Many people who have reached financial independence have done so investing in real estate. This might seem like an impossible achievement if you’re only looking at the end result, but by starting out with small steps and making continued forward progress, you can make your way to “real estate mogul” even if you only have a smaller dollar amount to start investing with. Today we’ll talk about how you can get started in real estate investing even if you don’t have a ton of cash in the bank.
First, let’s talk about how you can save up money for real estate investing. Saving money has to start with making a budget. Check out this post on how to create a budget that works so that you can maximize the amount of money you save every month. When you’ve created your budget, you can then put all of your extra monthly funds into a savings account designated for investing in real estate. If you’re serious about investing, you should be able to save up money in a reasonable amount of time by eliminating unnecessary expenses for a short amount of time.
For the sake of argument, let’s say you’ve got $5,000 saved and you want to get started with real estate investing. There are two options you can look at to get started in real estate investing.
Traditional Real Estate Investing
The first option is in traditional real estate investing. In other words, you buy rental properties and rent them out to others. Traditional real estate investing is a great option for growing wealth. However, there are some downsides with traditional real estate investing that require serious thought before you go that route.
First, traditional real estate investing requires heavy time input. It often requires you look at dozens of houses before you find the right one for rental purposes. After you make your purchase, you’ll spend time readying the house for tenants, searching for tenants, managing the property and maintaining the property.
Also, because you’re starting with a minimal amount of money, you’ll need to first purchase the home as an owner-occupied home and live there for at least twelve months before renting the house out. This is the rule with most lenders for purchasing an owner-occupied home with a minimal amount down. There’s also added risk with traditional real estate investing because you are responsible for a large mortgage loan on the property, and with only five percent down (on an assumed $100,000 purchase since your cash available is $5,000), you are holding a loan with very little safeguard between you and a housing market downturn. Again, I’m not against traditional real estate investing, but when you’re going in with a small amount of cash to start with, it’s important to be aware of the risks.
Crowd-Funded Real Estate Investing
If owning and managing your own rental properties isn’t necessarily your deal but you still want to grow wealth through real estate investing, you can try crowd-funded real estate investing.
Similar to peer-to-peer lending, crowd-funded real estate investing means that you are a part of a group of people who pool their money with other investors and lend that money to experienced rental real estate investment property owners. The work on your part is minimal yet you still have the potential to make a serious profit from real estate investing.
Investors who invest their money in crowd-funded real estate investments can invest in a small piece of a real estate investment or in the entire investment. Statistics charts on crowd-funded sites track an investment’s earnings history information and often provide investors with year-end tax information as well. Investments can also be managed online at the investor’s will.
The main attraction of crowdfunded real estate investing is that it’s easier for the investor because someone else does the work of finding the property, getting a mortgage loan on the property, screening tenants, managing tenants and managing the property. Also, because the dollar amount you’ve invested is minimal and someone else is responsible for the property loan or loans you invest in, you don’t have to worry about being responsible for added debt on your credit report.
Basically, your workload is minimized yet the potential for profit can still exist.
Before the world of crowdfunding, only those with connections were allowed to invest in private real estate deals. Under the Securities Act of 1933, private securities investments such as real estate investments could not be marketed publicly. You had to be “in the know” if you wanted to fund the real estate ventures of wealthy real estate moguls, and the select group of people who had access to these deals often had to invest massive amounts of cash (often times in the six-figure range) for the privilege of being involved in private real estate investing ventures.
Crowdfunding has changed that. Crowdfunded real estate investing allows investors of all different backgrounds to get in on ground-floor investing deals. It doesn’t matter who you know or whether you’re a first-time real estate investor or seasoned real estate investor. You can start with a few thousand dollars or with hundreds of thousands of dollars. Basically, crowdfunded real estate investing has leveled the playing field instead of closing the door on real estate investing to anyone but the super-rich.
There are many platforms for investing in real estate via crowd-funding. I’m going to talk about two of the biggest today.
Realty Shares is one of the largest crowd-funding companies around today, and they’ve got a pretty large selection of properties to choose from. Here are some features of using Realty Shares.
- $5,000 general minimum investment, although they occasionally offer properties with a $1,000 minimum
- No fees for registering. A 1% annual management fee
- Accredited investors only. An accredited investor needs to have a minimum income of $200,000 per year ($300,000 for married couples) for the past two years OR a net worth minimum of $1,000,000.
- Residential and commercial real estate offerings
- We have an affiliate relationship with RealtyShares
Another popular crowd-funding company is Fundrise. They opened in 2012 and also have a fairly large selection of property investments to choose from. Here are some of the specifications for investing with Fundrise.
- $1,000 minimum investment threshold
- One percent annual management fee
- Non-accredited investors as well as accredited investors
- Residential and commercial real estate offerings
There are hundreds of crowd-funded real estate investing companies out there. Here are some tips for picking crowdfunding real estate wisely.
Research the crowdfunding companies you’re considering. How long have they been in business? What is the experience of their leadership team? What are their guidelines for borrowers? What are their guidelines for investors? What is the minimum investment amount? What fees are charged by the crowdfunding companies? Do investors have access to historical returns? The more transparent the crowdfunding company is, the more information you have with which to make an investment decision.
Understand what your getting into
It’s important to understand how the process works when it comes to crowdfunded real estate investing. Different companies have different methods for calculating and distributing investor returns. There are generally two types of crowdfunding investment when it comes to real estate: debt investments and equity investments.
With debt investments, you earn your money as the real estate borrower pays back his or her loan. With equity investments, your return is based on the performance of the rental property and its income. For instance, if you invest in a commercial real estate property that has the ability to house several tenants, you as the investor make more money if all of those spaces are rented out. If the commercial building sits half empty for a period of time, you make lower returns.
It’s important as you research the many crowdfunded real estate companies that you understand which types of investments they fund and choose the type of investment that fits your risk tolerance and investment education level. In other words, the more you educate yourself the better your understanding of the risks and benefits will be, and that will allow you to make smarter investing choices.
As with any investment, there are risks involved with both traditional and crowd-funded real estate investing. Traditional real estate investors may find themselves unable to rent a property situated in a bad area of town, may be the recipient of a housing market crash or may have to do massive repairs if a tenant damages the home.
When investing in crowdfunded real estate investments, the investment you choose to invest in does have the potential to lose money. It’s important to educate yourself on the pros and cons of both types of real estate investing before making a choice as to which type of real estate investment is best for you.
Your risk comfort level is also a factor as well. With crowd-funded real estate investing, you don’t carry the entire burden of rental property ownership, instead often sharing the risk with several other investors. Either way, the potential for increasing wealth through real estate investing is a serious reality for both types of investments; both traditional and crowd-funded. Crowdfunded real estate investing has opened the door for investors with nearly any amount of cash to grow their net worth via real estate investing.
People will always need a place to live and companies will always need offices to conduct their businesses in. That truth makes real estate investing in any form a smart investment to consider.
Which type of real estate investing most appeals to you?
The information contained herein neither constitutes an offer for nor a solicitation of interest in any securities offering; however, if an indication of interest is provided, it may be withdrawn or revoked, without obligation or commitment of any kind prior to being accepted following the qualification or effectiveness of the applicable offering document, and any offer, solicitation or sale of any securities will be made only by means of an offering circular, private placement memorandum, or prospectus. No money or other consideration is hereby being solicited, and will not be accepted without such potential investor having been provided the applicable offering document. Joining the Fundrise Platform neither constitutes an indication of interest in any offering nor involves any obligation or commitment of any kind.
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