What are 8 ways to invest in real estate with only $20,000?
When most people think of investing that amount of money, their first thoughts go to things like investment portfolios and retirement plans consisting of stocks and fixed-income investments.
Real estate is an excellent form of portfolio diversification because it is a physical asset, meaning it cannot be devalued by inflation. Real estate’s long-term investment performance is difficult to refute. In fact, I recommend that it’s the first thing you should consider when you have that amount to invest.
Investing in real estate can help improve your investment returns over time.
Real estate can be a scary investment for a lot of people. If you fix-and-flip or own a property to rent out, you can make money.
There are more than one or two ways to invest in real estate. Even people who don’t have a lot of money to invest can get involved in real estate investing.
Many successful real estate investors agree that they could have started sooner and been more successful.
According to Robert Kiyosaki, who wrote Rich Dad Poor Dad, investing in real estate is a reliable way to generate income and increase net worth.
Why don’t more people invest in real estate earlier?
Some people believe that you need a lot of money to invest in real estate. This may have been the case in the past when buying property required a lot of money. But today, that’s not necessarily the truth.
This article covers ways to invest in real estate in general, plus eight ways to invest in real estate with a starting budget of $20,000 or less.
Key Takeaways:
- Real estate is an excellent form of portfolio diversification and can improve investment returns.
- Fundrise enables users to invest in Real Estate Investment Trusts (REITs) without extensive research or hands-on work.
- Homeownership can be an excellent first real estate investment if adequately managed.
- Rental properties can generate income and provide the potential for capital gains.
- Online P2P platforms and real estate crowdfunding offer more control and diversification in real estate investments.
- Commercial real estate investments can yield higher rental incomes and appreciation but require more experience.
- With a $20,000 budget, options include low down payment purchases, seller carrybacks, fix-and-flips, wholesale real estate, rent-to-own agreements, single-family rentals, real estate crowdfunding, and investing in ETFs and REITs.
How To Invest in Real Estate
1. Invest in Fundrise
Many people want to invest in real estate but don’t want to deal with the hassle of having tenants, repairs, and managing payments. They also don’t want to go through the process of learning how to invest in real estate through trial and error.
You can put your money into real estate without having to do all the research and work yourself.
Fundrise allows users to invest their money in Real Estate Investment Trusts (REITs) through an online platform. REITs are portfolios of income-producing real estate that are typically used to finance commercial property acquisitions and development. Professionals at Fundrise manage your money so you can sit back and watch it grow.
2. Owning Your Own Home
Owning a home is not only about providing shelter. If you manage your home properly, it can be the best way to invest in real estate for your first investment.
What do I mean by “if properly managed”?
Purchasing a home at a fair market value or less means that you are paying the same price or less than what the home is currently worth. It’s better to buy the cheapest home in a neighborhood than the most expensive one.
If you want to, you can pay off your mortgage in 30 years or less. However, rather than doing that, I recommend keeping any extra money, growing your emergency fund and then investing in other ways.
This means keeping the property in good condition, without spending more on upgrades than the increased market value you will gain.
3. Buy Rental Properties to Generate Income
This has been a popular method to gaining wealth over a long period of time. The same reasons that make your home a good investment – gradually paying off your mortgage and the property increasing in value – also apply to rental properties.
Not only does investing in real estate provide you with the potential for capital gains, but it also offers the opportunity to earn rental income.
rent from an investment property should at least cover the costs of owning it. If your tenant does nothing more, they will be effectively paying for your investment. When the money you make from renting is more than the money you spend on the property, you will have a positive cash flow.
If the business produces a positive cash flow, the income will come to you tax-free. This is because you can take depreciation expenses on the investment property. Since it is an investment property, the improvements can be “expensed” over a number of years. Although depreciation is an expense that is only on paper and doesn’t require an actual cash payment, it can reduce the amount of money you earn from renting property.
As rents increase, your monthly payment will remain relatively unchanged, resulting in an increase in your income. After the property is paid off, most of the rental income will be profit.
There are some things that you need to be aware of with rental properties:
- They require large down payments, generally 20% or more of the purchase price.
- It’s more difficult to qualify for a mortgage on investment property than on an owner-occupied home.
- There are vacancy factors – times in between tenants when there is no rent income.
- Repairs and maintenance – painting, replacing carpets, etc. – will need to be done after each tenant moves out.
There are some challenges that come with owning rental property, but they can all be overcome if you are aware of them.
This is my own personal recommendation for any kind of investing. Single family rental homes are a cornerstone of our financial freedom plan.
4. Invest in Real Estate through Online P2P Platforms
There are a growing number of P2P investment platforms that focus on real estate investing. The process is commonly referred to as crowdfunding. An investment group is a group of investors who come together to invest money in a specific investment.
There are platforms that allow you to invest in real estate online, which provides different types of real estate and different ways to invest. Your investment in ETFs is not as easy to convert to cash as it would be if you invested in mutual funds, but it is less complicated than investing in real estate LPs.
Real estate crowdfunding is similar to investing in a REIT, but the investor has more control over what they are investing in. You can choose which deals to invest in with a P2P platform.
This allows you to invest a small amount of money into multiple deals, which can help to diversify your investment.
Crowdfunding platforms that focus on real estate have been present for a few years. There are many platforms available that allow you to choose how and where to invest your money.
Meanwhile, new platforms are coming online all the time.
If you’re unsure about the best way to invest in real estate, the following options are definitely worth a quick Google search.
5. Investing in Commercial Real Estate
This is a type of rental property where you would invest in an office, store, or warehouse space. It follows the same general pattern. You purchase a property with the intention of renting it out to tenants in order to have them pay your mortgage and generate a profit.
Commercial property investment is generally more complicated and expensive than investment in residential real estate rentals.
What are the benefits of investing in commercial real estate?
This is because commercial properties tend to have higher rental incomes and can be sold for more money than residential properties. If you don’t know how to invest in property, especially commercial property, you can end up losing a lot of money.
If you have experience and money to invest, commercial real estate is a great way to go. You can make a lot of money if you do it right.
One advantage of commercial real estate is that it typically involves long-term leases. The business renting the property will want a multi-year lease. This will ensure the continuity of their business.
A lease typically lasts for 10 years or more. This means that the cash flow will be more stable and consistent since you will not have to worry about changing tenants every year or two.
The appreciation of the property can be more generous than for residential properties. This is especially true if the property is highly profitable. Tenants who rent commercial property are often responsible for the upkeep of the building in addition to their monthly rent.
Leases can be structured to give the landlord a percentage of the profits of the business as well. This allows the landlord to benefit from the success of the business, while still providing the tenant with an incentive to succeed.
One caveat is that commercial real estate definitely isn’t for beginners. You should definitely have at least some experience investing in real estate before you do so.
Now, let’s get down to the nuts and bolts of this. What about if you only have $20,000 to invest? Here are a couple ways to get started with a little as that amount.
8 Ways to Invest in Real Estate with $20,000 or Less
Here are eight ways to invest in real estate if you have $20,000 to spend.
#1. Low down payment purchase.
You can buy a rental property with only a $20,000 down payment. There are properties available on Roofstock that require an initial investment of $20,000 or less. These properties include single-family and small multifamily investment properties.
Financing property is also an option. You can make your purchase offer stronger by selecting a lender and getting preapproved online. You will receive a preapproval letter when you are preapproved.
#2. Seller carryback.
Sellers who have a lot of equity in their property are sometimes willing to provide financing to buyers by holding the mortgage themselves. This is why sellers might want to avoid paying capital gains tax and aren’t interested in a 1031 exchange- they want to receive less money up front.
Make sure you get everything in writing as you would if you were taking out a conventional mortgage. An escrow company can keep track of payments and the balance of the loan due to the seller.
#3. Fix-and-flip.
If you’re looking to make a quick profit by buying and selling properties, fix-and-flip investing may be for you. The best fix-and-flip homes are the ones that can be immediately sold for a profit.
This allows you to put part of your $20,000 down and obtain a short-term loan for the rest by using the property equity as collateral. Even after putting down a sizable down payment, you’ll have some money left over for smaller repairs and updates. If you’re not familiar with the area’s real estate market or lack experience with construction, flipping houses can be a risky endeavor. This is especially true if the local market for housing suddenly slows down.
#4. Wholesale real estate.
Wholesalers in the real estate industry don’t typically close on homes themselves and don’t want to. Instead, wholesalers find an extremely motivated seller. They purchase the property with a contract that has a closing date 60- to 90-days out, and a small earnest money deposit.
Once the property is no longer available for purchase, the wholesaler finds someone who is willing to take over the contract, collects a fee for their services, and earns a quick profit. The wholesaler doesn’t put any money into repairing or updating the property, but they run the risk of not finding a buyer to sell the contract to before close of escrow.
#5. Rent-to-own.
The contract gives you the option to buy the house for a certain price within a certain time frame. Some of your monthly payments contribute to the down payment. Your equity that has built up, plus the $20,000 you have in cash, will then let you get a mortgage on the property.
A lawyer should review the rent-to-own agreement. An escrow company (a third party) should be responsible for accepting, disbursing, and keeping track of all payments made by you to ensure neutrality.
#6. Buy a single-family rental property.
This is our own favorite way to get started in real estate, purchasing single family rental properties.
Think of it this way, you don’t need to fund the entire purchase of a property, but you only need to provide a down payment for it. You can fund the rest of it with a loan from the bank or with several different ways to fund it with other people’s money.
#7. Real estate crowdfunding.
Crowdfunding platforms like RealtyMogul and Fundrise let investors pool their money together. They use money from investors to buy Class A, investment-grade commercial real estate such as shopping centers, office buildings, and large apartment complexes. As an investor, you would receive quarterly cash flow distributions, and would be able to own a small piece of a large property that you would likely be unable to purchase by yourself.
Geographically and asset-class diverse investment capital can be good to crowdfund. Although investing in commercial real estate has the potential to be profitable, it also comes with risks. During a recession, the demand for retail and office property usually decreases significantly because consumers and businesses spend less and make cuts.
#8. Real estate ETFs and REITs.
Investors can also buy and sell shares of ETFs and REITs, which are publicly listed on stock exchanges. Broad Market ETF, and iShares US Treasury Bond ETF. Some of the most commonly traded ETFs are those that track real estate, the broad US stock market, and US Treasury bonds. REIT ETF, and iShares U.S. Real Estate ETF.
A real estate investment trust (more commonly knowns as a REIT) is a investment company that owns or operates income-producing real estate assets.. This means that a REIT must distribute at least 90% of its taxable income to shareholders in the form of a dividend. Real estate investment trusts (REITs) can help to diversify an investment portfolio by both geography and asset type. These are some of the biggest real estate investment trusts that are publicly traded.
Investing in Real Estate with $20k
The purpose of investing in real estate is to use your money to generate income in the present, as well as profits through appreciation in the future.
In today’s world of real estate investing, you don’t need hundreds of thousands of dollars to get started. You can start with a smaller amount of money and still be successful. There are numerous ways to invest in real estate even if you have a budget of $20,000 or less.
It’s important to understand how rental property investment works before you invest.
- Search for property by price, down payment, cap rate, and more.
- Analyze rental property with interactive tools to help with visualizing returns.
- Make an offer.
- Close on the property with the help of service and transaction team.
Real Estate Investing With More than $20k
Here is some further reading if you happen to have more money than that to invest in real estate:
7 Ways to invest $1 Million Dollars
What about you, the reader? How would you invest $20,000? Let us know in the comments below!
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.
