Real Estate Investing
How to Invest in Real Estate with Little Money
Real estate investment is certainly an attractive proposition for almost all potential investors. Even those with little money to put in from the start. Typically speaking, that makes investing in real estate difficult or historically impossible. Times, however, are changing and there are a growing number of avenues to real estate investment with even the smallest of capital.
How to Invest in Real Estate with Little Money
It’s important to note that the title of this article is “How to Invest in Real Estate with Little Money” rather than with no money. You will still be required to put some money into the investment, after all, nothing truly comes for free. That’s especially true with investments. By definition, you have to invest something first.
In a traditional sense, the money you needed to invest in real estate was the downpayment that you would make as a deposit to secure a mortgage. Nowadays there are many various routes into real estate, and some mortgage lenders require remarkably small amounts of capital to use as a down payment, in some instances, they’ll even offer you 0% mortgages for a fee.
Investing in real estate appeals because it’s one of the leading passive income ideas of our current time. The property market is relatively stable worldwide and is seen as somewhat low-risk in terms of investment. The main question that has dogged wannabe investors for years is where to get the initial cash to start the journey. There are now a wide variety of other options beyond the traditional downpayment route.
Why You Should Invest in Real Estate
There are a variety of reasons to get into real estate investing, the majority of people start their journey with their own homes but these aren’t necessarily seen as working investments. If you’re considering investing in real estate for financial gain, these reasons why you should take the plunge should sway your decision.
The Risk Is Low
Investing in real estate is comparatively much lower risk than investing in traditional stocks or bonds. Investing in stocks is one of the highest-risk moves because your investment relies on the company continuing to do well and grow. Your investment can be held at the whim of the company’s board, or in some instances the company’s CEO (See Elon Musk and Tesla). Bonds are seen as lower risk than stocks but pay relatively low interest.
Property, however, is an actual thing. It is bricks and mortar, that physical asset remains in your possession. The land that the property sits on retains value too, and in most cases that land will appreciate in cost due to scarcity. Regardless of market conditions, your property will stay standing (bar natural disasters…) and will only depreciate if you choose to sell at a time when the market is low.
The Market Is Relatively Stable
The stock market is volatile, especially in recent times of global pandemics, war, and economic worries. Real estate is far more secure, the property market moves in a more predictable way. Yes, it does fluctuate based on larger economic events but at a slower pace. It would be unprecedented for a property to lose value dramatically overnight based solely on external market conditions.
Returns Are Competitive
There’s an argument that you shouldn’t compare property investment returns against, for example, stock market investment because the two don’t have a similar amount of risk. The investment trend tends to show that the higher the risk, the higher the reward. Stocks can be volatile and therefore gains and losses are high. Cryptocurrency is even more so. Property, however, tends to be more steady. Over the last 20 years, many areas see steady returns of between 6-8%.
There Are Many Finance Options
Investing in stocks requires the majority of your capital to be invested to see returns. Property, however, (due to it being a physical asset that banks can take control of) only requires a fraction of the total asset value to be invested.
You Are In Control
We alluded earlier to the property being your own investment, rather than relying on the whims of a company or government. This means that you maintain control. If you choose to refurbish or renovate a property you can be fairly certain that this will increase its value. The decision is entirely yours, meaning that when potentially lucrative opportunities present themselves you can reinvest appropriately at your leisure. Plus the exit strategy is as simple as selling the property and moving on.
9 Ways You Can Invest in Real Estate with Little Money
Online Investment Platforms
There are a growing number of online investment platforms that facilitate investment in property with incredibly small amounts of capital compared to traditional property investing. Take, for instance, Getaway. Getaway aims to give any investor the opportunity to own a share of incredible vacation homes around the US from as little as a $1,000 initial investment. Getaway source, purchase, renovate, and then manage properties. Investors get rental income generated by the properties, plus the added benefit of being able to vacation in any of Getaway’s properties at discounted rates. Higher initial investments yield higher returns, but with such a low entry point it’s accessible to the majority of investors.
Using A Lease Option
The lease option is a variation of a traditional property purchase. The property owner raises a premium on either a monthly or annual basis against the buyer typically as higher rental payments. From here the owner takes the additional accrued capital and puts it towards the purchase price. This allows investors to purchase at a lower initial rate but with higher monthly or annual fees.
There are many private loans available to the wider market, and this doesn’t mean turning to a loan shark. Yes rates will be higher than through banks, and the terms might be shorter, but they are a route to finance that comes with fewer regulations and often quicker approvals. What you gain in convenience you lose in higher interest rates so taking short-term loans only if they make absolute financial sense and can be paid off within the agreed term
Microloans are exactly as they sound, small loans vs say a high value mortgage that can be combined to fund the purchase of a property. Microloans can also be used to achieve traditional mortgages. They can facilitate acceptance by acting as a small downpayment (i.e 5% or less) but they do need to be paid back. As the loans are far smaller than traditional loans they are far easier to obtain.
Purchasing With A Partner
Going into property investment solo is an expensive process, and it means that all of the associated risks sit with you. On the other hand, going into the venture with a partner not only spreads the risk and accountability but also increases your buying power. Many people turn to a partner (personal or business) to purchase a property at a higher price than they would typically be able to afford. Some people are able to find partner investors who aren’t interested in the property itself but are interested in the potentially lucrative financial gains.
In many western countries, governments have created home-buying schemes that offer low rates to encourage people onto the property ladder. Take for instance the scheme from the U.S. Department of Agriculture (USDA), the Rural Development scheme. Applicable to rural areas as the name suggests, the USDA offers some loans with absolutely no downpayment whatsoever, 0%, but only if the property is situated in a town with a population lower than 10,000 people.
It’s not going to work for those who are looking to purchase in urban or densely populated areas but considering that the vast majority of the U.S. falls into the USDA’s classification it’s certainly worth considering.
Use Your Home To Generate Income
Widely known as House Hacking, many people are turning to their current homes as ways to build their investment funds. There are two typical routes into this. You already have the ability to purchase a single home and can leverage the space within it to generate income or you are renting and are able to convince a landlord to allow you to sublet part of the accommodation.
If you’re in the first position and can purchase a property you should aim for the home to accommodate multiple people, either single tenants renting bedrooms or a property that can be split into larger self-contained units. You then charge rent and save this income towards another property.
Don’t forget that if you’re using this method and the property is therefore likely your own residence you’ll qualify for preferential rates for loans vs traditional buy-to-let mortgages.
Real Estate Crowdfunding
Acting in a similar way to investment portals, such as Giveaway mentioned above, real estate crowdfunding works by a large collection of people pooling their money together towards the collective goal of owning a property. This property is usually then maintained by a chosen management agency that looks after the vested interests of all parties. Any profit made from the property is distributed proportionally to the initial investment.
Many of these crowdfunding companies require investors to be carefully vetted and accredited. This can sometimes close the door for many investors as some require net worths exceeding $1 million. Other similar options include the debate between fractional ownership vs timeshares.
The BRRRR Method
Probably one of the most popular ways to access real estate with little money. This method requires a deeper explanation.
The BRRRR Method Explained
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. You essentially purchase a fixer-upper, rehab it so that it is in a rentable position (ideally at a high level), successfully rent out the property, refinance the property so that you recoup your initial investment then repeat.
The rental income covers the cost of any mortgage repayments and you now have the capital to invest in a second property and then the process starts again. In an ideal world, when you refinance you’ll be able to cover the downpayment and refurbishment costs meaning that you won’t use any of your own capital. The beauty of the BRRRR method is that you’re able to grow your portfolio in a short period of time, you could even use the BRRRR method for vacation rentals.
It can, however, be a time-sink way of investing and often requires you to dedicate a high amount of time and effort to the process, especially if you’re trying to keep costs low by renovating the property yourself. You also have to be wary of the market conditions, should there be a market downturn you might find yourself in a position where refinancing isn’t an option.
The BRRRR method is incredibly effective but is, compared to the methods listed above, an expensive way to get into property investment. You still require the initial downpayment, we can’t say what that amount is because every home requires a different amount, but if you do your research there are bargains to be had.
It’s also worth considering that there are loans available that lend themselves to the BRRRR method specifically. So-called Fix-and-Flip loans can cover the vast majority of the home (up to 90%) but over much shorter terms than typical mortgages. That means months not years.
The BRRRR method is popular because it is, simply put, a great way to make money through real estate investment. That said, be sure to seek financial advice from professionals before taking the leap.
You’d be forgiven for thinking it takes a great deal of capital to get involved in property, but these methods show how you can invest in real estate with little money. They might not be conventional methods, but the world is changing and so are the ways for you to access lucrative investments.
- There are methods that cater to all budgets, from online investment platforms such as Getaway to the BRRRR method.
- Remember that real estate is a lower-risk investment than typical stocks and shares.
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