How to Invest $5,000 in Real Estate

The post How to Invest $5,000 in Real Estate by Kaity Wolf appeared first on Benzinga. Visit Benzinga to get more great content like this.

If you’re interested in investing in real estate but are worried you don’t have enough money for it, you aren’t alone. Most people new to investing believe they have to have thousands of dollars to make any kind of profitable real estate investment. The good news is that isn’t the case; it is possible to start your real estate investing journey $5,000 or less. This guide will teach you how to get into real estate investing without a lot of money in the bank and help you decide which strategy is best for you. 

Why Investing in Real Estate can be a Lucrative Opportunity

You may believe that investing $5,000 in real estate won’t get you a return on your investment; however, that may not be the case. Real estate can offer cash flow, tax breaks, competitive risk-adjusted returns, equity building, and a hedge against inflation depending on how you go about investing. It is an opportunity to diversify your portfolio and create another stream of income. Even with only $5,000 to start, the strategies in this guide can help you grow your cash in the bank to invest in even larger real estate opportunities. 

8 Ways to Get Into Real Estate With $5,000 or Less

While you may not be able to purchase a property with only $5,000, you can still begin investing in real estate to create another stream of income. Here are eight strategies for how to invest $5,000 in real estate.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) allow you to partner with a larger network. With REITs you’re investing in large-scale, income-producing real estate. A REIT is a company that owns and operates real estate or related assets such as office buildings, shopping malls, hotels and resorts, apartments, warehouses, and mortgages or loans. REIT companies don’t develop real estate properties to resell them. Instead, they buy and develop properties to operate as part of their own investment portfolios. When you invest in REITs, you earn a share of income through commercial real estate ownership, without ever buying commercial real estate. 

Self-directed IRA

Did you know you can invest in real estate within an IRA? This option is often overlooked when it comes to real estate investing but can be a great route to take, especially when starting with $5,000. Self-directed IRAs allow you the ability to hold real estate under certain conditions and offer tax-free or tax-deferred benefits. It also allows you to partner your IRA money with someone else’s IRA or non-IRA money, helping you raise the capital for investments larger than $5,000. This type of investment is a bit more complicated than just purchasing stocks, bonds, or ETFs in a retirement account. Here are a few important considerations when buying and holding property via your IRA: 

• The type of account you’ll need to have to make real estate investments is a self-directed IRA, the benefit of this account is that it acts just like any other retirement account with the added ability to invest in real estate. 
• You need a custodian to facilitate the transaction. A custodian is an entity that specializes in self-directed accounts to keep you from violating the strict rules in place regarding these types of real estate transactions. The custodian charges a fee for the service and will not advise you on what investments to make. 
• It’s important to note that your IRA owns the property, not you as an individual.
• In most cases to purchase real estate within an IRA, you are required to pay cash and the IRA must pay all ownership expenses.
• While there can be tax advantages to holding real estate in your IRA – such as portfolio diversification and a potentially high return on investment – it can also be more complicated and involve a lot of red tape. 

Borrow Money

Borrowing money is a simple way to help you start your venture of real estate investing, and you have a few options for how you can borrow funds. 

• Family or friends: Before you borrow money from friends and family, consider if doing so could harm your relationship and if the person of your choosing is the right fit. Always treat the loan like you would any financial transaction and write up a promissory note. You can find easy-to-use templates online. You’ll want to specify the interest rate, repayment schedule, and interest your lender has in the property. 
• Peer-to-peer lending: Another option is peer-to-peer lending (P2P). This type of lending is when individuals or businesses provide micro-loans through online providers that match lenders with borrowers. Micro-lenders like RealtyShares or GROUNDFLOOR can help you get the funds you need for your real estate investment.
• Home equity line of credit: Finally, if you already own a home you may want to consider taking out a home equity line of credit (HELOC). A HELOC is a loan where the borrower uses the equity of their current home as collateral. The amount of the loan is determined by the value of the property.

Get a Partner

If you’re worried about putting a kind of strain on your relationships, consider finding a real estate partner instead of borrowing money. Look through your network to find someone else who is interested in real estate and go in on the investment with them. If you don’t have anyone in your current network, join a real estate investing club in your area to help you find the right partner you can trust. Write up a contract that outlines specific terms, responsibilities, and division of profits so both parties have a clear understanding of the partnership.

Seller Financing

Seller financing can be a great option as buyers can typically get lower interest rates and it’s easier to qualify for. In seller financing, the person who owns the property takes on the role of the lender. Rather than giving cash to the buyer, the seller extends credit to the buyer for the home purchase price. You make your mortgage payment to the seller rather than to the bank. You’ll both sign a promissory note that describes in detail the terms of the loan such as interest rate, repayment schedule, and what happens if you default. Be sure to understand the pros and cons of seller financing and keep in mind these loans are usually short-term financing. 

Wholesaling 

With real estate wholesaling, you act as the middleman in the investment process. You as the wholesaler find a property with potential and enter into a contract with the seller for the purchase price, then you ultimately sell the property to another buyer for a fee. Wholesaling is similar to flipping; however, it is a much quicker process and you don’t make any repairs to the property before selling it. This option means you put up little capital. All you need is your time and effort and in some cases an earnest money deposit. 

Private Money Loan

Private money loans are short-term loans that are used to purchase or refinance a property. The loan comes from an individual or group of individuals who pool their funds to help facilitate a real estate transaction. These short-term loans are primarily used for properties that don’t fit traditional lending criteria such as homes that banks won’t provide financing for because of their poor condition. A private money loan is often referred to as a hard money loan because they have high interest rates (10% to 15%) and fees, along with being a short-term loan. The best time to use hard money loans is to fix and flip properties.

Lease Options

Lease options allow you the ability to rent to own. You lease a property with the option to purchase it at a set price after a set amount of time. No one else will be able to buy the home during that set period. 

Another more complicated option is known as a sandwich lease. Here, you sign a lease option with a seller, you then find another tenant and arrange a lease option at a slightly higher rent-to-buy rate. This is similar to wholesaling as you act as the middleman. The difference is that the timeline is much longer, and the property becomes a rental rather than a flip. 

Your $5,000 Investment Can Go a Long Way

A $5,000 investment into real estate can seem like an impossible goal, but it doesn’t have to be. These strategies can help you invest in a way that suits you so you can grow that $5,000 to meet your financial goals. Whichever investing route you choose to take, do your research so you fully understand how your investment works, your potential return on that investment and how you can benefit in the best possible way. 

Frequently Asked Questions

The post How to Invest $5,000 in Real Estate by Kaity Wolf appeared first on Benzinga. Visit Benzinga to get more great content like this.