How To Start Investing in Real Estate With Very Little Money

Investing in real estate goes far beyond owning property, which is what many people think of when they think about real estate investing. It has long been one of the most effective ways to build wealth. The combination of a consistent cash stream, capital appreciation, and tax advantages have helped lay the foundation of great fortunes and secured stable retirements for investors far and wide.

Real estate has historically generated rates of return comparable to stocks and equities with much lower volatility. High rates of return without the up and down roller coaster ride of investing in stocks make real estate an attractive investment.

There are dozens of paths one can choose in real estate investing. The nice part is that, if done well, no one path is absolutely better than the others. So instead of saying which one is best, let’s look at the types of real estate investing, what makes each one unique and how they may best fit your investment style and financial standing.

Let’s take a look at some options. If you have a small amount of money to invest, you may want to look at real estate investment trusts, real-estate related stocks, mutual funds and funds or ETFs.

What is a REIT?

Let’s start with REITs or real estate investment trusts. Real estate investment trusts are a company where investors pool their money to invest in a portfolio of properties that they may not have access to individually. Since they are set up as trusts, there are certain rules related to what kind of assets they can own and returning capital to shareholders through dividends.

Most REITs also specialize in a particular type of property such as residential, mortgages, healthcare facilities, or infrastructure. Buying publicly-traded REITs is the same as buying stocks. You can buy them through a typical brokerage account or pretty much all tax-advantaged accounts such as IRAs, 529s, and health savings plans.

There are also private and non-publicly traded REITs. Buying these kinds of REITs isn’t as simple as hitting the buy button at an online brokerage, but they can also be held in tax-advantaged accounts like self-directed IRAs.

What about real estate stocks?

Real estate-related stocks, mutual funds, and ETFs are one of the lesser discussed options when looking at real estate, but there is a plethora of stocks that are closely tied to real estate and can be a good way to get exposure if you are looking for growth over time.

The gamut of real estate stocks to invest in runs incredibly wide from homebuilders, real estate agencies, government-supported mortgage buyers, home improvement suppliers, construction companies, and many more.

You can also invest in a portfolio of these stocks through mutual funds and ETFs. While a vast majority of real estate ETFs will hold REITs, there are some real estate adjacent options. One such example is the SPDR S&P Homebuilders ETF that holds 34 different companies spanning home improvement retail, building products, household appliances, homebuilders, and home furnishings.

Just like how you can invest in all different types of stocks and real estate investment trusts, you can purchase real-estate related stocks through a brokerage account or through the other various tax-advantaged such as 401(k)s, traditional and Roth IRAs, and 529 college savings plans.

The third option for people with a small amount to invest are mortgage notes. Investing in mortgage notes is pretty self-explanatory. You buy the notes tied to a mortgage and collect the payments. In many ways, you become the bank for that particular lender. For many, buying mortgage notes doesn’t sound too appealing when you see low mortgage rates. The upside is that most of the time, you can buy mortgage notes for less than the outstanding loan value. Buying mortgage notes at a discount to their par value means a higher rate of return than the interest rate tied to the mortgage itself.

Investing in mortgage notes can span a wide range of outcomes and risk. It can be as simple as buying a performing loan and collecting the interest and principal payments until it is paid off. Or, you can invest in non-performing loans at typically steep discounts to re-negotiate payment terms or potentially take possession of a property. As is the case with almost any investment, though, the potential for higher returns generally means more work on your end and higher potential for loss of principal.

Most of what we’ve discussed so far are passive real estate investment strategies. This means you don’t take an active role in managing the investment.

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