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How to Invest in Real Estate if You're Not Rich

SmartAsset: How to Invest In Real Estate With Little Money
SmartAsset: How to Invest In Real Estate With Little Money

Real estate investing can seem daunting. But it doesn’t have to be that way. If you want to invest in real estate with little money, there are four common ways you can start building your portfolio. Here’s a breakdown from the cheapest and least risky to bigger ticket investments.

If you’re interested in making a real estate investment, a financial advisor could help you figure out which type is best suited for your financial needs and goals.

Here are four common ways you can start investing in real estate with little money:

1. Rent a Room

The old practice of getting a roommate has been rebranded as a form of “house hacking.” Whatever you call it, if you need extra cash flow, one common method is to find someone to live with you. While this may not seem like a way to invest in real estate, the extra money you’re charging from rent can be used for your mortgage or for a down payment on an investment.

By renting a room, you’re also getting experience in being a property manager. You’ll have to vet applicants, collect rent and manage any issues that arise. Plus, if you have a basement or back room with its own entrance, renting it out can work even better. A little separation of space can go a long way in

Maybe you’re not ready for a long-term renter in your home? Consider putting your space up on a platform like Airbnb or Vrbo. These platforms allow you to dip your toe into renting out your space without committing to a housemate.

2. Invest in a Real Estate Investment Trust (REIT)

Another way to invest in real estate with little money is through a REIT. A REIT is a company that either owns rental properties or the mortgages for them. What’s interesting about REITs is that, as part of their structure, they’re required to pay out 90% of their earnings as unqualified dividends.

In fact, historically REITs outperform the S&P 500. According to Cohen and Steers, an actively managed REIT portfolio can see an average yield of 10.6% over 15 years. If your REIT allows a dividend reinvestment plan (DRIP), you can see your initial investment compound over the years. For instance, an initial investment of $500 with an annually compounding rate of 10.6% would be worth $2,266.19 after 15 years.

REITs allow you to get in on the action of a booming real estate market without the large initial investment. However, that doesn’t mean they’re free from risk. If your money is a mortgage REIT and mortgage rates skyrocket, it may become less profitable. Likewise, if the REIT is mismanaged, you could see your earnings diminish, or worse.

3. Turn to Real Estate Crowdfunding

SmartAsset: How to Invest In Real Estate With Little Money
SmartAsset: How to Invest In Real Estate With Little Money

If you’re wondering how to invest in real estate with little money, look no further than crowdfunding. While you may not think of real estate when you think of crowdfunding, the truth is it’s a great way to start investing in real estate. Crowdfunding is done through specific sites online.

With some sites, you’ll need to meet a minimum investment. Sometimes this can be several thousands of dollars, but with many sites, it’s as little as $500. There are two main ways real estate crowdfunding works: buying shares in an investment property or helping fund a mortgage. Either way, you’ll receive a regular payment without the hurdles and hassle of managing the property.

Be careful, however. Crowdfunding isn’t as regulated as other investment types. Do your due diligence before investing your money in a crowdfunding program.

4. Buy a Multi-Unit Property as a Primary Residence

If you’re ready to own physical real estate, investing in a multi-unit property is a great place to start. Conventional and FHA mortgages allow you to claim a multi-unit property with 2-4 units as your primary residence if you live in one of the units.

While investing in a property like this is a big step, it may not be as huge of an upfront financial commitment as you think. If you have good credit, you can get a conventional mortgage with as little as 3% down. That means if you invest in a $300,000 duplex, you just need $9,000 to start.

Let’s work this example out further. Let’s say you take out a $291,000 30-year fixed rate mortgage at 6% interest. Not counting insurance or taxes, your monthly mortgage payment would be $1,744.69. Now let’s say you can rent the other half of the duplex for $1,500. That leaves you with only having to pay $244.69 for the rest of the mortgage payment.

Of course, with owning a multi-unit property comes all of the hazards of being a property manager. When there’s a plumbing problem in your tenant’s house, you’ll be called and will have to pay for the repairs. You’ll also have to either pay to have the property maintained, or do it yourself.

Bottom Line

SmartAsset: How to Invest In Real Estate With Little Money
SmartAsset: How to Invest In Real Estate With Little Money

There are several ways to get started investing in real estate without having to be wealthy to begin with. This article has shown you how to invest in real estate with little money through renting out a room, crowdfunding, investing in REITs and buying a multi-unit primary residence. The good news is that there’s a lot of opportunity in the real estate world. Use these four methods as a jumping-off-point to start investing in real estate.

Tips for Investing

  • A financial advisor could help you put a financial plan together for your real estate investments. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • If you’re going to be investing in real estate, you need to be familiar with capital gains tax. Use our capital gains tax calculator to estimate how much you’re going to owe.

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The post How to Invest in Real Estate With Little Money appeared first on SmartAsset Blog.