How to Invest in Real Estate Without Big Money
Conventional wisdom dictates that it is usually a good step to invest in real estate, but how do you do it if you are short on money? After all, not everyone has huge wads of money waiting to be spent on investment property. Fortunately, there are several ways to profit from the hot housing market, even if you only have a few hundred dollars to work with. Here’s a look at your options.
Invest in real estate with crowdfunding
With crowdfunding, you can directly invest in a property or company through platforms with a minimum of $ 500. Since the number of wealthy investors is limited compared to those with less money, the idea is that large sums of money can be raised quickly from a larger pool of individual investors – something like Kickstarter. There are tons of platforms out there that do this, including Fundrise, PeerStreet, and RealtyMogul (Investopedia has a good overview of the options here ).
Ideally, you could make a lot of money by investing in a company that goes public later. But as Nerdvallet points out , this method also has many drawbacks, such as annual fees that can exceed 2.5%, dividend taxes, and the difficulty of selling properties quickly. In addition, you must be able to find good investment opportunities on a case-by-case basis.
Invest in a REIT (Real Estate Investment Trust)
REITs allow you to invest in companies that own commercial real estate such as office buildings, apartments and hotels. Many REITs are publicly traded on major stock exchanges, allowing investors to buy and sell as stocks.
The great thing about REITS is that they are required to pay 90% of their profits to investors as dividends, without having to deal with the hassle of actually managing the property. The downside is that REITs are vulnerable to market downturns, and this impact could be exacerbated by these 90% payouts limiting their ability to grow by investing in more properties. Plus dividends are taxed as income.
On the other hand, they are easy to invest in – you just need to create an account with a brokerage company. Depending on the type of REIT you invest in , the minimum investment amount could be as little as $ 2,500 or less.
Exchange traded funds REITs or real estate mutual funds
Both REIT ETFs and real estate mutual funds allow you to invest in a basket of publicly traded real estate securities, although ETFs are easier to deal with if you are a more active investor. The costs are relatively low – you can start at $ 1,000.
This type of investment can be a good option if you prefer to passively track indices for a larger real estate market rather than monitoring the performance of a particular property more closely. Of course, as with REITS, this approach also leaves you vulnerable to market dips.
Buying real estate with an FHA loan
This is obviously more expensive than the previous options, but you can buy real estate with an FHA mortgage for as little as 3.5% (which is $ 10,500 for a $ 300,000 home). And because these federally backed loans are designed to help low- and middle-income people buy homes, they have less stringent credit rating requirements than other private mortgage lenders.
While you cannot use an FHA loan to just buy an investment property, using it to buy a primary residence, you will be investing your money in an asset rather than spending it on rent, or even just freeing up cash that you would have made a larger advance payment to explore one of the above options. Plus, there is no limit to renting rooms in your new home, allowing you to generate some passive income on top of your initial investment.