. I actually am a big fan of partnerships. I partner on a lot of my deals. It sounds like you are partnering with 50 people right now. It is a great option and every real estate investor I know does it. It’s not weird. It’s very common. But again, I just want everyone to think these are formal agreements, treat them like a business and think about what you can offer in these deals because it’s not just like, Hey, I’m going to show up. I went on Zillow and found this pretty picture. You got to really think of this. Put yourself in the other investor’s shoes. If you had money, what would you expect from someone who wants to borrow that money from you to bring you? I would think you would expect a detailed business plan and a lot of commitment and a lot of evidence of their work ethic. And so just think about it in that perspective. And you really can raise money and do these things, but you doubt it. Be professional about it.

Deandra:A hundred percent. And if I could add one more piece about seller financing, it’s something I have started to offer a lot and I think we talk a lot about creative financing from the buyer’ss perspective and not as often about seller perspective. Because another way you might not have money is you got inheritance. You’re sitting on some property, you’re sitting on some land and maybe you can sell it out, but there’s something real sweet. I’ve been watching my 8% checks come in, I’ve been watching my 10% checks come in all, and it has been

Dave:10% on seller financing.

Deandra:Look,

Dave:We agreed to what we agreed

Deandra:To, you know what I mean? And it comes in and it’s wonderful. I own the properties outright now their names are on it, but I’m the lien holder and they paid a good chunk upfront. So if something goes bad, I get those properties back. But I have a few properties I want to sell now that I essentially only want seller financing. I want to spread it out over 15 years. I got time.

Dave:If you can get ages 10%, I can understand why you’ve done it. I own a property outright and people build these lists where they can see these things. And so some people have approached me about seller financing and they’re like, rates are so high. They see it as seller financing as the way to get a lower rate. I’m like, yeah, I’ll give you a 5% interest rate, but you’re going to pay me 10% more than this property is worth. And they’re like, why would I do that? I’m like, why would I do that? Why would I?It’s again, it’s put yourself in the other person’s shoes here. Why would they give this to you at a lower rate than a bank is going to give you at the same price? I could just sell it and get all the money now and then go invest that somewhere else. But yeah, I’m interested in it. I think it’s if you own places free and clear. It’s pretty interesting idea. So I think we’ve established here house hacking partnerships, really good ways that you can go about doing this. Are there any other things that we’re missing here for how to guide for people with little savings?

Deandra:Again, this will be an assumption that with little savings comes little experience. And so I would really say to that person, one of the things you can give is going after their properties that nobody wants, but not to overwhelm yourself, going too big at once. So even with that down payment assistance, we’ve been talking about maybe not going for the quad day one. If you have no experience with anything, right? Or make sure you have a mentor or someone on your phone that you can call to and ask for help. It might be a little too much.

Dave:Yeah, that’s fair

Deandra:On the first day. But if can get those condos or those town homes that maybe are a little further out of town or not as big as everybody else wants and hold onto them a little bit in a few years you’ll have money, you will have equity. The property will appreciate in most markets for you to do something with. So maybe holding the right expectations for what that no money down property looks like.

Speaker 3:Yeah,

Deandra:I love that. Sometimes we think it looks like the dream home or it looks like the dream rental and that is not always the case.

Dave:I like that a lot. I think appropriate expectations is 50% of this industry. It’s so much of it. Everyone’s like, I want the perfect burr. I’m going to flip this house and make a hundred percent returns. No, you’re not immediately. You’re not in 60 days.

Deandra:That’s too long.

Dave:I hear people that too long. I hear people like, oh, I didn’t do well on my first flip by 30% return. I’m like, that’s triple the stock market and you did it in six months. It’s literally six times better than anything else you could have done with your money. And you’re mad about it

Deandra:With the highest interest rates

Dave:Both buyers have seen. Exactly. That’s why I always say this. I’m a broken record. You probably don’t hear this all the time, but on the show it’s like if you just commit to seven to 10 years, you’re going to be good. That’s it. Just commit to seven to 10 years and take it slow. It’s not even that slow. It’s fast. That’s just a totally reasonable thing. And the only reason you would mess up and not be able to pull it off in 70 years if you try and go too fast and you burn out on your first deal or take on too much riskOr put yourself in a worst financial position because you take on too much. So I love that advice of just taking off something appropriate for you at your given stage. You’re going to learn so much and then next time you can take a little bit bigger bite and then a little bit bigger bite. And if you do that for 5, 7, 10 years, you’re going to be good. So I think that’s a really good thing to end on. But we can’t get out of here. I want you to lie to me again. Tell me what you’re doing next. I want to get it on camera so that next time you’re here, we know if you lied or not.

Deandra:That’s really funny. I think right now honestly, it’s about stabilizing these joint ventures because even with those, I wanted to go as big as I could in terms of the building, but I knew I had some cultures to reset. I knew I had some units to turn over, so this is going to take three to six months of effort in order to get these properties operating the way I want them to. But I think the dream would be for next year to scale larger with the joint ventures. There’s a lot of 15 to 25 unit properties in my region that those prices keep dropping. Nobody wants ’em crazy and I don’t want ’em yet. That’s crazy. But once they get to that number I’m looking for, I feel more comfortable moving forward.

Dave:I love it. If you didn’t listen, there was an episode of the show maybe in May with Brian Burke. He wrote a book for BiggerPockets called The Hands-Off Investor a couple of years ago. He does a lot of syndication deals, but he knows more about multifamily than anyone I’ve ever met. And he was like, the 12 to 25 unit is the sweet spot. He’s like right now, that’s where you should be buying. I’ve been looking at a couple of ’em the last couple of weeks. Yeah, I think it’s just, if you can pull that off, if you have the experience and the capital you’ve put in your time to earn your way up to that, it’s a really good thing to look at. So next time we’re going to hear how you’ve scaled that.

Deandra:That’s right.

Dave:Well, thank you so much for being here. It was a lot of fun to have you. Thanks Dave, and thank you all so much for listening to this episode of the BiggerPockets Podcast. We’ll see you next time.