How to Start Investing in Real Estate with Little Money

3 ways to invest in real estateYou hear it all the time, “There’s no better investment than real estate!” I used to hear it growing up all the time and actually come from a family of four generations that heavily invested in real estate so I’ve learned a lot from their experiences and have started the path myself.

The biggest question I hear is “How can I get started in real estate?” and usually it’s in regard to the fact that real estate typically has a high barrier to entry. However, not all real estate investing requires a lot of money and if you’re looking for a way to get started easily and with the least resistance. In fact, I’m going show you how to start investing in real estate with little money.

The best ways to invest in real estate with little money are by purchasing REITs (Real Estate Investment Trusts), Crowdfunding, and purchasing pre-screened turnkey rental properties.

The Traditional Real Estate Buy and Rent Model

So everyone knows the traditional real estate path means, looking for a property that has a strong rental market, putting 20% down to finance the home with a loan, and making sure the rental income is higher than the mortgage, taxes, management fees, and unexpected occasional fixes. In fact this is really simplifying the process. Let’s give an example:

Let’s say, I want to buy an investment property. I find a property that costs $200,000. The first thing I need to know is how much is this going to cost me? Well, there are exceptions but typically lenders will require a down payment of 20% and may charge a monthly insurance premium if you put a smaller down payment. 20% of $200,000 would be $40,000. That’s a lot!

Now let’s say the mortgage payment comes out to about $1000 which is pretty typical assuming about 1% property tax, insurance, and a loan rate of 4%. Curious how I got this information? Zillow has a great mortgage calculator you can use.

So, I found a house in Las Vegas, NV that costs around $200,000 and is currently being rented for $1400/month. That means in this example, there is a maximum of $400/month that you can take away, not including unexpected occasional costs, management fees and periods of time that you have an unoccupied residence between tenants. That’s pretty razor thin as far as profits go.

Now, you can absolutely find better deals out there and this is a viable option if you have the cash to get into the rental business but as you can see, the challenges are there and cost to entry is pretty high.

Invest in REITs with as little as $100.

Now I know that sounds cliche and the truth is, you won’t make a lot off your investment if you only have $100 but this is definitely a way to start investing at ANY price point, you can add to your investment as much as you like, and it’s the easiest to do.

What Are REITs?

six investment properties in a row

Real Estate Investment Trusts (REITs), pronounced “Reets”, are basically the same thing as Mutual Funds except they are made up of actually real estate investments. A REIT can be made up of tens, hundreds or even thousands of properties and by owning shares, you the investor own a piece of all of these real estate investments. Some REITs are made up of commercial real estate, residential real estate, rentals, leases, land, or any combination above. One requirement for a REIT to be considered a REIT is that at least 75% of the investments must be actual property.

One of the biggest things that separate a REIT from just a mutual fund is that the fund management company is required by law to pay out at least 90% of all profits directly back to the shareholders in dividends yearly.

Also, REITs are pretty diverse in terms of investors as well and no single party can own too much voting control of a REIT to ensure all investors have a voice. This is enforced by the SEC and requires that REITs have at least 100 shareholders within it’s first year and no more than 50% of the REIT can be owned by any five investors.

Why Should I Invest In REITs – The Pros?

The biggest advantage to REITs is the ability to invest right away. They are accessible to just about anyone since some REITs trade as little as $10-$50 per share. This means you can buy a few shares of a REIT and add to your position over time. For example, say you only have $100, you could buy 4 shares of a REIT that is valued at $25/share and then each month invest $100 more and by the end of the year, you’d have 48 shares valued at $1200. In traditional real estate you would need a large amount of money up front and generally don’t add to it’s value over time except by paying down a loan or making expensive improvements.

Another advantage is that you can get in and out of REITs just as easily as stock. You could invest in one long enough to receive a dividend and exit your position or you could even buy into it that then a few days later realize you would rather invest your money somewhere else and cash out of the REIT right away with no questions asked. If you use a company like Webull or Robinhood, you could even trade shares for free. It is very difficult to get out of a physical real estate investment quickly and easily.

Lastly, REITs are very diverse so if one or two properties are vacant or under repair, it will not really affect your overall portfolio strength. Since real estate is relatively independent of the stock market, it provides a great way to diversify a current portfolio.

Some Downsides of REITs – The Cons

One downside to REITs is that since you are getting paid out in dividends, you will be required to pay tax on the dividends every year just like your regular income. So whatever income bracket you are in, you will pay the same amount on the income you make from your REIT dividends.

Another downside which isn’t that important to me but may be to you is that since you are only a shareholder and not an actual decision maker on the board, you have very little say in business decisions and property decisions. The reason I don’t mind this is because a main reason I would invest in REITs is to have passive income that I don’t have to actively manage. Some investors are a lot more hands on though and this could be a major downside.

Lastly, another downside is that since dividend payouts are 90% or more, the REIT is limited in terms of growth. They only have a maximum of 10% that they can reinvest in the fund in terms of new properties, renovations or any other improvements. That means your shares won’t appreciate as much as a typical investment.

Where to Find REITsREITs Results in Webull

REITs are found anywhere stocks are traded. Here’s a screenshot from Webull which offers the ability to trade stocks, ETFs, and REITs with no commission costs. Also, you receive a free stock valued from $8-$1000 when you deposit your first $100.

So as you can see, you can select Residential, Commercial and even Specialized REITs which give you the ability to invest in whichever ones you like. I personally focus on the residential and commercial since I prefer broader real estate investments in the stock market.

Once you select one of the REITs categories you want to explore, you can sort it to find the highest dividend yield or sort by price performance depending on which investment metric is more important to you.

Overall REITs can be a great addition to any stock portfolio and they can even standalone as a great way to start investing in real estate with less money than traditional real estate methods.

Crowd Funding – Private REITs and Funds

I chose to mention publicly traded REITs first because they were the easiest to transition to from the majority of this site’s content which focuses on investing in the stock market. I chose to right about Crowd Funding next because if you understand the principles of public REITs, crowd funding will make sense as well.

What is Real Estate Crowd Funding?

Similar to REITs, you are buying shares of real estate so the cost of entry is much lower than buying actual real estate on your own. The major difference though is that instead of trading on the stock market, you get to see the actual investment properties you are investing in typically and choose them if you prefer. So let’s go over some pros and cons of crowd funding. Two of the most well-known Real Estate crowdfunding sites are Fundrise and RealtyMogul.

Why Invest in Real Estate Crowdfunding

Generally you will higher returns when you invest in private crowdfunding sites. Usually there are fewer fees that affect the investment. Although you may pay 1% to have a private crowdfunding site managed and public REITs have lower fees, it typically costs less to manage a Private REIT or Fund and therefore your overall returns tend to be higher.

Another benefit to Real Estate Crowdfunding, similar to REITs are there is a lower cost entry than typical real estate. Since you’re buying shares, you can invest with as little as $5000 on Realty Mogul and as little as $500 on Fundrise.

Thirdly you can choose portfolio’s that focus on receiving high dividends quarterly right to your bank account or you can choose portfolios that focus on higher property appreciation and smaller dividends. This means you can choose a long term investment model or a supplemental income model. Obviously, there’s a balanced option typically that gives a healthy balance between dividends and appreciation.

Here are some investment opportunities found by investing at Fundrise:fundrise portfolio

Drawbacks of Real Estate Crowdfunding

Since the benefits of crowdfunding is very similar to public REITs, they share some same drawbacks as well. First of all, you still have less control over each property since you are sharing it among many other investors.

Also, what separates crowdfunding sites from public traded ETFs and REITs is the fact that they are harder to withdraw. Just like in buying actual real estate, crowdfunding with private REITs and funds is designed to have less liquidity. This means, you can not just click a button and your money is pulled out and send to your bank within 2-5 business days like a stock brokerage. Some sites require that you have your money invested for fixed terms such as 2 years or 5 years. You can still receive your dividends every month or quarter depending on the company but you will not be able to withdraw your original investment until the time is up. Fundrise has a new policy that does allow for withdrawal earlier but it still takes at least 60 days to have your money credited back to your account.

Last, you will still be taxed under typical dividend rates whereas if you had physical property, you would only owe taxes on the sale of the property.

Turnkey Rental Property

So the first two options I’ve presented are extremely passive and require only a little money down. The last option does require more money up front but offers a better approach than trying to find properties from scratch and takes away a lot of the stress of locating a perfect investment property for rental income. Turnkey rental properties are properties that are vetted as income properties and are either move-in ready as a rental unit or already have tenants living in the unit with a lease.

One popular site that I’ve seen a lot about and am I considering giving a try is Roofstock. Roofstock has a full listing of properties similar to a typical real estate site except it focuses on single family rental homes.

Roofstock Search Results

Pros of Turnkey Rental Properties

There are a lot of pros to building an empire of your own properties. An obvious benefit is that you own the profit without splitting it among other investors.

You have full control of your investment. Once you invest in a rental property, you decide when to renovate, change rental rate and how to overall manage the property. You also get all the reward of owning the property from rental income to property appreciation.

Another benefit is that the United States treats real estate investors rather well when it comes to taxes. You’ll need to look up local tax regulations that apply to you but there are generally a lot of write-offs for taxes when it comes to owning real estate. You can sometimes write off property taxes and mortgage insurance which helps out against the taxable income that you make from rent.

You get to choose how to manage it. Take the reins and manage it yourself or pay a local management company that knows the neighborhood to manage rental collection, maintenance, showings between residents, and tenant relations. It’s up to you!

What are Downsides of Turnkey Properties?

Well, since you benefit from all the reward, you also get to acquire all the risk associated with owning physical property. If the property goes down in value, you still have a mortgage to pay or if you paid cash, you suffer from the depreciation in value.

Another downside is that you do need to come out-of-pocket quite a bit for each investment. Typically, you’ll need 20% down for the purchase price to finance the property and possibly additional fees such as closing costs and the service fee for using a turnkey property broker. The reason I have this as an option for investing with little money is because there are properties listed as low as $25,000-$50,000 which would require a little over $10,000 as an initial investment which is still lower than most private purchased properties.

The last risk is that your investment is not very diverse. If you own one turnkey property that has a large repair or is vacant longer than anticipated, you could find your finances affected greatly. Make sure you are doing your due diligence and have enough money in reserves to protect yourself in the event of unplanned issues that could come up similar to your primary residence.

So which method is the best?

woman invests in real estate

Honestly, all three are viable options for an investor. I would say if you do not have very much money to invest, get started with a public or private REIT by trading on a brokerage like I mentioned or by joining a crowdfunding site such as Fundrise.

If you are looking for returns that typically beat the stock market but want to ensure a diverse portfolio at a lower price, also consider REITs and Crowdfunding.

If you have enough money to get started and want to be hands-on with your investment, take a look at Roofstock and decide for yourself by looking at a few properties if being a rental property owner is right for you!

If you’ve had any experience with any of these methods, please comment below so we can all grow in our journey to wealth. Did you find success in all the right places using one of these models or did you learn an expensive lesson by making a mistake? It can happen to any of us and I know by sharing our experience we can all grow together as a community!

So, now that you know some more options in real estate, let’s start investing!

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