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How to invest in real estate with little money

Yahoo Personal Finance· Getty Images
Robin Hartill, CFP®
Updated 9 min read

Investing in real estate may seem impossible if you don’t have big bucks. But there are ways to become a real estate investor, even if you’re not rich. Read on to learn about how non-millionaires can add real estate to their investment portfolios.

Real estate investing comes in many forms. You could invest in physical properties by buying properties to rent or flip. You could also take a passive investing approach using real estate investment trusts (REITs) or crowdfunding sites.

Regardless of your approach, it’s possible to invest in real estate without putting down a large amount of money up-front.

House hacking is a real estate strategy where you buy a home and live there while also using it to generate rental income. Many house hackers seek to earn enough rental income to cover their housing costs. Of course, you have to be willing to be a landlord to people living close to you.

Here are some common house hacking strategies:

  • Buy a multifamily property. The most common approach to house hacking is to buy a multifamily property and live in one unit while renting out the others. For example, say you took out a 30-year fixed-rate mortgage at a 6% interest rate for $300,000 to buy a triplex. Between principal and interest, taxes, property insurance, and private mortgage insurance (PMI), your mortgage payment is around $2,600 per month. But if you find two renters who are each willing to pay $1,500 in monthly rent, you could cover your housing expenses and pocket an extra $400 per month.

  • Build an accessory dwelling unit. An accessory dwelling unit (ADU) is a secondary housing unit on a single-family home property. Some house hackers buy a primary residence where they can build an ADU and use it to generate rental income. An ADU can be a garage apartment, or it can be an existing space, like a basement that you convert into a rental space. You could also build a detached structure, like a backyard cottage or tiny home. Just make sure you find out what’s allowed under your local zoning codes if you want to try this real estate investment strategy.

  • Rent out extra space on Airbnb or VRBO. If you have extra bedrooms or living space, you could try using a short-term rental platform, like Airbnb or VRBO, to earn extra money. Again, find out what’s permitted under local laws before you post your listing. Also, many homeowner associations (HOAs) have strict rules around short-term rentals. For example, some HOAs require a minimum lease of 30 days or one year.

  • Get roommates. If you’re willing to share your living space with others, getting roommates is probably the simplest way to become a house hacker. But be sure to have your roommate sign a contract that spells out their rent and household rules before you hand over the keys.

Pro tip: Home buyers can get an FHA loan or a VA loan on a multifamily property with up to four units. Both types of loans are good options if you want to become a homeowner while putting little to no money down.

As a passive income strategy, real estate investment trusts (REITs) are a good way to go. A REIT is a company that owns, operates, and finances commercial real estate properties like apartment complexes, office space, or industrial properties. They’re often compared to mutual funds because they invest across many different real estate projects, providing instant diversification with a single investment.

Many REITs are publicly traded on the stock market. That means you can buy shares using your brokerage account in the same way you’d invest in a regular stock.

REITs are probably the easiest way for beginners to invest in commercial real estate with little money. You can start investing for the price of a single share. Or if your brokerage firm allows fractional investing, where you specify the dollar amount you want to invest instead of the number of shares you want, you could invest in REITs with as little as $1.

Real estate investment trusts are required to pay out at least 90% of their taxable income to shareholders each year, making them a reliable source of dividend income. Though most REITs pay quarterly dividends, a handful make monthly payments to shareholders.

If you don’t want to pick individual REITs, you could invest in a real estate exchange-traded fund (ETF) that invests across many different REITs. Some REITs, like the Vanguard Real Estate ETF (VNQ) and the Schwab US REIT ETF (SCHH), track the performance of the overall commercial real estate market. Others focus on specific types of properties, like apartment complexes, healthcare properties, or shopping centers.

Several online real estate platforms provide investment opportunities through crowdfunding. Crowdfunding platforms allow investors to pool their money to fund real estate projects.

Some real estate crowdfunding opportunities are limited to accredited investors. To qualify as an accredited investor, you need a net worth of at least $1 million (excluding your primary residence), or an annual income of $200,000 as an individual or $300,000 if you’re married. But several crowdfunding platforms allow people without deep pockets to invest. Some crowdfunding options if you’re not an accredited investor include:

  • Fundrise

  • RealtyMogul

  • YieldStreet

Minimum upfront investments will vary. For example, Fundrise allows you to start investing in real estate with just $10, whereas YieldStreet requires at least $10,000.

If you own your home, you could use a home equity line of credit (HELOC) to finance a real estate investment. A HELOC is a revolving credit line that uses the value of your property as collateral. It’s different from a cash-out refinance, which replaces your existing mortgage with a new one. You take out a HELOC on top of your existing mortgage and charge the line of credit as needed, similar to the way you use a credit card.

You can often borrow up to 85% of your home’s value, minus the outstanding mortgage balance. For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, many lenders would calculate the amount you can borrow as follows:

$400,000 (home value) x 0.85 (loan-to-value ratio limit) = $340,000

$340,000 - $250,000 (outstanding mortgage balance) = $90,000 maximum HELOC

Here are some ideas for how to invest in real estate using cash from a home equity line of credit:

  • Use the money as a down payment on an investment property.

  • Pay cash for a fixer-upper and sell the home after rehabbing it.

  • Put the funds toward adding an ADU on your property or upgrading your home so you can rent out a room.

Usually, borrowers need a good credit score and steady income to qualify for a HELOC. Because the line of credit is secured by your home, HELOCs often have lower interest rates than credit cards and personal loans.

Pro tip: The interest you pay on a HELOC is usually tax-deductible if you use it to buy, upgrade, or build the home that serves as your collateral. To take advantage of this tax deduction, you’ll need to itemize your return.

If you’re still undecided about how to start investing in real estate, consider your financial goals. Here are a few questions to ponder:

  • Are you looking to build equity when you make your monthly housing payments? If so, consider saving for a down payment so you can buy a home. You may need less money than you think. For example, you can get FHA loans with a down payment of just 3.5%.

  • Do you want to generate reliable cash flow? If you want to earn monthly income from your rental property, buying an investment property could be a smart move. You could become a landlord by buying properties and renting them out. If you don’t want to deal with maintenance and repairs, you could hire a property management company. Otherwise, you could try house hacking if you’re willing to live near your tenants.

  • Are you looking for passive income? If you simply want a stream of passive income, you don’t need to buy physical properties. REITs and crowdfunding platforms offer an easy way to invest in real estate with little effort.

Once you’ve identified your goals, evaluate your financial situation. If you want to buy property but don’t have a solid credit score, you may want to focus on paying down debt and making on-time payments so you can get better financing terms. You’ll also want savings that you can tap in case things go wrong, i.e., a tenant doesn’t pay rent or there’s a big repair bill.

If you’re considering a real estate investment through REITs or crowdfunding, look at your existing investment portfolio. You may already be invested in real estate without knowing it. For example, if you own S&P 500 index funds through a retirement account, you’re already a real estate investor, as roughly 30 REITs are represented in the index. A financial adviser can help you determine whether it makes sense to invest in real estate or increase your exposure.

If you want to invest in real estate but can’t afford to buy a house, consider a REIT or a real estate crowdfunding platform. You could also put your money in a high-yield savings account with the goal of eventually saving enough money to make a down payment on a house.

Yes, you can invest in REITs or real estate ETFs with less than $5,000. Some online real estate crowdfunding platforms also have minimum investments below $5,000.

Many house flippers use hard-money loans to finance home purchases. A hard-money loan is a short-term loan where the property you’re purchasing serves as collateral. The interest rates are usually higher than traditional mortgage rates. You’ll probably need to work with a private lender to obtain a hard-money loan, as few banks and credit unions offer them. Other options for financing house flipping include using a HELOC or a cash-out refinance on your primary residence or saving money and paying cash.