Traditional wisdom suggests it’s usually a good move to invest in real estate—but how do you that if you don’t have much money? After all, not everyone has huge stacks of cash lying around, waiting to be spent on an investment property. Fortunately, there are a few ways you can realize some upside from the hot housing market even if you only have a few hundred dollars to work with. Here’s a look at your options.
Invest in real estate using crowdfunding
With crowdfunding, you can directly invest in the ownership of a property or a company through platforms that have minimums as low as $500. Since the number of wealthy investors is limited compared to those with less money, the idea is that large sums of money can be raised quickly from a larger pool of individual investors—kind of like a Kickstarter. There are a bunch of platforms that do this, including Fundrise, PeerStreet, and RealtyMogul (Investopedia has a good overview of the options here).
In an ideal scenario, you could make a lot of money by investing in a company that later goes public. But as Nerdwallet points out, there are a lot of downsides to this method too, like annual fees that can exceed 2.5%, taxes on dividends, and the difficulty in selling real estate assets quickly. Plus, you have to be good at spotting good investment opportunities on a case-by-case basis.
Invest in a REIT (real estate investment trust)
REITs allow you to invest in companies that own commercial real estate such as office buildings, apartments, and hotels. Many REITs are publicly traded on major securities exchanges, allowing investors to buy and sell them like stocks.
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The great thing about REITS is that they’re required to pay out 90% of their profits to investors in the form of dividends, without you having to deal with the hassle of actually managing a property. The downside is that REITs are vulnerable to downturns in the market, and that impact can be made worse by those 90% payouts limiting their ability to grow by investing in more properties. Plus, the dividends are taxed as income.
On the other hand, they’re easy to invest in—you just have to set up an account with a brokerage. Depending on the type of REIT you invest in, the minimum investment can be as little as $2,500, or even less.
REIT exchange traded funds or Real Estate Mutual Funds
Both REIT ETFs and real estate mutual funds allow you to invest in a basket of real estate securities that trade on an exchange, although ETFs are easier to deal with if you’re a more active investor. The costs are relatively low—$1,000 can get you started.
This type of investment can be a good option if you prefer to passively track indexes for the larger real estate market, as opposed to more closely monitoring the performance of a specific property. Of course, as with REITS, this approach also leaves you vulnerable to declines in the market.
Buying property with an FHA loan
This is obviously more expensive than the previous options, but you can buy property with an FHA mortgage for as little as 3.5% down (which amounts to $10,500 on a $300,000 home). And since these federally-backed loans are designed to help low- to moderate income earners buy homes, they come with less stringent credit score requirements than other private mortgage lenders.
While you can’t use an FHA loan just to buy an investment property, by using one to purchase your principle residence, you’ll be putting your money into an asset rather than blowing it on rent, or even just freeing up cash you would have put into a larger down payment to explore one of the options above. Plus, there are no restrictions on renting out rooms in your new home, which would allow you to make some passive income on top of your initial investment.
