Buzz
Conventional advice often encourages investing in real estate, but what if you don't have much capital? Not everyone has a large sum of money set aside for investment. Luckily, there are affordable ways to tap into the booming housing market, even if you're only starting with a few hundred dollars. Let's explore your options.
Invest in real estate through crowdfunding.
Crowdfunding allows you to invest in either the ownership of a property or a company through platforms that require as little as $500. The concept works by gathering large amounts of capital from individual investors, as wealthy investors are fewer in number. This method is similar to crowdfunding sites like Kickstarter. Popular platforms include Fundrise, PeerStreet, and RealtyMogul, with Investopedia offering a great guide to explore more options here.
In an ideal situation, investing in a company that eventually goes public could yield significant returns. However, as highlighted by Nerdwallet, this approach has several downsides, including annual fees that can exceed 2.5%, taxes on dividends, and the challenges of quickly selling real estate assets. Furthermore, you need to have a keen ability to identify strong investment opportunities on a case-by-case basis.
Consider investing in a REIT (real estate investment trust).
REITs enable you to invest in companies that own commercial properties such as office buildings, apartments, and hotels. Many REITs are listed on major stock exchanges, providing investors the flexibility to buy and sell them just like stocks.
A key benefit of REITs is their obligation to distribute 90% of their profits as dividends to investors, sparing you from the burden of managing properties. However, REITs are sensitive to market downturns, and the required payouts can hinder their ability to expand by acquiring more properties. Additionally, the dividends are taxed as income.
On the positive side, investing in REITs is relatively straightforward—you simply need to create an account with a brokerage. Depending on the type of REIT you choose, the minimum investment might be as low as $2,500, or even less.
REIT exchange-traded funds or Real Estate Mutual Funds
Both REIT ETFs and real estate mutual funds give you the chance to invest in a collection of real estate securities traded on an exchange, with ETFs being a more suitable option if you're an active investor. The costs are relatively affordable—$1,000 is enough to get you started.
This kind of investment may be a good choice if you prefer to passively track broader real estate market indexes, rather than focusing on the performance of a specific property. Like REITs, however, this strategy makes you susceptible to market downturns.
Purchasing property with an FHA loan
While this is more costly than the other options, you can buy property with an FHA mortgage with as little as % down (equating to $10,500 on a $300,000 home). These federally-backed loans are specifically designed to assist low- to moderate-income buyers, offering more lenient credit score requirements compared to private mortgage lenders.
Although an FHA loan isn’t available for purchasing an investment property, you can still use it to buy your primary residence. This way, you’re investing in an asset rather than wasting money on rent. Additionally, you’ll free up cash that would have gone into a larger down payment, giving you more flexibility to explore other opportunities. Plus, you can rent out rooms in your new home with no restrictions, providing a chance to earn passive income on top of your initial investment.
