If you want to invest in real estate but don't have a lot of expendable money, you're not alone. Many new investors understand the benefits of owning real estate but don't have tens of thousands of dollars in the bank to help them get started.
While having $20,000 or more will undoubtedly accelerate your real estate investing career, it's not the only option. Several affordable investments allow people to invest in real estate, even on a tight budget. Let's look at four cheap real estate investments so you can get off the sidelines and start investing.
1. Invest in a real estate investment trust (REIT)
Real estate investment trusts are one of the simplest ways to get started in real estate investing because of their accessibility, liquidity, passive returns, and low cost of entry. A REIT is a company that pools money from multiple investors to buy or develop a variety of commercial real estate assets.
In order to benefit from several tax incentives, REITs must pay at least 90% of their net taxable income to their shareholders or investors, typically in the form of a dividend. This means the shareholder or investors receive a consistent and often higher than average return without having to actively own or manage the real estate themselves.
A REIT can be private (non-publicly traded) or publicly-traded. Publicly-traded REITs are the most straightforward investment option and are as simple as buying shares in the REIT of your choice from your current brokerage account.
Private REITs have different required minimum investments and can’t be as easily traded as their publicly traded brethren. Some start as low as $500, while others require tens of thousands to hundreds of thousands of dollars as a minimum investment. For this reason, the private sector is typically harder to gain entry to. However, there are new platforms that are making non-traded REITs more accessible to those who want to start investing in real estate on a budget.
2. Invest in a REIT exchange-traded fund (ETF)
There are more than 225 publicly-traded REITs on the stock market, which means there are a lot of options. If you are starting to invest in real estate on a budget, may want to consider an investment that gives more diversification than any single REIT. You can do that by investing in multiple REITS through a real estate exchange-traded fund (ETF).
An ETF is a fund that holds an interest in multiple asset classes and is designed to track a benchmark such as the stock market index such as the Dow Jones, the S&P 500, or, in this case, an index that tracks REITs . When you buy a share (or shares) in an ETF, you invest in dozens of different companies. ETFs hedge risk by spreading your investment across multiple different sectors and companies. ETFs are one of the simpler ways to get exposure to real estate without having to make large upfront investments.
3. Make your home your first investment
Some real estate experts classify your home as a liability rather than an asset. After all, if you own a home, you pay for taxes, property insurance, maintenance, and possibly a mortgage. Put simply, it costs you money to own. But there are ways to offset the liability to potentially become an asset where the property produces income.
Think of Airbnb, the popular homesharing website, as an example: If you have additional space in your home, a garage apartment, or in-law suite, you could rent that space out as a short-term rental. The additional income could help offset some expenses of homeownership or help pay off any mortgage debt at a faster rate. Not all cities or specific neighborhoods allow this, so if you think this is something you’d like to look into, find out what your local zoning rules first. There are websites, like Airdna.co, rented.com, or VRBO’s calculator vacasa that offer free income calculators to help analyze the property’s income potential and viability.
If you don't own your own home yet, the first thing you need to do is save money aggressively. Even with various home buying programs that offer down payment assistance, you will still need to bring money to the table, anywhere from 3% - 10% in addition to being able to afford the cost associated with homeownership.
When you are ready to buy your first home, consider buying a duplex or a property that has the potential to rent an additional unit. This technique has become more and more popular as a way to participate in appreciation, take advantage of many tax incentives of owning real estate, and have rental income to cover the cost of your home each month. Think of how nice it would be to have a tenant paying your mortgage, while you get to live for free, or close to free.
If you don't want to live in a duplex or have to rent out part of your home, try taking advantage of one of the many first-time homebuyer assistance programs. Several programs will help you come up with additional funds for a down payment, reducing your investment to just a few thousand dollars.
Another option to start investing in real estate with little upfront capital is by wholesaling. This specific niche of real estate investment allows investors to make money from a real estate transaction without ever having to buy a property themselves.
When you wholesale a property, you find an off-market seller and get their property under contract to purchase at a set price. Typically this is a low value. You then find a third-party buyer who has cash available to purchase the property and assign the contract to them at a higher price. You get paid the difference between the higher sale price paid by the buyer and the lower purchase price from the seller. You never have to buy the property, nor do you need to have the money to purchase the house. For the lack of a better term, you make a finders fee.
While there are expenses with any investment, wholesaling is relatively cheap. The most considerable cost would be marketing. Sending letters, putting out bandit signs, or advertising online can add up quickly, and the most successful wholesalers spend a lot of money on their marketing.
Wholesaling is an active real estate investment strategy, meaning you would be doing the work to find, acquire, and sell the property. It is very time consuming and requires consistent work and effort. It takes time to learn how to accurately wholesale properties, find off-market inventory, analyze potential investment opportunities, talk with sellers, and grow your network of buyers.
For this reason, this method is not for everyone and is best for those willing to put in “sweat equity” in order to get their foot in the door of real estate investing. Many real estate investors begin here because they can get started with very little money upfront. After completing a few wholesale deals, they often can buy an investment on their own.
As you can see, there are several options available if you want to start investing in real estate on a budget. Some methods may appeal to you more than others, so determine which of the five cheap real estate investments best fits your current goals and get started.