Investing in Real Estate: How Much Money Do You Really Need?

Real estate has long been considered one of the safest investment options out there. After all, as Phoenix agent Lauren Rosin, an expert at working with real estate investors, points out, “people always need a place to live.”

The dream of passive income attracts many investors, but it can be confusing deciding how to get started. If you’ve been considering taking the leap, you’re probably wondering, “how much do I need to invest in real estate?” Can you get started with a few hundred dollars, or do you realistically need thousands to make it work? Many potential investors think they need thousands — if not hundreds of thousands — of dollars to begin investing. That simply isn’t true.

Options exist at all investment tiers, from $500 and up. Starting small and growing will allow you to learn as you grow and help you decide if it’s really for you. Here’s how much cash you need to invest in real estate

A room that is used as a real estate investment.
Source: (Chastity Cortijo / Unsplash

If you have: Less than $500

One of the easiest ways to gain landlord experience is to rent a room in your house. Listing services such as Airbnb let you list a room for just a night if you’re unsure about sharing your space with a stranger.

Natalie Taylor began her real estate investing journey by listing her condo’s second bedroom on Airbnb. She lives in a college town, and she often rents to parents visiting students. Some months, she says that her Airbnb income “pretty much pays for my mortgage.”

The upfront cash needed for this type of real estate investment is minimal. If you don’t already have furniture in your guest bedroom, or if it’s worn and outdated, you might need to buy a new bed frame and mattress. Hiring a professional cleaning service will eat into profits, but will save you the headache of cleaning up after someone else — and if you’re serious about continuing, you can charge your guests a cleaning fee.

If renting on a nightly basis has worked for you and you’re ready to take the next step — or if you don’t live in an active nightly rental market — consider renting a room on a month-to-month or yearly basis. You’ll have to share your space with another person, but you’ll gain valuable skills managing tenants and discover if being a landlord is right for you.

If you have: $500 to $1,000

Multiple websites have sprung up online to help new real estate investors enter the investing world. They function as investing platforms, where investors put money into a specific deal or portfolio of deals with other investors.

Investors using the Fundrise platform can put in as little as $500 into portfolios containing several real estate deals. They promise returns of 8.7% to 12.4%.

A peer-to-real-estate lending marketplace, patchofland.com connects people who want to invest with borrowers who are rehabbing properties for resale. Once you sign up, you can review vetted opportunities, complete your profile, and invest online in as little as ten minutes. Returns are up to 12%, and most projects last for a period of less than 12 months.

With peerstreet.com, you partner with professional lenders to invest in a real-estate-backed loan. They claim your investment will yield a return of 6% to 9% over twelve months. They select quality loan originators, and most loans have loan-to-value ratios below 75%.

Rosin points out that this approach is “basically like buying a stock. Whether it’s going to do well will depend; you don’t really have any control over the outcome.” For some new investors, this will be fine, but others prefer to have more say in their investment.

If you have: $1,000 to $5,000

Real estate investment trusts, or REITs also function like a stock. The difference is that, rather than buying into a company, you’re buying into the real estate that REIT has purchased. A REIT can own, manage, or finance commercial or residential buildings — or do all three.

With a real estate investment group, you’re actually a property owner. These groups buy or build a group of homes, and then sell them to investors as rental properties. The group remains in place to find tenants, maintain the buildings, and take care of other administrative tasks in exchange for a percentage of the monthly rent.

Forming a partnership with friends is another great way to begin investing — one that doesn’t require trusting strangers with your money. By pooling your resources, you increase your buying power. Look into buying a vacation rental or rental home in an area with low housing costs.

If you go this route, budget for legal fees to hire a lawyer to draw up partnership paperwork and legal agreements. It’s important to have spelled out the various partner’s responsibilities, how and when money will be put into the partnership if necessary, and an exit strategy.

A house used as a real estate investment.
Source: (Binyamin Mellish / Pexels)

If you have: $5,000 to $10,000

With roofstock.com, accredited investors are putting their money into single-family properties. Investors become fractional owners in a house with a $5,000 minimum investment. They have a 30-day money-back guarantee, and guaranteed rents on their properties. Some investors might prefer this to taking a risk with owning and managing directly or hiring a management company.

At this point, you may be close to a minimum 3.5% down payment for an FHA loan, depending on where you live. It might be worth it to get your foot in the homeownership door instead of waiting to save up a full 20% down payment and possibly get priced out of the market.

One of Rosin’s favorite ways to help investors get started is to have them buy a house to live in, taking advantage of lower down payment programs like those offered by the FHA or VA. While living in the home the one to two years minimum the loan program requires, the investor saves up money for their next down payment.

“After a year, we convert it to a rental property,” Rosin explains. “It’s the best way to build your wealth from nothing.”

If you have: $10,000 or more

If you’ve been able to save more than $10,000, your options open up further. Investors more flush with cash can invest on CrowdStreet, a website with commercial real estate options such as funds, vehicles, or direct investment in a project. Their minimum investment is $25,000, but they estimate higher returns than many other options — 15% and above.

Somewhere above $10,000, you’ll be able to look into investing in a multifamily property. With a multifamily home, you can follow a similar strategy of buying, living in it and renting out additional rooms or units, then moving on. Buy the property, live in one side, and rent out the other. Your tenant pays your mortgage, giving you the freedom in your budget to save your next down payment, and you get experience managing properties.

However, multifamily properties are harder to sell. Rosin thinks that “the multifamily market is very saturated and over-priced right now — you want to be careful.”

A note on becoming an accredited investor

Many of these opportunities are only open to accredited investors, particularly those that require a larger investment. If you’re serious about investing in real estate, it’s worth it to become accredited, per SEC rules…but it might be out of reach at the beginning of your investment journey.

Accredited investors must have a net worth that exceeds $1 million, either individually or with a spouse, and that does include their primary residence. Their earned income must exceed $200,000 — $300,000 with a spouse — in the last two calendar years, and be able to demonstrate that they’ll maintain that level of income going forward. To qualify for the income requirements, the method used to calculate income (either joint or single) must be the same.

No agency or credit bureau certifies you as an accredited investor. Instead, lenders and companies like CrowdStreet conduct their own verification process.  Because of this, you may have to become accredited with multiple sites and lenders.

It could take years to build up to becoming an accredited investor, but by starting small, you can build your portfolio to this point

Cash used to invest in real estate.
Source: (PxHere)

How much do I need to invest in real estate?

How much you will need to invest in real estate depends upon your strategy, your risk appetite, and where you plan on investing. Options exist for people who want to invest directly in property, or indirectly through a REIT or other investment vehicle. The internet has been a boon to investors, with new websites giving you the chance to start small.

Before making a final decision on strategy and where to invest, do your due diligence. Investigate local market conditions, talk to an experienced real estate agent who specializes in working with investors, and become comfortable running the numbers on potential deals.

By educating yourself, researching, and forming a network of experienced real estate partners, you can become a successful investor.

Header Image Source: (Ced Ngujo / Unsplash)