Young people ask me all the time if they can start investing in real estate even if they only have $1,000. For that matter, some not-so-young people ask that question too.
To which I always answer “Yes – with some limitations.”
The more time your money has to compound, the less you have to invest. Compounding does the heavy lifting for you, if you have 40 years to climb the wealth ladder. If you want to reach financial independence in only ten years, well… you need to get more serious about saving money.
No, really. At an 8% return, you only need to invest $310.45 per month to reach $1 million dollars in 40 years. If you want to reach $1 million in 10 years, you need to save $5,551.72 per month: roughly 18 times as much monthly savings.
Which means you should start investing now, if you want to reach financial freedom at a young age. Even if you only have $1,000 to get started.
Don’t kid yourself – you’re not going to be wheeling and dealing as a mogul. But that doesn’t mean you can’t get started in real estate with only $1,000.
If you don’t have much money, but want to get started in real estate investing, partner with an experienced investor and offer to do all the gopher work. You have to bring something to the table after all, and it certainly isn’t capital or experience.
Partnering with an experienced real estate investor makes a great way to learn the ropes, and to learn how to avoid common pitfalls that swallow most new investors.
Another way to get started with little money is to wholesale real estate deals.
The concept is simple: you find a phenomenal deal on a property, get it under contract, then turn around and flip that contract to an investor who actually wants to buy it. For a tidy profit margin.
But “simple” doesn’t mean “easy.” Finding outstanding deals takes skill and work, and then it takes a healthy buyer’s list and marketing strategy to find a buyer quickly for your contracted deal.
What it doesn’t take is much money. You only need to put a small amount down as an earnest money deposit, and you get that money back either when the deal closes or if you put contingencies in place for it.
House hacking involves buying a property and then putting it to work for you to generate income and cover most or all of your housing costs.
You can do that by buying a duplex or other small multifamily, like this young man did with very little money. You rent out the other units to your neighbors, and they cover your mortgage. Note that you can use the rental income from the other units to help your income qualify for the loan.
Or you can house hack a single-family home, like my business partner does. Her latest tactic: hosting a foreign exchange student.
Either way, you get to use owner-occupied financing, which means a down payment as low as 3%. You’ll still probably need a little help beyond that $1,000 in your bank account, but your mortgage lender will allow gifts from family members or friends to help you.
To cover closing costs, negotiate a seller concession.
Contractually, you have to live in the property for at least one year before your mortgage lender allows you to move and rent out the unit. You can do this a few times, to help kick start your rental portfolio and reduce the cash you need to buy rental properties.
Being overseas, a married father, and extremely busy building an online landlord software business, I’m not exactly spending my weekends out driving for dollars and chasing down deals at the moment. At this stage in my life I prefer hands-off real estate investing strategies.
To keep my asset allocation diversified and balanced between real estate and stocks, I invest some money in real estate crowdfunding platforms. Some of these, such as GroundFloor, allow everyday investors to crowdfund hard money loans to real estate flippers. Others, such as Fundrise and Streitwise, work more like private REITs. They buy properties through a fund, and investors buy shares in these funds.
It’s all completely passive on your part as the investor, and all three of the examples above allow you to invest with $1,000 or less. And unlike many real estate crowdfunding platforms, they allow non-accredited investors to participate.
Alternatively, you could invest in publicly traded REITs. These come with several pros and cons, compared with their privately traded cousins.
To begin with, they’re easy to invest in. Anyone can buy shares directly through their brokerage account, which makes REITs a simple investment for beginners.
On the plus side, they’re extremely liquid. You can buy and sell them instantly. But that comes with an equal and opposite con: they’re far more volatile than most real estate investments. They tend to gyrate in uncomfortably close correlation with the stock market – and the whole point of diversification into real estate is to avoid a crash in the stock market from derailing your entire portfolio.
Another coin with two sides is regulation. As publicly traded equities, they fall under the SEC’s regulation, which means these REITs must make a great deal of information public and transparent. But under that very same regulation, public REITs must distribute at least 90% of their profits in the form of dividends. That leaves almost nothing for them to expand their portfolios with and grow.
When I was in my 20s and even my early 30s, I wanted to believe I was clever. Smarter than all the other bozos out there.
I lost hundreds of thousands of dollars on bad investments. Most of them are real estate investments, but also some speculative stock investments.
Today I no longer pick individual stocks or invest without deep due diligence in real estate deals. I invest in index funds for stocks, in real estate crowdfunding, in investment properties with local partners I know and trust. To satisfy my inner narcissist, I set aside a little money each month for “play” investments in individual stocks or other high-risk investments.
It’s not sexy. I don’t get the smug pleasure of bragging at cocktail parties about my latest 150% stock return. Instead I’m quietly (and quickly) building wealth, and hope to be financially independent by age 42 – five years after I got serious about investing and stopped trying to be “clever” with my investments.
Don’t wring your hands. Don’t try to be cute or clever with your investments. Just get started, get a mentor, and do as much reading as you possibly can about your investing strategy of choice.
In other words, be smarter than I was when I had my first $1,000 to invest.
What do you plan to invest your $1,000 in? Why?