How to Invest in Real Estate for $1,000 or Less
- Real estate mutual funds such as REITs provide a beginner-friendly path to investing in real estate.
- Property tax liens enable you to invest with a lower level of risk.
- Real estate partnerships enable you to spread property funding and management requirements across multiple partners.
The average price of a house in the United States peaked at a little over $400,000 in May 2022, causing many to believe that investing in property would likewise require a king's ransom to participate. Fortunately, numerous affordable options remain for investing in real estate. In this guide, we’ll share five ways to invest in real estate for $1,000 or less.
1. Real Estate Investment Trusts (REITs)
Publicly-traded real estate investment trusts, or REITs, provide a beginner-friendly path to investing in real estate. REITs allow you to invest a small amount—for some REITs, as little as $100—in a collection of properties that number in the hundreds or even thousands.
Similar to how stock and bond mutual funds allow you to choose your adventure in terms of asset type, real estate investment trusts vary by real estate type, from shopping malls to apartment complexes to self-storage facilities.
REIT shareholders receive quarterly dividends based on the portfolio’s investment returns. However, unlike traditional mutual funds, payment of dividends is more than a mere suggestion. The Securities and Exchange Commission (SEC) requires publicly-traded REITs to pay out at least 90% of their annual profits to REIT owners via dividends.
The good news is that dividend yields for REIT investments can be quite attractive. The bad news is that since the lion’s share of profits is turned over to shareholders, there’s very little left to grow the REIT or to weather unexpected losses.
When making your list of potential REITS for investment, consider the REIT’s reputation, track record, dividend history, performance, and management team.
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Real estate crowdfunding offers another vehicle for making small investments in real estate using the power of pooled resources. Crowdfunding occurs on a platform and involves property owners raising investment capital for real estate ventures. The crowdfunding platform serves as a middleman of sorts, such as evaluating potential property investor requests before allowing them to be posted.
Crowdfunded investments tend to be less liquid than REITs. The reason is that REITs are publicly listed assets that are purchased and traded on stock exchanges, while crowdfunding occurs by buying shares in a platform.
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Opportunities to participate in crowdfunds exist at the investor and lending levels:
When participating in crowdfunding as an investor, your share of the profits will be based on the performance of the investment, just as with REITs. Unlike REITs, minimum hold periods in the investment, extending five years or even longer, may be required. These hold periods enable the property owner to ensure that they have sufficient time to develop the asset before facing the risk of an investor cashing in their investment.
For investors preferring a higher level of certainty in receiving returns, serving as a lender might be a better fit. When lending funds to an investment, the property or portfolio of properties serves as the collateral. In this regard, participating as a lender is similar to buying into a bond fund.
3. Real Estate Wholesaling
Another popular, low-cost, and relatively straightforward way to invest in properties is through wholesaling. The job of a wholesaler is to find owners who want to sell their property but have not yet listed it. With a seller in hand, the wholesaler enters into a contract giving them the right (but not the obligation) to buy the property at a specified price. The wholesaler will then seek a buyer to acquire the property at a price above the specified price, thus pocketing the difference.
While the wholesaler, in theory, faces an investment cost of zero, in practice, they incur transportation and marketing costs in order to find and screen properties. Wholesaling can be a good way to get to know a real estate market in detail and profit from the sale of a property with very little start-up capital.
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4. Property Tax Liens
Counties and municipalities require property owners of all types, from single-family homeowners to commercial and industrial complexes, to pay property taxes. When the taxes or other payments to the county or city go unpaid, for instance, municipal water and sewer services, the governmental entity places a lien on the property. The lien amount comprises the amount owed plus interest, late fees, and any penalties.
Cities and counties use the services of tax lien platforms to auction off liens. Auctioning liens to the highest buyer allows the government to pass off the headache of debt collections to the winning bidders. Additionally, auctions allow the local government to collect on debts immediately through the auction proceeds rather than later.
Real estate investors are able to register online to buy tax liens. Since the liens are sold through an online portal, investors can make purchases in multiple states and with no travel time. Winning investors will be issued a tax lien certificate, which then transfers the ownership of a particular debt to the investor and entitles the investor to collect payments from the property owner. Tax lien requirements and auctions vary from state to state, so spend time researching the rules before participating.
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5. Real Estate Partnerships
Forming a partnership with other like-minded investors is a great way to gain entry to investments that would otherwise be beyond your pocketbook or skillset. There are two types of partnerships that most investors consider: active and passive.
Active partnerships, as the name implies, entail a very hands-on role by each of the investors. Engagement can range from property renovation to property management, to sales and marketing, to all of the above
A passive partner is usually the ‘money’ behind the deal, providing a large portion of the investment in exchange for a large share of the profits. Such investors often have a minor role in operations, instead allowing the active partner to take the lead.
No matter the partnership structure you choose, you will want to ensure that a written agreement, ideally one evaluated by an attorney, is drafted to define roles.
The Money Wrap-Up
Real estate investing doesn’t have to require a large outlay. Fractional investment-type opportunities, whether through REITS, crowdfunding, or tax lien certificates, as well as brokering opportunities such as wholesaling, offer great on-ramps to investing.