Exploring real estate investments might seem daunting if you lack substantial financial backing. However, it’s entirely feasible to become a real estate investor without being wealthy. Continue reading to uncover how everyday individuals can incorporate real estate into their investment strategies.
Investing in real estate offers various avenues. You can purchase physical properties either to rent or sell for a profit, or adopt a more passive strategy using real estate investment trusts (REITs) or crowdfunding platforms.
No matter your selected method, you can indeed engage in real estate investment without needing to make a massive initial financial commitment.
House hacking involves purchasing a residence to both live in and generate rental income. Many who pursue house hacking aim to earn enough from rentals to offset their living costs. Naturally, this means being open to acting as a landlord to tenants nearby.
Below are several popular strategies for house hacking:
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Acquire a multifamily property. A prevalent house hacking strategy is to buy a multifamily dwelling, living in one unit and renting out the others. For instance, consider acquiring a triplex with a $300,000 mortgage at a 6% fixed rate. Monthly mortgage payments may amount to approximately $2,600. However, by securing two tenants who pay $1,500 each in rent, you can alleviate housing costs and earn an additional $400 monthly.
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Construct an accessory dwelling unit. Accessory dwelling units (ADUs) act as secondary housing units on a single-family property. Some individuals explore the option of constructing an ADU on their primary residence to generate extra income. This might be a garage apartment or transforming an existing basement into a rental space. Building a separate structure, such as a backyard cottage or tiny home, is also a possibility, contingent upon local zoning regulations.
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List additional space on Airbnb or VRBO. If you possess unoccupied bedrooms or living areas, utilizing a short-term rental service like Airbnb or VRBO could be a lucrative option. Before listing, check your local regulations as well as any rules set forth by homeowner associations (HOAs) regarding short-term rentals. Some may enforce a minimum lease period, such as 30 days or longer.
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Invite roommates. Sharing your space with roommates is arguably the easiest route to house hacking. Ensure a written agreement is drafted, outlining rent responsibilities and household guidelines before handing over access to your home.
Pro tip: Homebuyers might qualify for an FHA loan or a VA loan to purchase a multifamily property with up to four units. Both loan types can be advantageous for aspiring homeowners aiming to minimize their initial down payment.
For those interested in earning passive income, real estate investment trusts (REITs) present an appealing option. A REIT is a company that governs, finances, and operates commercial real estate such as apartments, offices, or industrial spaces. They resemble mutual funds in that they diversify investments across various real estate ventures, providing a simplified approach to ownership.
Numerous REITs are publicly traded on stock exchanges, allowing you to purchase shares just like traditional stocks.
REITs may serve as one of the most accessible ways for beginners to delve into commercial real estate with modest investments. You could begin with the cost of a single share, and some brokerage firms even offer fractional investing, permitting you to invest as little as $1.
REITs must distribute at least 90% of their taxable income to shareholders annually, which ensures a steady flow of dividend income. While most REITs pay dividends on a quarterly basis, a few provide monthly distributions.
If choosing individual REITs seems daunting, consider investing in a real estate exchange-traded fund (ETF) that encompasses multiple REITs. For instance, the Vanguard Real Estate ETF (VNQ) and Schwab US REIT ETF (SCHH) benchmark the performance of the broader commercial real estate sector, whereas others may specialize in specific property categories such as healthcare facilities or retail spaces.
Several online platforms offer real estate investment opportunities through crowdfunding methods, pooling investor resources for real estate projects.
Some crowdfunding avenues are restricted to accredited investors. To qualify as an accredited investor, you must have a net worth exceeding $1 million (not including your home) or an annual income of at least $200,000 individually, or $300,000 as a married couple. Fortunately, several crowdfunding platforms allow participation by those without considerable wealth, such as:
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Fundrise
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RealtyMogul
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YieldStreet
Initial investment requirements can differ greatly. For instance, Fundrise permits entry at just $10, while YieldStreet necessitates a minimum investment of $10,000.
Homeowners have the option of utilizing a home equity line of credit (HELOC) to fund a real estate-related investment. A HELOC operates as a revolving credit line, leveraging your property’s value as collateral. This differs from a cash-out refinance, which involves replacing your existing mortgage with a new one. Instead, with a HELOC, you take an additional line of credit over your existing mortgage, drawing funds as needed, similar to a credit card.
Typically, you can borrow up to 85% of your home’s value after deducting the outstanding mortgage balance. If your home is valued at $400,000 and you still owe $250,000, many lenders can help you calculate your borrowing limit as follows:
$400,000 (home value) x 0.85 (loan-to-value ratio limit) = $340,000
$340,000 – $250,000 (existing mortgage balance) = $90,000 maximum HELOC
Here are a few potential uses for funds drawn from a HELOC for real estate investments:
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Utilize the funds for a down payment on an investment property.
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Purchase a fixer-upper outright and resell after renovations.
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Direct funds toward constructing an ADU on your property or enhancing your home to enable renting a room.
Generally, HELOC lenders usually require a favorable credit score and reliable income for qualification. Because the credit line is secured by your home, interest rates tend to be lower compared to credit cards and personal loans.
Pro tip: The interest on a HELOC may be tax-deductible if used to purchase, upgrade, or build the home that secures the loan. To benefit from this tax deduction, itemizing your tax return will be necessary.
If you’re still contemplating the path to real estate investment, reflect on your financial aspirations. Consider these questions:
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Are you aiming to accumulate equity with your monthly housing payments? If yes, consider saving for a down payment to purchase a property. You might need less capital than anticipated; for instance, FHA loans can be acquired with down payments as low as 3.5%.
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Do you seek consistent cash flow? If generating monthly rental income interests you, investing in a rental property could be an effective strategy. You could directly manage properties or choose house hacking if you’re comfortable living among your tenants.
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Are you interested in passive income? If passive income is your goal, physical property acquisition isn’t a prerequisite. REITs and crowdfunding platforms facilitate easier investment avenues in real estate.
Once your objectives are clarified, assess your financial landscape. If property ownership is on your radar but your credit score is subpar, focusing on debt reduction and timely payments can enhance your financing opportunities. Additionally, maintaining a reserve fund is essential to cover unexpected occurrences, like missed rent payments or unexpected repair expenses.
If venturing into REITs or crowdfunding piques your interest, review your current investment holdings. There may already be indirect real estate exposure in your portfolio. For instance, if you invest in S&P 500 index funds via retirement accounts, you likely own shares in multiple REITs without realizing it. Consulting a financial advisor may help clarify whether enhancing your real estate investments aligns with your financial goals.
If your interest lies in real estate investment but purchasing property is out of reach, consider investing in REITs or exploring real estate crowdfunding platforms. Alternatively, place your savings in a high-yield account to eventually accumulate enough for a down payment on a home.
Indeed, you can invest in REITs or real estate ETFs with an investment of less than $5,000. Various online crowdfunding options also permit minimum investments below this threshold.
Many house flippers utilize hard money loans to fund property acquisitions. These are short-term loans where the purchased property serves as security. Interest rates typically exceed those of traditional mortgages. It’s common to work with private lenders to secure hard money financing since few banks offer these kinds of loans. Other methods for financing house flipping include leveraging a HELOC, cash-out refinancing from your main residence or simply saving up for a direct purchase.
