Want to invest in real estate, but don’t have large sums for downpayments? You are in luck. There are plenty of ways to invest in real estate with little money.
5 Proven Ways to Invest in Real Estate with Little Money ($500 or Less)
One of the easiest ways to build your wealth is through real estate. Everyone who has made some money vouch for real estate as a sure way to grow your wealth.
However, starting in real estate is usually a challenge for most people. It seems to cost an arm and a leg to get started.
Nonetheless, this should not discourage you. You can start real estate investing with very little money.
In this article, you are going to see some of the cheap ways to get started in real estate investing.
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Proven, Easy Ways to Invest in Real Estate with Little or No Money
Let’s get into some of the top ways to invest in real estate even if you don’t have large sums of money to invest.
1) Online Real Estate Investing Sites
Crowdfunding real estate websites have made it easy for people to dive into real estate. To boot, you do not need to have a lot of money.
These real estate investing sites are some of the best ways to invest in real estate to earn extra income (even on the go).
And one of the best crowdfunding real estate sites in the market is Fundrise. This platform is open to both accredited and non-accredited investors.
The Financial Wolves top pick is Fundrise. As one of the top real estate crowdfunding sites out there, you can invest for as low as $500 and they offer industry competitive fees.
If you are a non-accredited investor, you can check out these top non-accredited ways to invest in real estate crowdfunding.
How does real estate crowdfunding work?
To begin with, you will need to open an account with them. From there, you can choose the available investment options.
You can start with their Starter Portfolio which is the most popular for only $500.
To operate your account, you will be charged a management fee of 1%, while your account will earn an interest rate of between 8.7 -12.4%.
Pros of Real Estate Crowdfunding
- This method of investing gives you exposure to investing in real estate without being hands-on.
- There is a low barrier to entry. With as little as $500, you can get started.
- It is a good return on investment with annual interest rates of between 8.7 -12.4%.
- It is a great passive income strategy for investing.
Cons of Real Estate Crowdfunding
- If you are drawn to old fashioned real estate investing, you may feel a fish out of the water with this method. First of all, you will not be doing any site visits to know how your project is coming along. Also, the traditional pride of owning a real estate project is not there, which is a big draw for many people venturing into real estate.
This is yet another way to get into real estate. It does not demand the amount of time and expertise needed in traditional real estate.
It is, therefore, a recommendable approach for passive income strategy.
2) Real Estate Investment Trust (REIT)
REITs, or real estate investment trusts, are publicly traded companies that own, operate and finance income-generating real estate.
These companies may specialize in a particular real estate or hold a wide range of portfolios in real estate. One of the best ways to participate in REITs is through M1 Finance.
You can build a portfolio of yield-producing REITs in a fully diversified manner.
How does investing in REITs work?
To begin with, publicly-traded REITs operate like any other publicly traded company in the stock market.
To get started, you can buy individual traded stock or purchase shares in REIT mutual fund or exchange-traded fund.
Otherwise, you may engage a broker or investment advisor to help you analyze your financial objectives and recommend REIT investments that align with your goals.
Pros of REITs
- You earn a share of the income from real estate without having to deal with the hassle.
- You can invest in REIT ETFs to diversify your portfolio and cater to your goals of that investment.
- Most REITs have long term lease contracts with tenants. For this reason, you have an income that is secured. So, as an investor, you are guaranteed you will earn your dividends.
- Most REITs pay 100% of their taxable income to shareholders. And on this account, they are not subjected to income tax. Instead, shareholders pay income tax on their dividends. Ultimately, there is no double taxation, and shareholders earn higher dividends.
Cons of REITS
- REITs grow at a slower pace compared to other companies traded on Wall Street. By law, they can only reinvest at most 10% of their profits back into their business.
- States and municipals can increase their property taxes, and this may affect the number of dividends paid.
- Real estate is a cyclical business, and REITs are not immune to market downturns.
REITs are a convenient way of getting started in real estate. It does not require as much time, effort, and expertise compared to traditional real estate.
Furthermore, you can use them as a passive income strategy to grow your real estate portfolio.
See Related: Best Rental Income Trackers to Use
3) Real estate wholesaling
To begin with, this is one of the easiest ways to get into real estate. It requires little or no capital. On top of that, it is one of the best short term investment strategies in real estate.
So, how does it work? In a nutshell, this method involves finding a cheap property and then selling it with a markup. The motto in wholesaling is buying low, sell low.
So how does real estate wholesaling work?
For example, you get informed that the owner of a property in a desirable neighborhood has just passed on. The home is not in good shape and needs renovation. Or better still, it is a prime location for redevelopment.
Being a savvy real estate agent, you approach the family to request them to sell their home. However, your goal is not to move into the house.
Your goal is to sell it to another house investor.
How do you make money with wholesaling?
Let’s say the family agrees to sell their home for $150,000. You then approach an investor in the market who is on a hunt for their next fix-and-flip.
You show them the property and they estimate after renovations of $100,000 the house can sell for $375,000.
You then negotiate to assign them the contract for a fee of $10,000. Therefore, the total cost of the property will be $160,000 for the investor.
Consequently, you will make $10,000, and the investor will make $115,000 after the flip. Win, win.
The technicality of real estate wholesaling
Once the property owner agrees to sell, you put the property under contract. In this transaction, “the middleman” is called the wholesaler. (Note: There is no relation to the retail-wholesaling business)
To get the house under contract you may be or may not be required to make a deposit.
However, in most cases, the seller will need you to put an earnest money deposit (EMD). It can be as little as $500.
This is to show the commitment that you are going to sell their property before the closing dates as agreed on the contract.
If that sounds like something you want to do, you can read these top books about flipping houses to help you.
Pros of Real Estate Wholesaling
- It is a short term real estate strategy. In most cases, you will sell the property in about 3 months.
- Even with no/bad credit, you can undertake this type of real estate transaction.
- It is a great way to learn about real estate investing without having to put in your money.
Cons of Real Estate Wholesaling
- Not being able to sell a property you have put under contract will affect your reputation.
- There is no guaranteed income. So, if you do not find a buyer, you have no income.
Despite it looking like a walk in the park, real estate wholesaling can be tough. You will need to be aggressive in search of leads of people selling their homes.
It will be overwhelming for the start, but if you keep at it, you will build a strong network in due time. Also, be sure to check out your state’s law on real estate wholesaling.
See Related: Important Pros and Cons of Real Estate Investing
4) Lease with the Option to Buy
Another way to get started in real estate investing is through the lease with the option to purchase.
How does lease options work?
To get rolling, you will first need to lease a property from a seller. You then agree on how much you will be paying per month.
On top of that, you agree to an exclusive right that you can buy the property after several years. Once you have agreed on the terms and signed a contract, you look for a “tenant-buyer” to move into the property.
Subsequently, you get them to sign the lease agreement and with an option to buy.
After this, the tenant-buyer will then make a non-refundable deposit to buy/lease the property.
A word of caution. Always have your lawyer with you when entering into a lease option.
It will protect you down the road.
Pros of lease options
- You earn the non-refundable deposit fee.
- You earn a monthly commission on the lease (as a rule of thumb, you should aim to make at least $200 monthly).
- You are also banking on the fact that the tenant-buyer will cash out and you will get a huge chunk of that money.
Cons of lease options
- They never buy
90% of the time, this option attracts B&C credit buyers. These are low-quality borrowers, who have poor loan repayment history, are bankrupt or have excessive debt.
They are attracted to the “Rent to Own” option because no bank will loan them money EVER.
Unfortunately, in this economy, this type of buyer is everywhere. Be as it may, very few of them ever clean up their credit and end up buying the house.
A good portion of these tenant-buyers you have to evict them, and they will tear up your property.
This method is the most stressful way if you want to start cheaply in real estate. And in most cases, it is not worthwhile.
However, if you choose this approach, ensure you earn a huge non-refundable deposit.
As a result, you will be covered in case of loss of rent. Not to mention, attorneys fees and damage done on the property.
See Related: Important Pros and Cons on Renting vs Selling
5) Purchase lease option (PLO)
This is yet another way to get started cheaply in real estate.
How does it work?
To begin with, it works just like the lease with an option to buy. However, this method does not drive you up the wall.
With this arrangement, you can grow your cash flow and equity from a property you do not own.
So, how does it work? First of all, you need to understand why people sell their property. It is usually one of two things. One they want the equity (i.e., money) or two they do not want the property.
Therefore, someone who is looking for equity (money); a purchase lease agreement will not work for them.
Consequently, for this method to work, you need to find someone who wants to dispose of their property.
For example, they may be moving abroad, they have difficult tenants, or simply they do not want the hustle of maintaining a property.
These people are selling not for money. Therefore, a purchase to lease option is favorable.
So, what is a PLO?
This is an agreement with the property owner that you will buy the property in the future at an agreed price. However, you may or may not buy the property. Hence, why it is called an option.
For this method to work, you need to have a motivated seller. And, in most cases, the PLO has to be a better solution than what they would get in the market.
So, you offer them more money than what they would get if they would put it in the market.
Therefore, it is a win-win situation. The property owner gets a better deal compared if they are to sell now, and you as a real estate agent get to buy it at a discounted price in the future.
Today’s price is tomorrow’s discounted price. These are some other real estate investing terms to consider.
Types of purchase lease options
Here are some of the most well-known types of purchase lease options.
Rent the property
In this approach, you can agree to rent the property for 3-5 years, and then after the period is over you can buy it at a set price.
So, you will make be making monthly rent payments to the owner. And so, you can move into the property, rent it out; make it a service apartment, the discretion is on your part.
However, you will take care of the property. You will need to pay insurance, taxes and maintain it just like your own.
For this option, you may find a property owner who is selling, but only wants a percentage of the money.
For example, you may have a property owner who is selling their property for $300,000 but only wants $30,000.
In such a case, you can get into a PLO, with this seller, and offer them the $30,000 as an option fee.
It will then be deducted at the end of the purchase lease price.
Option to buy
In this option, you do not use any of your money. All you do is enter into an exclusive agreement with the vendor that they will sell you the property at an agreed price after a set period.
In this case, they continue to stay in the house and maintain it. You may be wondering if they are people who agree to this arrangement.
Yes, they are.
For example, someone may be relocating after 5 years and know they will be selling their home. Instead of waiting until the fifth year, they opt to put it under a PLO to ease their selling when the time comes.
Consequently, when the time comes, they will not need to hire a real estate agent and incur commissions to sell their property.
- The purchase price is agreed upon at the onset. Hence, when you come to purchase the property, you will buy it at a discount.
- If you are new in real estate investing, you can use the option to buy to learn about the market before committing to buy.
- It is a much more favorable option than making mortgage payments on a property.
- Unfortunately, with this method, you are not the owner of the property. It still belongs to the seller, and they have full control over it.
- It is a long term strategy and cannot be used if you want to make money quickly.
The key to success in PLO is finding a property owner who does not want the money now. On top of that, you need to sign options that go for at least 5 years to be worthwhile.
See Related: Fundrise vs RealtyMogul – What is Better?
Conclusion on Investing Real Estate with Limited or No Money
Real estate is one of the most powerful ways to grow your wealth. However, very few people have thousands of dollars to get started.
Being the case, this should not deter you. If you are patient and diligent, you can use the above methods to start investing.
And as you grow and learn the ropes, you will be able to venture into the big leagues of real estate. Are you ready to invest in real estate with little money?
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