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5 Ways to Invest in Real Estate With Little Money

Invest in Real Estate with Little Money
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Investing in real estate can be pretty lucrative, but despite the potentially high returns, many investors shy off from investing here because they figure it's pricey or quite complex.

But they couldn't be more wrong. You can invest in real estate without spending thousands of dollars.

Here are five ways to invest in real estate with little money:

  1. Invest in a rental property.
  2. Buy real estate investment trusts (REITs).
  3. Flip real estate properties.
  4. Become a member of a real estate investment club.
  5. Crowdfunding real estate platforms.

In this article, you will find detailed information on how you can invest in real estate with minimal funds - even without prior knowledge about real estate investments. You will also learn about the benefits, risks involved, and why you should consider investing in property.

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How to Invest in Real Estate

Real estate investing involves buying and selling both land and buildings to earn a profitable income. This includes vacant land, apartments, commercial buildings, shopping centers, and warehouses.

While such investments could entail using enormous amounts of capital, there are ways to invest in this sector with minimal funds. Let's unpack some of the ways you can do this.

1. Invest in a Rental Property

Buying a rental property is one of the principal ways of investing in real estate. You need to understand your real estate market pretty well, though. While this might sound like an insurmountable feat, it needn't be so.

You see, there are two ways you can go about investing in rental property:

Invest in Long-Term Rentals

You can purchase a single-family home that you can rent out for a year at the minimum. This will give you a regular monthly income that you can use to offset any rental-related expenses.

Owning a long-term rental property also may provide tax advantages with depreciation and mortgage interest write offs.

Eventually, you get to recoup your initial investment. Alternatively, you can decide to buy the property, hold, and later sell it for a profit. This way, you get to pay down your mortgage while increasing equity - with the rent income.

Invest in Short-Term Rentals

Short-term rentals like Airbnb cater to tenants who rent your property for short durations, such as overnight stays. The site also pre-screens potential renters.

You could invest in a property solely meant for this purpose or list your home or apartment when you're away. But with limited capital, the best option is to rent out a single room. So if you happen to have a spare one, go for it.  

When buying rental property, it's advisable to conduct a market analysis first and consult real estate professionals. Location is critical, so ensure you select your property from a prime area to reap maximum benefits.

Once you buy your first property, you'll find it much easier to buy more in other locations to diversify your real estate portfolio.

It's important to note that owning rentals or being a landlord can be quite labor-intensive since you need to look for tenants, handle all repairs and ongoing maintenance. You might also need to have a lot of time on your hands to deal with tenant issues - unless you employ a property manager.

2. Buy Real Estate Investment Trusts (REITs)

For newbie real estate investors, REITs provide an easy, affordable, and convenient way to venture into the real estate market. Better yet, they offer potentially high yields. 

With REITs, you get to invest in property without owning land or a physical building which makes the investment highly liquid since cashing out REITs is fairly straightforward.

Like stocks, you can buy or sell publicly traded REITs at the stock exchange through a trust or corporation, which then purchases the property. You can also use a brokerage firm.

As the property appreciates in value, you receive dividends which you can choose to reinvest and grow your investment. 

REITs tend to focus on a particular type of real estate development, such as apartment buildings, hotels, malls, or hospitals. One thing to note is that REITs must distribute 90% of their yearly earnings from rents and leases as dividends.

So, as an investor, you have guaranteed returns. Furthermore, REITs don't pay corporate tax; hence their returns are even higher. 

Equity REITs are the most common type of REITs. They allow real estate investors to pool resources and fund the buying, construction, and eventual management of real estate developments.

Non-traded REITs are usually the reserve of high net worth accredited investors. Besides, they require a steep upfront investment and are typically not available at the stock exchange. 

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3. Flip Real Estate Properties

In real estate, flipping entails rehabilitating ready homes to suit modern tastes. Here, you buy an underpriced residential property in need of some attention, renovate it inexpensively, then resell it at a profit.

Once again, location is essential; hence you need to look for properties that are not too high end or too cheap to recoup your investment after fixing them up.  

To be on the safe side, the best thing to do is use a contractor experienced at estimating expenses or managing such projects. This is because you need to budget for repairs, upgrades, property taxes, and professional services like using a leasing agent or attorney. 

Alternatively, you could purchase an undervalued home that's in good condition hence requiring no renovations, and wait to sell once the market improves. Choose carefully and select the right property at the right place.

Often there are good reasons why homes are selling for less than market value.

One downside to this method is that there's a risk in holding the property for an extended period. This is because you end up making less money since you'll be paying a mortgage without bringing in income.

A better option might be to live in the house during its rehabilitation. 

Again, flipping could hold up your finances for long. This is because you have to go through fixing up the property, listing, selling, and closing the mortgage before you get a return on your investment.

4. Become a Member of a Real Estate Investment Club

Another way to dip your feet into the real estate world without the hassle of becoming a landlord is to join an investment group. Here, investors come together, pool resources, and purchase residential properties, such as apartments or condos, through a company. 

The company handles all maintenance and tenant management issues and receives a percentage of the rental income in return. This makes it an excellent opportunity for smaller investors to own property.

The investment group could turn into a legal entity with members as joint owners. This way, you can own individual units in multifamily housing and still earn an income from pooled rent when a unit goes vacant.

5. Crowdfunding Real Estate Platforms

Crowdfunding platforms enable you to invest in specific real estate development projects. Quite similar to REITs, the only difference is that after pooling resources, investors match with real estate developers in both commercial and residential real estate to fund development projects.

Investors need to be ready to commit to their chosen real estate investments for up to 5 years though depending on the platform, you could access some funds before then. Also, most platforms are only open to accredited investors and require steep minimum investments, at times above $25,000.

Still, these passive online investments are quite popular with smaller investors, too, since there are opportunities for lower investments. For instance, with an initial investment of as low as $500, you can invest with Fundrise.

This simple, low-cost real estate investment platform helps you build a starter portfolio and upgrade to a core plan on spending $1,000.

With CrowdStreet, you can either invest directly in commercial projects or go for a tailored portfolio. The latter allows you to diversify your investment across a range of real estate projects.

Crowdfunding platforms can deliver dividends on properties you would find hard to access as an individual. The returns are also pretty high though you might wait long for them.

However, unlike REITs, these investments are illiquid, which makes them somewhat challenging to sell and therefore riskier to invest in.

Reasons to Invest in Real Estate

One rule about investing is that you need to diversify your investments. This helps to spread your risk and minimizes the chances of losing your entire investment portfolio if things were to go south.

And what better way to diversify than to include real estate as part of your investment portfolio? 

Real estate investing also enables you to have a steady source of rental income that you can use to meet your expenses or other financial goals. What's more, this passive income is for the long term; thus, you can even save a nest egg for your retirement.

But other than diversification and extra income, real estate investments deliver a host of additional benefits such as: 

  • Financial security: The reliable cash flow that streams from real estate investments guarantees you lifelong financial security. What's more, property appreciates over time, while rents climb higher, affording you a comfortable life into your sunset years.
  • Tax benefits: Owning rental property makes you eligible to receive certain tax benefits or exemptions. For instance, as a real estate investor, you get taxed at a lower rate, thanks to your long-term investment. Furthermore, rental income is exempt from self-employment tax, and there are tax breaks for property taxes, depreciation, maintenance repairs, and legal fees, among others.
  • A hedge against inflation: Inflation reduces your money's purchasing power and prevents it from stretching as far as it previously would. Hence, high inflation results in a higher cost of living. Conversely, it leads to a rise in rental income, while property value escalates significantly. Inflation is thus a boon to real estate investors - unlike with other investments - since they receive increased cash flow.
  • Leverage funds: Unlike stocks, you don't need to pay the entire amount upfront or even use your own money when buying property. Instead, you can use leverage. Doing so also enables you to run multiple real estate projects since your funds aren't held up in a single project.
  • Help with mortgage: Your tenants can pay your mortgage. You see, each month, you receive rental income that's enough to pay for expenses with extra to cover mortgage payments.
  • Build equity: Paying down a mortgage raises the value of your property. This means you are building equity and, at the same time, increasing your net worth. This gives you leverage to purchase additional properties, improve cash flow and create long-term wealth. Additionally, you can cash out on your equity by selling the property.

How to Reduce the Risks in Real Estate Investing

The real estate market has its share of risks, but there are also strategies you can use to mitigate some of them.

Try the following:

  • Be prepared with an exit strategy in case the market turns, e.g., reside in the house you had planned to flip.
  • Always engage the services of a real estate attorney to receive legal guidance.
  • Get an experienced real estate professional or contractor to inspect each property you intend to buy.

Determining the Best Option for You

The best real estate investment option for you depends on several factors:

  • The amount of extra time you have 
  • The amount of capital you're looking at investing
  • How handy you are with home repairs
  • Whether you are okay with being a landlord and ready to deal with tenant issues 

That said, REITs provide a good opportunity for an investor who is not interested in acquiring physical property but would like to maintain a liquid investment. If you choose to go for rentals or flipping property, note that it's not always easy to find tenants or maintain full occupancy.

Finally, to be successful in real estate investing, it's essential to:

  • Use a simple strategy and keep your costs low
  • Research on property prices in your area
  • Form good relationships with local real estate agents
  • Understand the risks and opportunities of your local real estate market

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