Investing in real estate is a great way to build wealth and diversify your portfolio. And now there are more ways to invest in real estate than ever, even for those who don't have the cash to buy real estate.
In this article we will see:
- Why does it make sense to invest in real estate?
- The best ways to invest in real estate with little money (and often without going into debt).
- Some common mistakes to avoid:
Why Invest In Real Estate?
If you are starting with little money, why invest in real estate?
First of all, real estate should not be your first investment. Most people will get the best results by making sure they match their employer's 401(k) plan or pay off high-interest debt.
But if you've already started building a portfolio, real estate can be a good way to diversify your assets.
Previously, this option was only available to investors with enough cash on hand to purchase real estate. But today there are several different ways to start investing in real estate for less than $10.
Some of the benefits of investing in real estate on a shoestring include…
#1. Low-Risk Learning
As your net worth grows over time, you will have more opportunities to invest in real estate. Starting small now allows you to learn about real estate and make mistakes without risking large amounts of money.
#2. Solid Returns Via Income And Appreciation
Just because you don't have a lot of money today doesn't mean you shouldn't invest. In fact, quite the opposite: the sooner you start investing, the better. The longer you let compound interest work in your favor, the more your wealth will grow.
To illustrate the power of compound interest, a $50 monthly investment at 7% interest over 20 years will grow to $26,248.
The same investment of $50 a month will grow to $132,056 over 40 years.
As Warren Buffett famously said: “Today someone is sitting in the shade because someone planted a tree a long time ago.”
Real estate as an investment class has performed well over time, not as well as stocks, but better than bonds in recent history.
To give you an idea of the overall performance of real estate, the chart below shows the returns of the Real Estate ETF (VNQ), Total Stock Market Fund (VTI) and Total Bond over the past five years (through October 2021). Market Fund by Vanguard.
VNQ is a combination of some of the largest real estate investment trusts (REITs).
A REIT is simply a corporation that generates income from income-producing real estate. Vanguard's VNQ aims to track the overall real estate market by investing in a diversified portfolio of REITs.
Of course, there are different niches and strategies within real estate investing. So, based on historical returns, you wouldn't expect a large general purpose real estate fund like Vanguard to outperform stocks over a long period of time (or even provide much diversification).
But there are dozens of different ways to invest in real estate, including commercial real estate, residential real estate, and investing in debt and/or real estate equity.
While the larger publicly traded REITs haven't provided much stock market diversification, it's just one type of real estate investment strategy. And it's in the various real estate investment strategies (discussed below) that you can find something that provides portfolio diversification.
The Best Ways To Invest In Real Estate With Little Money
There are many ways to start investing in real estate. Here are some of the most popular.
#1. Online real estate investment platforms
Now there is a lot of innovation, dozens of online platforms allow you to invest in real estate. Many of these are considered real estate crowdfunding platforms, where you invest directly in the property along with other investors.
One of the biggest real estate crowdfunding platforms is Fundrise, where you can start with as little as $10.
Fundrise allows you to invest in real estate through funds called eREITs.
There are a variety of eREITs to choose from. Some target specific investment objectives, such as income or growth, while others target a specific geographic area (ie, the West Coast).
Read our Fundrise review to learn more.
Another minimal real estate investment platform is Arrived Homes. While Fundrise invests in larger (often multi-million dollar) projects, Arrived Homes is a co-investment platform for single-family homes.
With a minimum investment of $10, it is an ideal place for those who want to learn the ins and outs of residential real estate. Instead of investing in a fund and allowing portfolio managers to allocate your investments, Arrived Homes allows you to directly value and invest in individual properties.
Find out more in our Arrival Homes review.
#2. Publicly Traded REITs, ETFs And Mutual Funds
- REITs, real estate mutual funds and ETFs offer low-cost, beginner-friendly ways to start investing in real estate.
- Real estate mutual funds are funds that invest in REITs, real estate stocks, or real estate indexes.
- ETFs are similar to real estate mutual funds, except that they can be bought and sold at any time, while mutual funds are only valued (and sold) at the end of each trading day.
What these methods have in common is that in each case you are buying a security that consists of a basket of properties. It's similar to investing in a stock mutual fund, except instead of individual stocks, you buy shares in a fund that invests in different types of real estate.
Like stock mutual funds, there are REITs, real estate mutual funds, and ETFs for different investment goals and types. While Vanguard REIT (mentioned above) has a general goal of tracking the real estate industry (which it does by investing in individual REITs), there are other REITs that focus on income-producing commercial properties or in a specific area. country.
One of the advantages of publicly traded REITs compared to investing through a crowdfunding platform like Fundrise is liquidity. Shares of publicly traded REITs can be easily sold on the open market when you need cash, while many of the platforms listed here have restrictions on when and how you can sell your investment.
Although a public listing allows for greater liquidity, the price of most REITs tends to track the broader stock market.
So if there is a big selloff in the market, REITs also tend to go down. While publicly traded REITs do exist, they typically have higher minimums and are only open to accredited investors.
#3. Rent Out Your Home, Room Or Storage Space
If you own real estate right now, such as a home or vacation home, it's easier than ever to turn it into an investment property.
The options here include:
- Airbnb and VRBO. Generate income by renting out your house, apartment or even one room in your house.
- Neighbour. It allows you to rent space in your home for storage, such as a garage or basement.
Renting out an existing asset through Airbnb or VRBO is an ideal starting point for an individual looking to invest in vacation rental properties.
Renting out your home or condo for one weekend a month allows you to understand how these platforms work, and then when it comes time to own a vacation property, you'll be better equipped to assess potential income, not to mention gain valuable experience working with tenants. :
Learn more in our beginner's guide to starting an Airbnb business.
#4. Purchase A Low-Cost Property
While we've discussed the cheapest ways to get into real estate investing, it's possible to own a property without bringing tens of thousands of dollars to the table.
An FHA loan only requires a 3.5% down payment. Multifamily properties qualify for FHA loans, so you can plan to live in one unit while renting out the other(s).
This is a strategy often referred to as home hacking.
Of course, this also greatly increases your risk, because if the property's value goes down, you could end up owing more than it's worth.
Recommended resource: 15 tips for buying your first rental property.
#5. Partner With Existing Real Estate Investors
Working for smart and successful people is never a bad thing. A good strategy for learning the art of real estate investing is to find someone who has done what you want to do and work for them.
You can offer value to this person by acquiring your own trades and presenting them to the investor, often called bird tracking.
Wholesale real estate is another option where you partner with an investor, such as a rehabber or flipper, who will buy the property and handle the renovation and sales process. Finder's fees for wholesalers can reach five figures, so with the right mentor, this can be a great way to learn the industry and make good money.
Common Mistakes Of New Real Estate Investors
To ensure your success, let's look at what you want to avoid as a beginner real estate investor.
#1. Taking On Too Much Debt
If you are a buyer, what often makes a property undervalued, and therefore a good investment, is the fact that the seller has too much debt and has no way to cover his costs other than selling. Often they are actually forced to sell because of the debt burden.
As a prospective real estate investor, you never want to find yourself in the position of having to sell.
Many people go into real estate investing with the idea that you need to borrow money to make money, but the truth is that it's often better not to borrow money (or to borrow as little as possible), especially when you're inexperienced.
#2. Not Having Enough Money In The Bank
While investing a few hundred dollars in a platform like Fundrise, Arrived Homes, or REITs is a great way to get started, these are long-term investments. And with long-term investments, you shouldn't make them if there's a good chance you'll need the cash in the short term.
That's why you'll want to have a fully funded emergency fund before you even jump into these lower-cost alternatives.
If you're investing in real estate on your own, there's a lot more that can go wrong. Renovations are needed, it can be difficult to find good tenants, and even then, it's not always easy to collect rent.
Real estate is not a place to operate with small margins because many things can and will go wrong. When this happens, the lack of cash can force you to sell at the wrong time (or go into debt), which can lead to big losses.
#3. Not Trusting The Numbers
Many beginners want to trade on instinct. The perfect property is available, and even though the numbers say the property is overvalued or won't generate income, they still think it's the right price based on what they know about the local market.
Here are some real estate investing rules that have stood the test of time.
- Earn 2%. Buy rental properties that generate a monthly income of at least 2% of the purchase price. for example, a $100,000 home might rent for $2,000 a month.
- Expect 50% costs. Enter with the expectation that operating expenses such as maintenance, insurance, utilities and taxes will be 50% of the property's gross income.
- Don't spend more than 70%. The rule of thumb for flipping is to spend no more than what you expect to sell the home for, including the price of repairs and expenses.
Real Estate Investing With Little Money: Closing Thoughts
After researching and developing a game plan, it's time to execute.
No matter how much money you have to invest in real estate, the best way to start is small and with little risk, either through the cooperative market or directly in the local market.
No matter how much money you have to invest, it's important to remember that real estate is a long-term game where patience and proper knowledge are essential.