There are many reasons to invest in real estate from rental income to portfolio diversification. During times of volatility in the stock and bond markets, some investors turn to hard assets such as real estate. In the past decade, investing in second homes to use for short-term rentals listed on home-sharing platforms has grown in popularity. There are several ways to get a start in real estate investing without an enormous outlay of cash.
- A real estate investment trust gives small investors access to the commercial real estate market.
- A real estate investment group offers management services for owners of single residential units.
- Buying a property outright to lease and manage demands a greater investment of time and money.
- The popularity of home-sharing platforms inspired many investors to purchase second homes to use as income.
- It may be possible to purchase a home with less than 20% down, but it will depend on the lender and the seller. Often, if you put less than 20% down, you run the risk of having to take out private mortgage insurance (PMI).
The Cheapest Option: REITs—$1,000 to $25,000 or more
First created in the 1960s to allow individual investors to participate in the commercial real estate market, the real estate investment trust (REIT) is one of the cheapest and easiest options (for as little as $1,000 depending on the type of REIT) for adding real estate to a portfolio.
These are securities and are traded on major exchanges like stocks. They invest in real estate directly, either through property purchases or through mortgage investments. Many REITs specialize in a particular type of real estate or a specific region.
A REIT offers the investor a relatively high dividend as well as a highly liquid method of investing in real estate. Most real estate investments are not easy or quick to get out of. An exchange-traded REIT is.
Moreover, you can start small with a little bit of cash. If you're in it for the long term, consider one of the REITs that offer a dividend reinvestment plan (DRIP).
Moving up the Cost Ladder: REIGs—$5,000 to $50,000
For investors seeking to own physical real estate instead of shares of a company, a real estate investment group (REIG) or private partnership may be for you.
The REIG allows an individual investor to buy one or more units of living space within an apartment or condo building through an operating company. The operating company collectively manages all of the units and takes care of marketing them. In exchange, the operating company takes a percentage of the monthly rent.
An REIG represents a relatively cost-effective way to enter the real estate market as an investor. It also takes the management work off of your hands.
Some real estate investment partnerships accept an investment of $5,000 to $50,000. That's not enough to purchase a unit, but the partnership will pool money from several investors to fund a shared and co-owned property.
The goal is to find a REIG that will provide a monthly cash return on your investment.
You might look for a REIT that has a dividend reinvestment option for greater long-term growth.
Investing in Rental Properties—$100,000 or more
The tried and true way of investing in real estate is also the most expensive and time-consuming: becoming a landlord. We're all familiar with the basic idea. An investor buys a residential or commercial property and rents it out to a tenant. The owner is responsible for paying the mortgage, taxes, and maintenance costs. Ideally, the rent will cover the costs and maybe, over time, provide income or capital growth, or both.
There are plenty of costs because the concept of a mortgage without proof of income went out with the credit crisis of 2007-2008. Depending on the seller and the lender, you may need as much as 20% down (with less you may be required to put down private mortgage insurance), plus closing costs and other fees. If you decide to purchase a fixer-upper, you may need to take out a construction or renovation loan to get the property in rentable condition.
The amount of money you need to purchase a rental property depends on a wide variety of factors about the building itself, including but not limited to, type and size of the building, where it is located, how much work it needs, and the list goes on. In Oklahoma, you can buy a fixer-upper for less than $50,000 (as of December 2021), but you are out of luck, most likely, if you are searching for a house in that price range in Boston.
When you own a rental property, whether it is one home or an entire apartment building, you should have a cash reserve to cope with emergency repairs and occupancy gaps, as well.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.