This article originally appeared on Spark Rental and has been republished here with permission.
At the risk of stating the obvious, real estate costs a lot.
That makes it expensive to invest in, and difficult to diversify among real estate investments. The median home price in the US is around $360,000. So, an investor who buys a median property with a 20% down payment would need to come up with about $70,000. And that doesn’t even include closing costs or property updating costs!
So, what can an investor do if they want to add real estate investments to their portfolio, but only have $1,000 to invest? Here’s how to invest $1,000 in real estate, whether you’re just getting started or simply want to diversify your existing investments.
How to Invest $1,000 in Real Estate
Yes, real estate is expensive. But in today’s world, you have plenty of options to invest $1,000 in real estate without hassling with 20% down payments.
The following types of real estate investments don’t require much cash, allowing you to get started with just $1,000 to invest.
1. Publicly-Traded REITs
The most traditional option on this list, anyone can buy shares of real estate investment trusts (REITs) through their regular brokerage account.
These companies trade on public stock exchanges, which makes them extremely liquid. You can buy and sell instantly, unlike brick-and-mortar real estate that takes months to buy or sell.
And you can buy with an extra $100 sitting in your bank account collecting dust, so there’s no financial barrier to entry.
A combined strength and weakness of publicly-traded REITs is their dividend yield. The Securities and Exchange Commission (SEC) requires all publicly-traded REITs to pay out at least 90% of their profits each year to shareholders, in the form of dividends. That keeps their dividends high, but it also makes it hard for REITs to reinvest their profits and build their portfolios. In turn, that limits their growth potential.
Their liquidity also cuts both ways. Because they trade on public stock exchanges, they tend to move in disturbing correlation with stock indexes. That largely defeats the purpose of diversifying into another asset class.
Consider VNQ, the Vanguard Real Estate Index Fund ETF Shares, with broad exposure to US REITs. In the pandemic-induced stock market crash of 2020, shares fell 44%. But US real estate values didn’t fall at all–quite the opposite. From March 2020 to March 2021, US home values actually rose 13.3% per the S&P CoreLogic Case-Shiller 20-city home price index. By late May 2021, share prices in VNQ hadn’t even fully recovered their 2020 peak, despite such strength in US housing markets.
In short, publicly-traded REITs make for easy, liquid real estate investments that you can buy with $1,000 dollars or $10. As a starting point for investing in real estate, consider these top REITs for beginners.
Just understand that publicly-traded REITs don’t provide much in the way of diversification.
2. Real Estate Crowdfunding: Private REITs
The most common type of real estate crowdfunding investments work similarly to REITs: pooled funds that own real estate directly or lend money secured against real properties.However, they come with two distinct differences. First, they don’t trade on public stock exchanges–you buy shares directly from the crowdfunding platform. That makes them far less liquid, and also far less volatile. They don’t move in sync with stock indexes, so they provide real diversification.
In fact, most real estate crowdfunding platforms require you to hold shares for at least five years. You can usually sell shares back to them before then, but at a discounted price. The second difference is that the SEC regulates crowdfunded REITs differently than publicly-traded REITs. Crowdfunding platforms don’t need to return 90% of profits to shareholders each year, and can reinvest them to keep growing their portfolios. That can mean lower dividend yields, but it also means far greater potential for share price appreciation.
Two crowdfunded REITs to consider are Streitwise and Fundrise. Both allow non-accredited investors to invest, unlike many real estate crowdfunding companies. Streitwise specializes in commercial real estate, mostly office buildings and mixed-use properties in “non-gateway markets” (read: second-tier cities like Austin and Nashville, rather than the New Yorks and San Franciscos of the country).
They’ve paid out 8-10% dividend yields every year since inception. Fundrise specializes in residential apartment buildings. You can choose between several REITs, some more dividend-oriented and others more growth-oriented. In addition to owning properties directly, they also lend money against real estate for even more diversification.
For full disclosure, I own shares in both, and have been largely happy with them. Fundrise still allows you to invest with less than $1,000, although Streitwise recently raised their minimum investment from $1,000 to $5,000. On the plus side, they maintained their 8%+ dividends throughout the coronavirus pandemic–a time when most commercial real estate struggled. They also now allow you to invest in cryptocurrencies as well cash transfers.
3. Real Estate Crowdfunding: Loans
Some crowdfunding companies offer a different model. Rather than pooled REIT funds, they let you put money toward individual mortgage loans secured by real property.
My favorite of these is GroundFloor. It allows non-accredited investors, so you don’t need to be wealthy to invest. In fact, their minimum investment is only $10. Who doesn’t have an extra $10 lying around? Skip a couple of lattes this week and test out a new real estate investment!
They operate as a hard money lender, issuing purchase-rehab loans to flippers. Flippers borrow short-term loans from them to buy and renovate properties, then pay it back when they sell the property 6-12 months later. Or refinance with a long-term rental property loan, if they follow the BRRRR strategy.
You get to pick and choose which GroundFloor loans you want to put money toward, in increments as low as $10. They grade the loans based on risk, from A-F, with higher risk loans paying out higher interest rates. Annual returns range from 6.5-14%, depending on the risk level. You can spread your money around to as many loans as you like, to diversify and spread both your risk and returns.
Time for the same disclosure: I myself invest my own money in GroundFloor loans. And again, my experiences have been positive.
4. Private Notes
Know some successful real estate investors personally? You don’t have to go through a crowdfunding company to lend money to other real estate investors. You can lend it to them directly, in the form of a private note.
A “note” is the legal document that a lender and borrower sign, as a promise to repay the loan according to specific terms. I have some money lent out to a successful real estate investing couple that I know. Every quarter, they send me interest on our 10% note.
Whether you secure your note against a property as collateral is up to you. It does involve recording a deed of trust in the county records office, and if your borrower defaults, you have to go through the long, expensive foreclosure process to try and recover your money by forcing the sale of the property.
Either way, only lend money to investors you know and trust, who have a solid track record of success.
5. Real Estate Wholesaling
Wholesalers put properties under contract, but they don’t actually buy them. Instead, they flip the contract to other investors–for a margin.
For example, imagine you find a property worth $140,000, and you get it under contract for $100,000. You then turn around and sell the contract to another investor for $115,000. They buy the property at a discount, and you get a $15,000 paycheck. All without ever owning any real estate yourself.
You don’t have to come up with a down payment or get a rental property loan. You don’t have to negotiate with contractors or oversee renovations, or hassle with screening tenants or signing lease agreements.
All you have to come up with is the earnest money deposit, which could be as little as $500. And you get it back as soon as you find a buyer for the contract.
If you’re interested, read more about wholesaling real estate here.
6. Invest in Land
Want to hear a dirty little secret? Deni and I are mostly investing in land these days, rather than residential rental properties.
It doesn’t fall apart or need renovation. Bad tenants can’t damage it. You don’t need to worry about screening tenants, rent defaults, or going through the eviction process. Or, for that matter, eviction moratoriums allowing tenants to live for free in your property.
My exit strategy involves flipping the parcels and offering optional owner financing. If the buyer-borrower defaults, I don’t have to go through the traditional foreclosure process. I just reclaim possession and sell it to someone else.
Best of all, you can buy parcels of land for as little as $100. Check out how Scott Todd replaced his day job salary in 18 months with land investments, and learn how to invest in land with either the Land Geek course or the REtipster land investing course. I’ve taken both and they’re excellent, teaching you how to invest with low risk and high returns.
7. House Hack
There are many ways to house hack, but the core concept involves using your home to generate revenue, which then offsets your housing costs, allowing you to “live for free.”
The classic multifamily house hacking model is buying a 2-4 unit property, moving into one unit, and renting out the other(s). You can use a standard owner-occupied mortgage loan, such as a Fannie Mae or Freddie Mac loan with a 3% down payment, or an FHA loan with a 3.5% down payment.
Which, granted, will still set you back more than $1,000. But it’s a lot closer than a full 20-25% down payment on a rental property loan. Note that your friends or family members can help you out with your down payment, but it must be a gift, not a loan.
Alternative house hacking options include renting out rooms to housemates or on Airbnb, setting up an income suite, renting out storage space or parking, or even bringing on a foreign exchange student. Deni did the latter, through a company called the Cambridge Network, and the stipend covers nearly her whole mortgage payment.
You get to live for free, and whenever you feel like moving out, you can keep it as a buy-and-hold rental.
8. Rental Arbitrage
What if you could build an Airbnb empire without actually buying a bunch of properties?
That’s exactly what Al Williamson teaches you how to do in the joint webinar we held with him a few months ago. It’s called rental arbitrage, and involves signing a long-term lease with a landlord, then renting out the property as a short-term rental on Airbnb. Or better yet, renting it as a corporate rental for a few months at a time.
No down payments. No roof replacements or repainting. Just passive income from someone else’s property.
9. Borrow the Down Payment with Credit Lines
Conventional mortgage lenders don’t typically let you borrow the down payment. But private rental property loans allow it.
Which means you can theoretically borrow a rental property loan from a portfolio lender, and then borrow the down payment from a credit line opened through credit concierge services like Fund&Grow.
Fund&Grow helps you open $50,000-$250,000 in unsecured business credit lines and credit cards. No collateral necessary, and real estate investors count as businesses. You can then tap into these credit lines and cards for down payments, for renovation costs, or even to finance properties entirely.
Rather than fretting about where to invest $1,000, just get started. There’s no perfect investment. If you want a completely passive investment, try GroundFloor, Streitwise, or Fundrise. If you want to live for free, look into house hacking, but note that it will take more knowledge, work, and money on your part.
Or dig into land investing with the Land Geek course or REtipster land investing course for high returns and low risk. But again, they require more knowledge and labor on your part.
Don’t freeze up with analysis paralysis. Pick one of the options above for how to invest $1,000 dollars, and you’ll quickly grow more comfortable with investing to build long-term wealth.
Because with enough passive income, you reach financial independence and working becomes optional.
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