There are so many great reasons to invest in real estate, from portfolio diversification to rental income and more. During times of stock and bond market volatility, some investors depend on their hard assets, like real estate, to keep them afloat.
Over the last decade, investing in second homes for use as short-term rentals listed on home-sharing platforms has become highly popular. These days, there are a number of ways to get started in real estate investment without spending a fortune.
Let’s take a look at how much money you really need to invest in real estate.
REITs – The Most Affordable Option ($1,000 – $25,000+)
The Real Estate Investment Trust, or REIT, was originally developed in the 1960s to allow investors to take part in the commercial sector of the real estate market and is now an easy and affordable option for diversifying your real estate portfolio. It can cost you a mere $1,000 based on the kind of REIT.
REITs are securities, so they are traded on most major market exchanges like stocks. These groups invest directly into real estate, either through the purchasing of properties or via mortgage investments. What’s more, plenty of REITs specializes in a certain region or specific real estate type.
The great thing about this option is that it offers you a nice dividend as well as a reliably liquid way of real estate investment. As you may already know, the majority of real estate investing is not particularly quick or easy to get yourself out of – that’s not the case with an exchange-traded REIT.
Can you afford a rental property purchase?
In the end, in most cases, purchasing a rental property is a process that requires a lot of capital. In addition to the minimum of 20% down payment and the closing costs, you are going to have to have some serious spare capital to cover unforeseen maintenance and repairs, as well as potential rental vacancies.
There are, of course, a number of ways to purchase rental properties without having to pay as much capital upfront, but these methods can be very challenging to implement. Even if you are able to find a way to borrow more money to purchase a property, doing so is generally not the most financially responsible decision you could make.
After all, one of the leading causes of the 2000s housing market collapse was the over-leveraging of investment properties. So, if you have enough capital to purchase a rental property, you might have a lucrative long-term investment on your hands. If you don’t have the capital, don’t worry – there are still other ways to invest in good real estate without having to spend a fortune, while still having a strong potential for returns.
REIGs – A Step Up in Costs ($5,000 – $50,000)
If you want to own your own real estate properties as an investor rather than only owning some of a company’s shares, then a real estate investment group, also called a private partnership, might be the option for you.
An REIG allows individual investors to purchase one or several units of space within a condo or apartment building via a group called an operating company. This company is responsible for the collective management of each of your units and handles their marketing in exchange for taking a percentage of the rent each month.
REIG is a representation of an affordable path for you as an investor to make your way into the real estate scene, while also taking a lot of the work involving management from your hands, allowing you to take a more passive approach to real estate investment.
Certain real estate partnerships will make investments of $5,000 – $50,000, which, as you may have guessed, would not be enough to buy a unit. However, the partnership will gather money from a number of investors in order to fund a co-owned, shared property. When working with an REIG, you want to find one that will offer you a monthly return on your investment, paid in cash.
Rental Properties ($100,000+)
The most popular and most trusted method of real estate investment also happens to be the most time-consuming and expensive method – working as a landlord. We all understand the basic premise – an investor purchases a commercial or residential property and leases it to a tenant. You are then responsible for the taxes, mortgage, and costs of maintenance. Ideally, the rent will be enough to accommodate these costs. It might even provide capital or income growth over time.
Of course, being a landlord means being responsible for paying a lot of costs, since the idea of a mortgage without having proof of income was eradicated during the credit crisis of 2008. It will differ for each lender and seller, but you might have to put down 20% as a down payment, and with less, you might have to put down mortgage insurance, in addition to closing costs and various other costs.
If you’re brave enough to borrow money to renovate a property that needs a little TLC, you might have to take out a renovation or construction loan to restore your property to a condition that makes it suitable for renting. The sum that you will need to buy a property to rent out is going to depend on a range of factors regarding the actual building, including its size and type, how many repairs it needs, where it’s located, and much more.
When you own a rental property, whether it is an entire apartment building or just one home, you’ll want cash in reserve to keep up with occupancy gaps and emergency repairs.
Real estate crowdfunding is a fairly new method of investment that lets you combine your cash with other investors to put funding toward investments in commercial real estate. Let’s take a look at an example of a way in which this method would work.
- A real estate developer with some good experience finds a dilapidated apartment building that can be bought for $5 million. It will take roughly $2 million to renovate the complex to a livable standard. Eventually, it can be sold for $10 million in a couple of years.
- For the sake of this example, let’s say that this developer is able to take out $5 million from a bank. They are also able to contribute a further $1 million from their own pocket, which means they have to get the remaining $1 million from other investors.
- They are able to list this opportunity on any crowdfunding platform to raise the necessary capital, and other investors will benefit from the profits that come from the deal.
Each crowdfunding opportunity comes with its own minimum contribution per-investor, and minimum income requirements. These days, the most popular minimum investment is around $25,000, which is often much lower than the required capital for purchasing rental properties.
So, How Much Will You Really Need?
Before the housing market meltdown of the 2000s, there was a time when loans for investment property with low down payments were pretty easy to come by. After the significant increase in the housing market throughout the 1990s and early 2000s, most people were under the assumption that home values would just rise forever into infinity.
In the eyes of a lender, the worst-case scenario for them would be that they would have to foreclose on the home, which would end up being worth more than the amount of the loan. As you have probably already guessed, this didn’t work out too well. A lot of banks and real estate investors lost exorbitant sums of money when real estate prices began to decrease.
These days, lenders exercise more caution in terms of financing investment properties, and they often won’t even be considered by mortgage insurance companies. The result is that most lenders now want at least 20% down to finance an investment property. What’s more, depending on each individual case, they might require an even higher down payment of 25% or 30%.
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Taking out a loan
If you want to pursue a conventional loan, then you can expect to pay a minimum of 15% for a down payment, though this only applies to single-family homes. Even in this case, you will only be able to take out a loan if you have six months of expenses in reserves, a good credit score, and a low debt-to-income ratio. In most cases, the most that a traditional lender will finance is capped at 75% of the price of purchasing.
Knowing how much you need to invest in real estate will allow you to plan and budget based on what you are looking to achieve. Everyone has a different plan for their property portfolios and investment schedule, so using the above information, you can optimize your path to be as efficient as possible so you can get returns sooner. Good luck!