Real estate investing may seem limited to the ultra-wealthy, but anyone can invest in real estate. Here’s how you can invest $5,000 in real estate. —-
Real estate investing may sound like a pursuit limited to the ultra-wealthy, but anyone can invest in real estate. Investing in real estate is for those pursuing wealth, but also for anyone who wants financial stability or to start planning for retirement. According to multiple surveys, as many as 90% of millionaires became wealthy, at least in part, due to real estate investments. And modern investors maintain that real estate is a solid investment.
While real estate as an investment is relatively stable, it’s important to note its weaknesses as well. Most investors agree that real estate is most effective as a long-term investment. As any real estate agent will tell you, it can be hard to predict when property might sell, which makes it hard to liquidate assets at short notice.
On the other hand, other weaknesses have been overstated. You don’t necessarily need a lot of cash to invest in real estate. If you’ve got $5,000 in your pocket, you’ve got more than enough to get started. These are 10 ways you can invest $5,000 in real estate right now.
1. A down payment on your home
If you haven’t already bought a house, one of the best real estate investments is to own your own home. Most people’s primary goal with buying a home is to access shelter and save rent money — and if you’re planning on staying in the house for more than five years and you buy wisely, you should recoup what you’ve spent to buy — but depending on how you approach homeownership, it can also be a great investment.
The key to using your house as an investment asset in addition to shelter is earning equity. To do this, you’ll want to make sure you pay it off in 30 years or less. If you plan your renovations and upgrades well, you can add extra value to your home.
Many people think they need to hold off on buying a home till they have 20% down, but down payments come in a lot of sizes. Some mortgage options require considerably less than 20%, or no down payment at all.
These mortgage types come with other restrictions; for example, FHA mortgage loans are typically restricted to first-time buyers. Talking to a local real estate agent is a good way to find out what loan types you may qualify for and how to get your $5,000 to work as a down payment.
2. Rent to own
If you want to buy a home but are dealing with barriers such as a low credit score or high debt, then rent-to-own options may be right for you. There are several different types of rent-to-own contracts, and you should know a bit about each.
The bare bones of it is that in some contracts you could be legally obligated to buy the home at the end of the lease (a lease purchase agreement). Others will give you the option, but no obligation (a lease option agreement).
Rent-to-own contracts typically require an upfront payment, and then they operate more or less like renting. If you use your $5,000 to fund your upfront payment for a rent-to-own home, at the end of the rental period, all or part of that $5,000 may be turned into the equivalent of a partial down payment. There are definitely situations where rent-to-own homes come with some pretty big catches. But there’s no denying they’ve been a great deal for some buyers.
3. A partial down payment on a rental property
Buying and maintaining rental properties is one of the top ways to invest in real estate. This is especially true if you’re looking for long-term, low-risk investments. There’s a lot to consider when buying your first rental property, especially if you’re worried about being someone’s landlord, but it’s easy to see the upsides.
Investment homes typically require at least a 20% down payment, so $5,000 doesn’t stretch very far, but if you have three or more friends who also have $5,000 to contribute toward a down payment on a rental house, then you’ll be spreading some of the risk, too. (Don’t forget to formalize any financial agreements with a legal contract!)
Owning a paid-off rental property is a great way to generate passive income coming in on a monthly basis. Josh McGrath, a top agent in Charleston, West Virginia, knows how great an investment opportunity rentals can be. McGrath owns 150 rental properties and helps others invest in them. Even though hiring a property management company can cost about 10% of your profits, McGrath recommends it highly.
McGrath also recommends purchasing rental properties on a 10-year mortgage term if you can. “As long as the monthly rent covers my mortgage payment, taxes, and insurance, in 10 years, it’ll be paying me $1,000 a month and I’ll have more than $150,000 in equity.” With returns like that, it’s easy to see how rentals could become a perfect retirement plan.
4. Rent your extra space
If you have an extra bedroom or a basement that doesn’t get much use, then renting out your excess space is a good way to invest. You can make $5,000 go a long way in terms of renovations. Finishing a basement into an in-law suite can add rental value now, but also can add even more value if you choose to sell your home in the future.
Short-term rentals (renting a room to people on a nightly basis) often have the potential to generate the highest month-to-month returns. There are a number of apps for this, like Airbnb and VRBO, that make it easy to get started and find renters.
Roofstock has gotten a lot of publicity for being a great “starting” real estate investment. Instead of starting up your own rental property from scratch, Roofstock sells rentals that have already been leased. This means that from day one, you already have renters in the home!
You also already know that it’s a property that renters like. Some rental property factors are hard to account for, but having attracted at least one set of occupants takes a little of the guesswork out.
If you love the idea of rent as a passive income but aren’t sold on being a landlord, then Roofstock also gives you the option of paying for a property manager.
If you’re not afraid of the hustle, then wholesaling is a great way to invest in real estate. Though the word “wholesale” may make you think of bulk purchasing, that’s not what you’ll be doing with properties.
Being a wholesaler is a bit like being a house flipper — just without the actual flipping part. If you’ve got a gift for seeing the potential in properties but shouldn’t be trusted with a chainsaw, then wholesaling might be your calling.
Wholesalers contract properties that are bargain-priced and then find a final buyer for them. Like a matchmaker, knowing a lot of people and being a great communicator is crucial here. A potential buyer who is the perfect fit for a property, then buys the contract from the wholesaler. The difference between what the wholesaler paid for the contract and what the buyer paid is pure profit.
Though $5,000 isn’t enough to buy a property, it’s enough to put down an earnest money deposit. Ultimately, the goal of wholesalers is to never actually end up in a contract themselves. To that end, most wholesalers add a condition to the contract that releases them from it if they’re unable to find a final buyer.
7. Partner up
If there’s a friend who shares your real estate mogul goals, then combining your investments lets you go further than either of you could go separately.
You’ll want to partner with someone with the same vision of success as you. If you’re planning on a long-term investment but they want a quick flip, then you’ll both be disappointed.
Ultimately, who hasn’t dreamed about owning a cute vacation cottage they can share with friends? In friendships with complementary strengths, one person can handle the challenges of qualifying renters and negotiating rent while the other manages the property.
Though it may sound strange to formalize your partnership legally, many professionals agree that’s the secret to keeping your money and your friends.
8. Real estate investment trusts
Real estate investment trusts, or REITS, are like partnering up, but with a larger network. REITs create a low-risk investment but have the potential to show large profits. Think of it this way: with $5,000, you can do a lot. With a friend who also has money to invest, you can do even more. With a large network of people who are all investing? You have the highest chance of rewards.
Many REITs are publicly traded, but there are also private REITs.
Anyone can invest in a public REIT, but typically only accredited investors can invest in private REITs.
To be an accredited investor:
- You need an annual income that’s greater than $200,000 for the last two years. Or, if combining income with a spouse, an annual income greater than $300,000.
- You must have a net worth greater than $1 million dollars, individually or with a spouse.
If you’re wondering if your home counts towards your net worth or debt, the answer can get more complex.
There are differences between how public and private REITs pay out that may make one a better choice for you than the other. One major difference is that private REITs don’t calculate share prices as often.
Publicly traded REITs are more liquid. This means that you can buy and sell your shares readily. It also means you need to pay attention to market fluctuations in order to determine when to sell.
Private REITs have more restrictions in place and are much less liquid. While private REITs have high return value, the decision of when to sell is typically made in advance and is reliant on a long investment term. If daily stock market fluctuations aren’t something you can see yourself caring about, then a private REIT may be a better option for you.
RealtyMogul is a real estate crowdfunding site, but it also offers private REIT benefits to both experienced and novice investors. For non-accredited investors, RealtyMogul offers its own private REITs.
RealtyMogul’s REITs have a lot of flexibility. Unlike traditional investments, you’re only required to keep your investment for a year. If after a year you realize that you want your money back more than you want to keep your shares, you can sell them back to the company.
9. Real estate crowdfunding
When it comes to big real estate investments, sometimes it takes a village. Crowdfunding opportunities for real estate investments pool investments from many individuals to fund different projects.
Each crowdfunding site is a little different. Though this sounds like a REIT, and there’s a lot of crossover between the two concepts, crowdfunding sites give you a little more control over what types of projects you invest in.
Fundrise was arguably the first crowdfunded equity real estate group. In some ways, Fundrise operates like both a tech company and a real estate company.
One of Fundrise’s distinct features is a low account minimum. With as little as $500 you can get started. With a $1,000 or greater investment, Fundrise allows you to select from three Core Plan strategies. Supplemental Income pays the highest dividends for people who want a return now, and Long-Term Growth has the highest total return. Balanced Investing strikes a balance between the two.
EquityMultiple’s claim to fame is how thoroughly it vets projects. Fewer than 10% of the projects submitted to EquityMultiple are accepted.
Equity Multiple displays their successful projects on their site. Some success stories include projects to create senior housing in Boston, condos in Brooklyn, and office space in Seattle. You’ll need to be an accredited investor to get started with Equity Multiple.
10. Peer-to-peer lending
While Fundrise and EquityMultiple vet and fund large projects, peer-to-peer lending is a way to invest in individuals.
The upside to this is that you could use your investment to help someone buy their first home or make much-needed repairs. It’s easy to get invested in people’s stories, and most peer-to-peer lending lets you be as hands-on as you’d like. You can individually select projects that you believe in.
The rate of return and risk are directly related here, though. If you choose to only fund people who have a good credit rating and are relatively low risk, then you won’t have huge returns. If you choose to pick the riskiest lending scenarios, your potential reward is larger — but so is your risk. Like crowdfunding, these options are all a little bit different.
Peer Street specifically focuses on crowdfunding for homebuyers. Most of Peer Street’s investments pay out in under 24 months. Peer Street is only open to accredited investors, but if qualified, you only need $1,000 to get started.
Peer Street is one of the newer peer-to-peer lenders and reported raising $60 million in October 2019. That could mean more opportunities for new investors soon.
Lending Club isn’t restricted to real estate, but that’s one of the major reasons loan seekers flock to the site. Like Peer Street, you’ll need $1,000 to get started. Once you get started, though, you can invest in any increment of $25.
With $5,000, you have the minimum investment needed to enroll in Lending Club’s PRIME service. This semi-automated investment service lets you set parameters for what loans you will invest in. Then, your investments will be automated within those guidelines.
Like Lending Club, Prosper is used for a variety of personal loans. Out of the peer-to-peer lenders, Prosper requires the least initial investment. For just $25, you can start selecting projects on Prosper.
Of course, this is definitely a case of nothing ventured, nothing gained. A 10% rate of return is incredible, but with $25, that still won’t buy you a coffee. Once you’ve gotten started with Prosper, you can loan any amount you want.
Investing in real estate can be as easy as downloading an app, but for local investing advice, meeting with a real estate agent is a great first step. McGrath advises talking to a local real estate agent and having a local financial expert you can talk to. These are some of your best sources for real estate news and investment opportunities in your local area.
Soon, your $5,000 will be out making money for you, and you’ll be on your way to real estate mogul status.
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