Investing in real estate has gained significant traction as an avenue for wealth accumulation, and it's not without good reason. The potential for property value appreciation and the prospect of consistent rental income have captured the attention of many aspiring wealth builders.
While some investors have managed to build impressive portfolios consisting of real estate assets that have amplified their net worth and generated a healthy cash flow, there are many more for whom the opportunity remains a distant and seemingly unattainable dream.
In the past, many hopeful investors faced a common obstacle: the financial barrier to entry. But here's something to celebrate—there’s been some major shifts in the world of real estate investing that have opened up new doors (literally) even for those with limited financial resources.
As the desire to invest in real estate is growing, the barrier to entry is falling.
That means that you—yes, you!—have the opportunity to venture into the world of real estate investing, even without a hefty sum of cash or leverage at your disposal. While there are numerous strategies for entry, we'll narrow our focus to three specific approaches that can set you on the path to ownership:
Real Estate Investment Trusts (REITs)
Real Estate Crowdfunding
If you’re wondering how to invest in real estate with little money, explore these three options today!
3 Ways To Invest in Real Estate
Long gone are the days of real estate investing being only for the ultra-wealthy. Today, more and more beginner real estate investors are adding real estate exposure to their portfolios, making them even more diversified. These three unique opportunities could be your chance to do the same!
1. Real Estate Investment Trusts (REITs)
What is it? REITs allow investors to gain exposure to the real estate market without directly owning or managing the properties themselves. REITs are companies that pool funds from multiple investors to invest in various types of real estate assets, such as residential buildings, commercial offices, shopping centers, or hotels.
REITs offer a wide range of investment opportunities, often targeting specific sectors or geographic locations. From luxury beachfront resorts around the globe to state-of-the-art medical facilities in the U.S., you can invest in real estate assets matching your interests and goals.
Benefits of REITs
Income. REITs are required by law to distribute a significant portion of their earnings to shareholders in the form of dividends. As a shareholder, this means you can earn a portion of the rental income or profits generated by the properties owned by the REIT, making it particularly appealing for investors seeking a steady stream of income.
Liquidity. REITs typically trade on major stock exchanges, similar to other stocks. This allows investors to easily buy and sell REIT shares and offers flexibility to liquidate their holdings when they need to raise cash.
Drawbacks of REITs
Concentration risk. Since many REITs focus heavily on specific sectors or geographic regions, there's a higher risk if those markets experience any downturns or unexpected events. For instance, a hurricane striking southern Florida could negatively impact the returns of a REIT that primarily owns hotels in that area.
Limited control. As a shareholder, you don't have direct control over the underlying real estate assets' day-to-day operations or decision-making processes. You're relying on the REIT's management team to make decisions on your behalf (which, for some, may actually be a benefit instead of a drawback!).
2. Real Estate Crowdfunding
What is it? Real estate crowdfunding brings together a group of people who combine their financial resources to collectively fund real estate projects. Think of it as a crowdfunding campaign, but instead of supporting a worthy cause or project, you're investing in real estate.
Instead of purchasing shares in a company as you would with REITs, crowdfunding investors typically contribute money directly to specific real estate projects, which means more targeted investment opportunities.
A real estate crowdfunding platform acts as a middleman, connecting investors with real estate developers or property owners seeking project funding. Similar to REITs, projects can range from residential properties to commercial properties.
Benefits of Crowdfunding
Niching down. Investors can browse through opportunities on the platforms to review project details, including property details, financial projections, and potential returns. This allows investors to participate directly in individual projects, which may be ideal for those seeking to align their investments with their personal preferences and criteria.
Early-stage investments. Real estate crowdfunding can provide access to early-stage or development projects that may not yet be available through REITs. This provides investors with the potential to capitalize on the early stages of the project, where there may be opportunities for significant appreciation in the property value.
Drawbacks of Crowdfunding
Diversification/project risk. Since the focus is typically on individual projects, there is less diversification and, consequently, more risk. Factors such as construction delays, underestimated costs, or zoning or regulatory issues can pose additional challenges and impact your returns.
Illiquidity. Unlike REITs, which can be easily converted to cash through trading, this option doesn't provide the same level of liquidity. In fact, investors should prepare for their capital to be tied up for the duration of the project or a predetermined holding period. In other words, don't even think about investing your emergency fund in a real estate crowdfunding project!
REITs and real estate crowdfunding may be well suited for aspiring investors with limited financial means or time constraints who still want to experience ownership. If you're a little further along and ready to experience direct ownership, let's explore an alternative avenue.
3. House Hacking
What is it? House hacking refers to a strategy in which an individual purchases a property to live in one part of it while renting out the remaining units or rooms to generate rental income.
For instance, you could acquire a multi-unit property, such as a duplex, where you live in one unit and rent out the other. Alternatively, you could purchase a single-family home and rent out individual rooms.
The goal is to reduce or eliminate housing costs by offsetting them with rental income from tenants.
Benefits of House Hacking
Reduced housing costs. Rental income can help cover the mortgage, property taxes, and other expenses, making homeownership more affordable.
Financing options. House hacking can open up financing opportunities that may not be available for traditional investment properties. For instance, you may be able to take advantage of an owner-occupied mortgage with lower down payment requirements and more favorable interest rates.
Drawbacks of House Hacking
Tenant-related risks. Remember that you will be residing in close proximity to or sharing the same property with your tenants. This can get uncomfortable if issues such as non-payment of rent, property damages, or even personality conflicts occur.
Income volatility. There may be periods of vacancy or difficulty finding suitable tenants, requiring you to be financially prepared to cover all expenses.
Let Wealthly Help You Strategize the Best Way to Begin Your Real Estate Investment Journey
At Wealthly, we understand and support your dream to explore real estate investing as a means of building wealth. In today's real estate landscape, investing is becoming increasingly accessible, and that is something to celebrate! However, the abundance of options can make identifying the most fitting path for your specific circumstances and goals challenging.
Whether you're seeking to begin your journey with gradual steps through indirect ownership as a precursor to direct ownership or if you're ready to embark directly on the path of ownership, we are here to guide you.
To see if we can help you evaluate your current position, develop a customized plan, and determine the optimal path to begin your real estate investment journey, email me at firstname.lastname@example.org or click here to fill out a contact form today. We’ll be in touch soon!
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.