If you’re looking to diversify your investment portfolio, real estate investing is one of the most popular and lucrative opportunities. Many investors assume that you need to have thousands of dollars in order to get in on the action, but there are ways to invest in real estate with little money.
Many real estate investors have reached financial freedom through rental properties or investment properties, so it’s easy to see why it’s such an attractive venture.
9 Ways to Invest in Real Estate with Little Money
Here are nine great ways to get started with real estate investing with little cash.
- Real Estate Investment Trusts (REITs)
- Real Estate Crowdfunding Platforms
- Hard Money Lenders
- House Hacking
- Seller Financing
- Borrow Your Down Payment Carefully
- Rent Out Space in Your Home
- Live-In House Flipping
1. Real Estate Investment Trusts (REITs)
If you don’t have much money to put down on a property, you can instead invest in REITs.
Real estate investment trusts (REITs) are similar to mutual funds in that they are companies that own, manage and finance commercial real estate properties.
Much like the stock market, real estate companies will sell shares of commercial properties to individual investors. In exchange, individual investors can receive dividends on the properties’ returns.
REITs are popular for beginner investors because they are more liquid than other forms of real estate investing. If the REIT is publicly traded, you can purchase and sell your shares through a brokerage firm without much hassle.
However, like any investment, REITs are not free from risk. You may see returns diminish if mortgage rates rise or if the trust is mismanaged. Plus, many REITs have minimum investments, which can inhibit some investors from participating in the trust.
DiversyFund is our top-ranked crowdfunding company because they only invest in multifamily cash flow positive properties in high growth areas, which is one of the least risky types of real estate.
2. Real Estate Crowdfunding Platforms
Another popular way to discover real estate investment opportunities is to join a real estate crowdfunding platform.
In many ways, crowdfunding platforms are similar to REITs; you pool your money together with other investors to invest in various types of real estate. Property management companies run the properties you invest in, so you don’t have to worry about the tedious tasks associated with managing properties.
Crowdfunding platforms are desirable as initial investments because they often have lower barriers of entry than other real estate investment options.
Platforms like Fundrise and HappyNest let you start with as little as $10. However, these platforms can have fees as high as 2.5%, which can eat into your investment earnings.
3. Hard Money Lenders
Have you ever watched Fixer Upper and thought, “I can do that?” Many house flippers rely on hard money loans to close a real estate deal.
Hard money loans are loans for real estate deals that come from individual or group investors rather than from financial institutions.
Because these loans come from private investors, they usually have more lenient lending requirements than conventional mortgage lenders. This means they are more likely to back riskier projects or lend money to someone with a low down payment.
The downside to hard money loans is that they usually charge high-interest rates because the investor is taking a more significant risk. They also require the borrower to cover all the application fees, appraisal costs, closing costs, or any other cost associated with purchasing the property outside its listing value.
This can be tricky for investors with little money to put together for a down payment.
4. House Hacking
If you are open to owning and operating rental properties, consider house hacking to get into real estate investing. The best part? If you do it correctly, you could score free housing.
House hacking is when you purchase a multi-family property, use one of the units as your primary residence, and rent out the others. You can use the income to pay your mortgage and other landlord expenses by renting out the remaining units. You can even use whatever leftover money you have to save up for your next investment property.
The brilliance of house hacking is that you can likely qualify for an FHA loan because your investment property is owner-occupied. This will only require you to put down a 3.5% down payment, which can be a game changer for starting from scratch.
Have you ever driven down the road and seen a sign that reads, “We buy houses for cash?” Well, it’s a little more involved than handing over your keys for a wad of cash. The people who put up those signs are called wholesalers, and they find properties and negotiate cash deals, often at or below market value, for motivated sellers. Don’t worry though; you won’t be the one putting cash on the line.
When a wholesaler negotiates a sale, they come to an agreed-upon “as is” purchase price for a buyer to purchase the house. You then “assign” the homeowner a contract that outlines the terms and includes a wholesaler fee, typically between $5,000 – $15,000. When you make the sale, the seller gets their cash, the buyer gets their new house, and you get your wholesaler fee. Everybody wins.
Becoming a property wholesaler is a challenging side hustle. It requires extensive real estate knowledge and the ability to find motivated sellers through cold-calling, direct mail, and other marketing channels. Wholesalers have the potential to make a lot, but it doesn’t come without a lot of work.
6. Seller Financing
Seller financing is a great way to sell or buy property if you don’t have a down payment or can’t secure financing with a financial institution due to your credit history. Also known as owner financing, seller financing is a type of loan in which the seller agrees to manage the mortgage process rather than a bank or credit union.
The lender (homeowner) will allow the buyer to make a down payment and mortgage payments directly to them. The terms of the agreement are laid out in a formal contract that states payment amounts, interest rates, etc. This is meant to be a short-term mortgage solution for both parties. Instead, it gives the buyer time to rebuild their credit score so they can secure a mortgage with a financial institution and repay the original loan.
One apparent risk of an arrangement like this is the possibility of the buyer defaulting on the loan. This is where mortgage insurance can come in handy. Mortgage insurance is purchased by the buyer and protects the lender if the borrower cannot make their monthly payments. You can establish this as a term of your seller financing agreement to protect yourself in the event of loan default.
7. Borrow Your Down Payment Carefully
You can always borrow your down payment if you can put no money down on a home. But be sure to do so carefully.
Many still recall the infamous housing bubble that fueled the great recession. Part of the problem was people who borrowed 100% of the money they needed to buy a house. Nowadays, mortgages don’t let you borrow your down payment, but there are still options.
One of the ways people borrow money for their down payment is to tap into their 401(k). Borrowing against your retirement savings means you are both the lender and the borrower. Because of this, many mortgage lenders don’t include this payment in your overall debt burden, which can help when qualifying for a mortgage.
You can also borrow against your home’s value through a home equity line of credit (HELOC.) A HELOC is a line of credit that taps into the value of your home and allows you to borrow against it. You can use a HELOC to fund a down payment for an investment property and use the earnings to pay back the balance.
8. Rent Out Space in Your Home
You don’t need to buy a whole new house to get into real estate investing. If you own a home with extra living space, you can get started by renting out rooms.
Renting out rooms in your home is a concept introduced previously to help travelers or renters find cheaper accommodations. Airbnb and VRBO have been a go-to resource for people with guest houses or extra rooms for years.
But you don’t need a separate bedroom to rent out space in your home. If you have additional storage space, you can rent that out to people looking for a cheaper place to store their stuff. There are plenty of options for earning rental income and making the best use of unused space.
9. Live-In House Flipping
This one’s for the true Chip and Joanne Gaines fans. If you think you’ve got the handy skills to flip your own home, live-in house flipping is a great way to increase your home’s value.
The difference between live-in and regular house flipping is that you’re living in the house rather than buying a beater and flipping that. You can also think of it as investing in your current home to raise your home’s value.
You don’t have to take a sledgehammer to the wall to make valuable renovations. Sometimes, updating cabinetry, tiles, and appliances is enough to increase your home’s value. Obviously, you will need some renovation skills to pull this off, but it can be a fun project and a great way to boost your property value.
Frequently Asked Questions
How much money should I have before investing in real estate?
You don’t need a lot of money to invest in real estate. If you want to get started on a crowdfunding platform, you can begin with as little as $10. Other investment options, such as wholesaling or REITs, may require anywhere from $500 – $1,000.
What are the tax implications of real estate investing?
One of the critical factors in determining the tax implications of your real estate investment is how the property is classified and used. Understanding how your property is treated under rental real estate activities can help you understand the tax rates you’ll face.
Can I invest in real estate with bad credit?
You don’t need to qualify for a loan to invest in real estate. You can include REITs and crowdfunding platforms in your investment strategy for passive income that requires no credit check.