In the wake of a recession, real estate is one of the last investments with a good ROI. But how to invest in real estate with little money?
Don’t worry, it’s possible to invest in real estate with little money, even in 2023, when real estate prices are soaring. This guide will give you nine options for investing in real estate with a limited budget.
Table of Contents
- Can You Invest Small Amounts of Money in Real Estate?
- 8 Ways to Invest in Real Estate With Little Money
- What Is the Cheapest Method of Investing?
- How to Find a Profitable Real Estate Investment Property
This guide will focus on three main points:
- How to make a return on investment with little money
- How to invest in real estate with little money
- How to find a bargain property to invest in
If you’re interested in how you can get this done, let’s explore these methods one by one.
Can You Invest Small Amounts of Money in Real Estate?
With the stock market, you can invest a couple of hundred dollars per month and make a profit. Real estate investment is much more stable, but normally, it requires a lot more money to start.
Even considering that very few people pay the full price for real estate in cash, a typical down payment is around 20% of the house price. With the median house price in 2022 being $360,000, that’s $70,000 in upfront investment, not accounting for renovation.
This means $70,000 in cash is the minimum you can invest in purchasing and running a rental property. But you can do away with much less money if you know how to invest the right way.
8 Ways to Invest in Real Estate With Little Money
You don’t need to have $70,000 in the bank to make money in real estate. There are multiple ways you can do that, but since the money isn’t the deciding factor, most involve either an increased risk or a skill requirement.
Let’s explore what these methods are as of 2023.
Home Equity
Not having six figures in your bank account is not a problem if you already have a real estate investment. You can get a home equity loan against your house to finance a real estate investment.
Most banks will let you borrow around 80%-85% of the home equity you own, i.e. the sum you’ve already paid out for your home. This means if you’ve paid more than $90,000 for your current house, you can realistically expect to be able to borrow the $70,000 needed to buy a median house.
This does solve the problem of having little money to invest in real estate, but it comes with a significant drawback. You’re getting a bit deeper in debt, and if your real estate investment doesn’t cover the monthly premium, you’re in a bad situation.
If you want to go with this route, make sure to do the math diligently. The average interest on home equity loans is around 7.30% at the time of writing. Calculate the rental income of the real estate you plan to invest in and see if it covers the mortgage, the rental expenses, and the home equity loan premium.
That may take a lot of research, but it’s necessary to have a good ROI on your investment.
Related: 3 Best Investment Property Lenders for 2023
Live-In Rental
What if you don’t have a home right now but do have the money for the down payment? It’s hard to make a profit on real estate when you’re renting yourself, so purchasing your first property to live in and using home equity to invest later on seems like a smart decision.
In many cases, it is, but you can combine these two strategies. What you could do to turn a profit on your first real estate is to live in it and rent out a part of it to cover the mortgage cost.
One way of doing that is by purchasing multi-unit housing like a duplex or a triplex. This way, you have a fair share of privacy while getting the mortgage covered by long-term tenants.
However, duplexes tend to be more expensive than single-family real estate, and they’re in low supply. Building a brand-new one would cost more than buying, and it isn’t a good fit for a real estate investor with little money.
If you don’t mind living with others, you could purchase a home with multiple bedrooms and earn money on short term rentals. After all, that’s how the Airbnb business is supposed to function.
Apart from privacy, this method also requires you to buy real estate in a place with high tourism numbers to attract short-term tenants.
Related: Airbnb Short Term Rentals vs Monthly Rentals—What Real Estate Investors Need to Know
Wholesaling
Flipping a home is a lucrative short-term real estate investment strategy. But it requires you to make a cash down payment and potentially cover the renovation cost. How to turn a short-term profit on real estate with little money? Wholesaling.
You, the wholesaler, find an eager seller and enter a contract to find a person who wants to buy vacation rental property for their asking amount, typically within a month or two. When you find a buyer, you sell them this home for 5%-10% higher than the seller’s asking price.
Then, you collect the 5%-10% difference essentially as a finder’s fee.
In some cases, you need to put forward an earnest money deposit in the contract that the seller keeps if you fail to find a buyer. This ranges between 1% and 5%. But it’s possible to sign a contract with a symbolic deposit of $100 or without a deposit at all, meaning you can make up to 10% of the sale price without investing a dime.
But this is not a passive way to invest in real estate. You have to put in quite a lot of work into finding a buyer, and if you don’t have a group of investors you can offer the real estate, it can be hard.
Related: 20 Best States to Buy Investment Property in 2023
Equity Partnerships
Another way how to invest in real estate with little money is by pooling together the funds of multiple people. If your network has trustworthy people who are interested in investing in real estate, you could partner up and invest in several properties together.
The best way to do that is by forming an LLC or another legal entity that will own the real estate. You also need to create a very detailed contract to avoid disagreements with your partners.
The best part is that you don’t have to bring money to the partnership. Instead, you could bring skills. Here’s what you can bring to the table:
- The ability to attract investors
- The skill of finding the best investment property
- The skills to do a renovation
- The ability to manage rental real estate
If you can offer one of these four, you could potentially invest in real estate with little money, having your partners to bring in the funds.
Master Lease
How to invest in real estate if you have very little money but really want to try managing a rental property? A master lease is one of the best options.
In this type of deal, the owner of real estate leases it to you as a Master Tenant. You have the right to sublease it, manage the day-to-day operations, and keep a percentage of the profits.
There are several ways how to set up this type of contract. Ideally, you’d want to get into a deal where you pay the legal owner of the property a percentage of the profits, not a lease amount. This way, you don’t have to take a hit during vacancy.
Typically, master lease deals come with an option-to-buy contract. This allows you to purchase the real estate at a fixed price after some time. If you enter the contract in an area with high real estate appreciation and renovate it, you essentially invest a lot less than its actual value at the time of purchase.
The downside is that your cash flow from a single property can be minuscule. If it’s a single-family home with $5,000 in annual cash flow and you receive 10% of that, you’re looking at $500 in annual profit. The experience in real estate management and the potential to invest in it later makes up for that, though.
Real Estate Investment Groups (REIG)
How to invest if you don’t want to learn real estate management and just want to put the little money you have into real estate to receive a profit? Try joining a real estate investment group.
This form of hands-off investment is a mutual fund that pools investor money to invest in real estate and profit from rent. It’s organized as a partnership or a corporation, and you can find REIGs that allow you to invest as little as $5,000.
Since you’re not directly involved in running REIGs, the decision to invest comes down to trust. You have to do your due diligence on the group to gauge how trustworthy they are, what they invest in, and whether they can turn a profit.
Real Estate Investment Trusts (REIT)
A REIT is essentially a much larger, corporate form of an REIG that is regulated by the government. Due to the size, REITs typically have more options to diversify real estate portfolios. This makes them less likely to go bankrupt, unlike an REIG with a couple of dozen residential units.
How to invest in REITs? It’s a bit different than REIGs. Here, you’re not just judging the skills of members of a group, you need to judge their portfolio.
Most REITs diversify their portfolio but still focus heavily on one form of investment, be it mortgages, office spaces, or shopping malls. If you believe an area of the real estate market is going to stop being profitable, don’t invest in a REIT that focuses on it.
You can find REITs that accept investors with little money, but it’s rarely going to be less than $5,000. One big drawback of this real estate investment is that the dividends that REITs pay out are taxed like regular income.
Real Estate Crowdfunding
Thanks to modern technology, investors with little money can afford to invest in real estate for as little as $100. The way you do it is by participating in real estate crowdfunding.
Entrepreneurs go on Kickstarter to fund their product or company, typically by pre-selling the product to thousands of early investors who believe it’s worth buying. Real estate managers can go on specialized crowdfunding sites to pitch their property to thousands of retail investors.
A person who wants to buy or build a rental unit presents their business plan, and you can invest as little as $100 in multiple properties like this. If a project doesn’t reach full funding, you get your money back. If it does, you can expect a return on investment, provided everything goes as planned.
The biggest drawback of this way of investing in real estate with little money is that you can’t possibly know every person and project you’re investing in. This means that while it’s possible to diversify investment, the chances of it not returning a profit are higher.
What Is the Cheapest Method of Investing?
How to invest in real estate with little money in the bank? All methods of doing that come with either an increased risk or a high skill requirement. The cheaper an investment is, the higher both of these grow.
The cheapest way to invest in real estate when you have little money is by crowdfunding. As an investor, you can put down as little as $100. This comes with high risk as you’re investing in a single project by an individual investor. If their real estate stays vacant or doesn’t resell well, your investment is gone.
If you want more control and very little money, the cheapest way to invest in real estate is either wholesale or master lease. Both of these methods require little to no money. Instead, you’re investing your time.
With wholesale, you have to find a seller and a buyer to bring them together for a 10% share of the real estate value. With a master lease, you have to manage the rental property for a 10% share of the annual profit and the option to buy it with a profit.
Both these methods require industry knowledge. For a wholesale real estate investment, you have to find a bargain deal and then find a cash investor. For a master lease, you need to find a property with high cash flow, high appreciation potential, and low vacancy.
Here’s how you can do just that.
How to Find a Profitable Real Estate Investment Property
The most important factor that you have to consider when looking for a property is its location. Even well-kept real estate with a good renovation may not be profitable if it’s in the wrong location.
What you’re looking for is a location where people want to live. There are multiple factors that determine whether the location is good or not. You need to look into the situations of local businesses, infrastructure, and schools. You should also check if there are new constructions going on.
All of these factors influence the demand for housing in an area. But researching all of them for multiple locations takes months.
A solution to this problem is using a real estate platform like Mashvisor. It provides extremely important data like the vacancy rate in the area based on rental analysis of millions of listings across the US. It also gives you a rental estimate of key real estate metrics like cash-on-cash return based on the price of the property.
You can find real estate deals on an interactive map with real estate comps displayed for each property. To narrow down the search, filter the map by one of six important metrics like cash on cash return, listing price, and rental income.
Want to give it a go? Get a 7-day free trial and find a house you can wholesale.
Mashvisor’s Investment Property Search With Heat Map
Conclusion
There are multiple answers to the question of how to invest in real estate with little money. If you have very little money, don’t care about the high risk, and don’t want to do any work, go for real estate crowdfunding.
But if you want to have more control over your investment, you have two options. Either find a seller who’s willing to postpone a sale to sign a master lease with you or wholesale an undervalued property.
These require different skills, but focus on one crucial decision—you need to find good real estate that can earn a profit.
You can do it with Mashvisor. This platform is made for real estate investors and agents, but even investors with little money can profit from using it.
If you’re trying to land a master lease option, look for properties with low occupancy rates and high rental income. This makes sure you have less trouble finding tenants and that your annual income is higher.
Meanwhile, wholesalers should look for undervalued homes—homes in good neighborhoods that cost $10,000-$15,000 less than average.
Want to see how it works? Schedule a demo, and a team member will guide you through all the aspects of using Mashvisor.
