If you’re looking for a way to invest in real estate but don’t have much money to get started, don’t despair! With a little ingenuity and some careful planning, there are many strategies you can use to launch a profitable portfolio, even on a tight budget. We’ll explore four paths to making smart real estate investments with limited start-up capital. And, by building up your portfolio over time, you’ll be able to gain valuable experience as well as the cash flow needed to realize greater returns down the road. Let’s get started.
Short term Rentals
Perhaps the easiest way to get started with real estate investment is by becoming a host in your own home and renting out a portion of it, for instance, a spare room or couch. The three biggest benefits of renting out a portion of the roof over your head are:
- It’s a lot easier than having a full-time roommate, as you control how long someone stays and do not have to worry about rental agreements and eviction procedures
- You’ll earn more money from a short-term rental than you will from a full-time roommate. As an example, if your rent or mortgage is $1,200 a month for a two-bedroom home, that means that a roommate would pay $600 a month, assuming a 50/50 split. Six hundred dollars a month works out to $20 a day. As there are very few markets indeed where a one-bedroom room can be rented for $20 a day, you will surely earn more renting it out through a temporary stay site, particularly during high-season spikes such as conventions or concerts in your area.
You’ll have a lot less wear and tear on your home, as someone staying for a short time— a couple of days or even a couple of weeks— will only have suitcases versus furniture and other trappings of a permanent resident.
But that said, there are also trade-offs of getting in the hosting game. Chief among them is that a stranger is living with you, in your own house. Using your bathroom. Lounging on your couch. If visions of this make your heart race or blood pressure rise, then hosting with this level of intimacy might not be for you. A less intrusive form of hosting might be renting out your home when you’re not there. For instance, if you have to be out of town for work, or will be away at a family gathering, that can be a great time to allow someone else to pay a portion of your rent and mortgage. Done right, hosting can be a great method to begin getting hands-on experience as a landlord as well as learn about the real estate markets located elsewhere from your visiting guests.
Real Estate Investment Trusts (REITs)
A real estate investment trust is similar to a mutual fund. Mutual funds usually invest in just one type of asset— for instance, stocks, bonds, commodities, etc. REITs also invest in one type of asset, in this case, real estate. REITs can be a relatively low-risk vehicle to gain experience with real estate projects because the REIT portfolios themselves are usually diversified— made up of a large volume of properties, across property types (residential, commercial, mixed-use) and geographies.
Two big advantages of REITs are returns and liquidity.
Returns
REITs offer the potential for good returns, in part, because one of the regulatory requirements of a REIT is to pay out 90% or more of its taxable income to shareholders.
Liquidity
REITs also offer good liquidity because, unlike owning a property, where it could take months to find a buyer and close on the sale, REITs that have a large market of buyers and sellers offer the ability to quickly increase or sell down your investment.
As far as disadvantages, the largest one is market risk. Because REITs are investments in the real estate market itself, if real estate prices or rents experience a downturn, the portfolio of the REIT can be likewise affected and see a decrease in returns.
Real Estate Crowdfunding
Another onramp for accessing real estate investments, particularly very large deals such as the development of a large apartment building or commercial complex, is through real estate crowdfunding. Crowdfunding is a pooled source of money in which multiple individual investors (hundreds or even thousands) buy equity in a commercial real estate project or provide the project with a loan (debt capital in the form of a short-term construction bond, for instance).
Opening an account with a real estate crowdfunding platform can be done with as little as ten dollars. Crowdfunding can also give you a peek behind the curtain of commercial real estate development, as a micro hard money lender— something that’s often difficult to see up close without donning a hard hat as a general contractor or developer. Perhaps one of the biggest advantages of participating in crowdfunding is that you can pick and choose the types of projects you invest in. Say for instance, that you’re interested in building up your knowledge about hotel development as you’d like to grow from small Airbnb operator to hotel owner and operator someday. Crowdfunding allows you to pick which investments suit your fancy, rather than requiring that you invest in whatever it is that the portfolio manager selects (the way real estate investment trusts and mutual funds work).
For every cup half-full, however, there is always a cup half empty. A disadvantage of real estate crowdfunding is that you are investing in the development of the project from the ground up. If there are construction delays, increased costs or the project is never completed at all, those become your risks to bear, and with it, the potentially adverse impact on your returns. A second disadvantage is that the fees on crowdfunding platforms can be hefty, so research is a must before jumping in with both feet.
Vacant Lots and Land Offer Opportunity:
Vacant lots and land are often viewed as investments of last resort by potential investors, but such properties can offer a good opportunity for low-cost income-producing investments. Just as houses and businesses are on land that is zoned by use— for instance, residential, commercial, industrial, or agricultural— lots and lands are also zoned by use. Thus, if you purchase a strip of land, overgrown with weeds, that has come to be viewed as the neighborhood eyesore by many, if it is zoned for commercial or agricultural use, it can be transformed into cashflow-generating businesses ranging from an outdoor storage lot to a small urban green market to a site for a hotdog cart or other vending. Small plots that are zoned residential and are in between two adjoining homes, might offer resale opportunities to one or other homeowner, who would love the opportunity to double the size of their yard.
Recommended Read A DUE DILIGENCE GUIDE FOR REAL ESTATE INVESTORS
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