Real estate investing is a great way to build wealth and diversify your portfolio. And there are now more ways than ever to invest in real estate, even for those without the cash necessary to buy property outright.
In this article, we’ll look at:
- Why it makes sense to invest in real estate.
- The best ways to invest in real estate with little money (and often without taking on debt).
- Some of the common mistakes to avoid.
Why Invest in Real Estate?
If you’re starting with little money, why invest in real estate?
First things first: real estate shouldn’t be your first investment. Most people will get optimal results making sure they’re reaching their employer’s 401(k) match or paying off high-interest debt.
But if you’ve already started building a portfolio, then real estate can provide a good way to diversify your assets.
In the past, this option was only available to investors with enough cash on hand to buy property outright. But today, there are a number of different ways to get started investing in real estate with as little as $10.
Some of the benefits of investing in real estate with little money include…
#1. Low-Risk Learning
As your net worth grows over time, you’ll have more opportunities to invest in real estate. Starting now with small amounts of money gives you a chance to learn about real estate and to make mistakes without risking huge sums of money.
#2. Solid Returns via Income and Appreciation
The fact that you don’t have a lot of money today doesn’t mean you shouldn’t invest. In fact, it’s the opposite: the earlier you start to invest, the better. The longer you allow for compound interest to work in your favor, the more your wealth will grow.
To illustrate the power of compound interest, an investment of $50 a month compounded at a rate of 7% over 20 years will grow to $26,248.
That same investment of $50 per month will grow to $132,056 over 40 years.
As Warren Buffett is famous for saying, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Real estate as an investment class has performed well over time — not as good as stocks, but better than bonds in recent history.
To get a sense of how real estate performs overall, the chart below shows the returns for the last five years (as of October 2021) of Vanguard’s Real Estate ETF (VNQ), Total Stock Market Fund (VTI) and Total Bond Market Fund.
VNQ is a combination of some of the largest Real Estate Investment Trusts (REITs).
A REIT is simply a corporation that generates revenue from income-producing real estate. The goal of Vanguard’s VNQ is 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, I wouldn’t expect a large general-purpose real estate fund like Vanguard’s to outperform stocks over an extended period of time (or even to provide much diversification).
But there are dozens of different ways to invest in real estate, including commercial properties, residential real estate and investing in real estate debt and/or equity.
While the largest publicly traded REITs haven’t provided much diversification from the stock market, that’s just one type of real estate investment strategy. And it’s in the different real estate investing strategies (discussed below) that you can find something that does provide portfolio diversification.
The Best Ways to Invest In Real Estate With Little Money
There are many ways to get started in real estate investing. Here are a few of the most popular.
#1. Online Real Estate Investment Platforms
There’s a lot of innovation happening right now, with dozens of online platforms that allow you to invest in real estate. Most of these are considered crowdfunded real estate platforms, where you’re investing directly in properties alongside other investors.
One of the biggest crowdfunded real estate platforms is Fundrise, where you can get started with as little as $10.
Fundrise enables you to invest in real estate through funds called eREITs.
There are a variety of eREITs to choose from. Some target specific investing goals, such as income or growth, while others target a specific geographic area (i.e., the west coast).
Read our Fundrise review to learn more.
Another low-minimum real estate investing platform is Arrived Homes. While Fundrise invests in larger (often multi-million-dollar) projects, Arrived Homes is a crowdsourced investment platform for single-family homes.
With a minimum investment of $10, it’s an ideal place for someone looking to learn the ins and outs of residential real estate. Instead of investing in one fund and letting portfolio managers allocate your investment, Arrived Homes enables you to evaluate and directly invest in individual properties.
Learn more in our Arrived Homes review.
#2. Publicly Traded REITs, ETFs and Mutual Funds
REITs, real estate mutual funds and ETFs all offer beginner-friendly and low-cost ways to get started in real estate investing.
- REITs are individual corporations that generate revenue from REITs by investing directly in properties.
- Real estate mutual funds are funds that invest in REITs, real estate stocks, or real estate indices.
- ETFs are similar to real estate mutual funds except that they can be bought and sold at any time, while mutual funds are only priced (and then are able to be sold) at the end of each trading day.
What these methods have in common is that in each case, you’re buying a security that consists of a basket of properties. It’s similar to investing in a stock mutual fund, except that instead of individual stocks you’re buying 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 goals and investment types. While Vanguard’s REIT (mentioned above) has the overall goal of tracking the real estate sector (which it does by investing in individual REITs), there are other REITs that target income-generating commercial properties or a specific area of the country.
One advantage of publicly traded REITs, compared to investing through a crowdsourced platform like Fundrise, is liquidity. Shares in a publicly traded REIT can be easily sold on the open market whenever you’re in need of cash, while many of the platforms mentioned here have restrictions on when and how you can sell your investment.
While being publicly traded allows for greater liquidity, the price of most REITs tends to follow the overall stock market.
So if there’s a big selloff in the market, REITs tend to go down as well. While privately 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 that into an investment property.
Options here include:
- Airbnb and VRBO. Generate income renting out your home, apartment or even a single room inside your home.
- Neighbor. Allows you to rent out spaces in your home for storage, such as a garage or basement space.
Renting out an existing asset through Airbnb or VRBO is the ideal way to start for someone who wants to get into vacation rental property investing.
Renting out your home or apartment for a weekend a month allows you to understand how these platforms work, and then when it comes time to own a vacation property of your own, you’ll be better equipped to evaluate the potential income — not to mention, you’ll have valuable experience in working with renters.
Lean more in our beginner’s guide to starting an Airbnb business.
#4. Purchase a Low-Cost Property
While we’ve discussed the lowest of low-cost ways to get into real estate investing, it is possible to own properties outright without bringing tens of thousands of dollars to the table.
Only a 3.5% down payment is needed for an FHA loan. Multi-family properties do qualify for FHA loans, so you could plan to live in one unit while renting out the other(s).
This is a strategy often referred to as house hacking.
Of course, this also greatly increases your risk, because if the property decreases in value, you may owe more than it’s worth.
Recommend resource: 15 Tips for Buying Your First Rental Property.
#5. Partner with Existing Real Estate Investors
Working for smart and accomplished individuals is never a bad thing. In the real estate investing world, a good strategy to learn the art is to find someone who has done what you’re looking to do and work for them.
You can offer value to this person by sourcing deals of your own and bringing them to the investor, often referred to as bird dogging.
Real estate wholesaling is another option, where you partner with an investor — such as a rehabber or flipper — who will buy the property and handle the renovations and selling process. The finder’s fee can be up to five figures for wholesalers, so with the right mentor, this can be a great way to learn the field, while making 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’re a buyer, what often leads to a property being undervalued — and therefore a good investment — is the fact that the seller has way too much debt and no way to cover their costs besides selling. Often, they’re actually forced to sell because of that debt burden.
As a potential real estate investor, you never want to be in the position of being forced to sell.
A lot of people get into real estate investing with the idea that you need to borrow money to make money, but the truth is it’s often better to not 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 be making them if there’s a high likelihood you’ll need cash in the short-term.
That’s why you’ll want to have a fully-funded emergency fund before jumping into even these lower-cost alternatives.
If you’re investing in actual properties on your own, there’s a lot more that can go wrong. Repairs are needed, good tenants can be hard to find, and even then it’s not always easy collecting rent.
Real estate is no place for operating on thin margins because so much can and will go wrong. When it does, being short on cash can force you to sell at an inopportune time (or to take on debt), which can lead to big losses.
#3. Not Trusting the Numbers
A lot of first-timers want to operate off of their gut. The perfect property becomes available, and while the numbers say the property is overvalued or won’t produce income, they still think it’s the right price based on what they know about the local market.
Here are a few real estate investing rules of thumb that have stood the test of time:
- Earn 2%. Buy rental properties that generate monthly income of at least 2% of the purchase price — e.g., a $100,000 home could be rented for $2,000 per month.
- Expect costs of 50%. Go in with the expectation that operating expenses — like maintenance, insurance, utilities, and taxes — will equal 50% of the property’s gross income.
- Don’t spend more than 70%. A key rule for flippers is to not spend more than 70% of what you expect the house to sell for, including the price and costs of renovations.
Get a more detailed look at these rules of thumb in the video below:
Real Estate Investing With Little Money: Closing Thoughts
After you’ve done your research and developed a game plan, it’s time to execute.
No matter how much money you have available to invest in real estate, the best way to start is small and with little risk — whether that’s through a crowdsourced marketplace or directly in the local market.
Regardless of how much you have to invest, it’s important to remember that real estate is a long-term game where patience and the right knowledge are key.