Get started real estate investing with $1,000 or less
Real estate is the most popular long-term investment, picked by 28% of Americans but why do less than half that, just 13%, actually own rental property?
Because it’s too damn expensive to get started! …In this video, I’ll show you five ways to get started investing in real estate for $1,000 or less. Then I’ll reveal the three secrets to success all real estate investors must know!
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The Problem with Real Estate Investing
Nation, you know I LOVE real estate investing. From my start as a commercial property analyst in college to my rental properties…there is just nothing like owning that physical piece of property.
Now it’s not all rainbows and unicorns. My real estate rentals almost pushed me into bankruptcy when the housing bubble burst but it’s still been some of the best returns I’ve seen. I’ve averaged annualized returns of fifteen- to 20% between commercial and residential properties and it’s a great tax shield for your income.
BUT the big problem with getting started is you just can’t do much with $1,000…or even ten-times that. Even my smallest rental is $130,000 and would cost twenty-six grand if I you wanted to buy it with 20% down.
There are ways to beat this and I want everyone here in the Nation to experience that financial freedom from real estate investing. So in this video, I wanted to share five strategies I’ve used to invest in real estate for $1,000 or less.
We’ll cover some direct methods, so actually buying the properties, as well as indirect investment, but stick around to the end of the video because I’m going to reveal my three biggest secrets to being successful in any real estate deal.
Indirect Ways to Invest $1000 in Real Estate
Our first couple of real estate investments are indirect, so you’re not investing directly into ownership of a property but into a fund that holds properties. These are great ways to build up your wealth so you can invest directly later on and get the properties themselves.
This first one is a favorite here on the channel, investing in real estate investment trusts or REITs.
REITs are real estate companies that own rental property, mostly commercial and they’ll usually focus on a specific property type. So you’ve got REITs like LTC that owns senior living and healthcare facilities and you’ve got Boston Properties, ticker BXP, that owns office space.
You buy these companies just like any other stock and through a cool trick in the tax code, these companies pay no corporate tax if they pass most of their income on to shareholders. What you get is a solid dividend, usually between 3% to 6% and some price appreciation on the shares.
Most of these are equity REITs where they own the properties but there’s also another type called a mortgage REIT. Here the companies borrow on short-term rates and use leverage to buy much more in mortgages than actual capital, sometimes on the order of two- or three-to-one times. So you get companies like Chimera Investment, ticker CIM, and yields as high as eight and twelve-percent.
Now, just like we talk about with dividend stocks, yield isn’t everything and these mortgage REITs can be highly volatile, especially around changes in interest rates. I usually prefer the equity REITs because you get a good mix of price gain as well as the dividend.
Pros of REITs are that you can get started with almost nothing. Share prices for REITs trade from a few dollars to hundreds each so anyone can invest in these. The companies are run by professionals, you don’t have to do anything but collect your dividends.
The downside to REITs is that you don’t get that same feeling of ownership you get with direct real estate investment. They also don’t offer the tax advantages or return you’d get with your own rental, though REITs do keep up with stocks for total return.
Investing $1000 in Real Estate Funds
This next strategy is similar to REITs, investing in private funds and property crowdfunding.
I really like this alternative and have been investing on a few platforms. These are professionally-managed funds that own the properties and pay out those dividends, just like REITs. The only difference is they aren’t publicly traded on the exchanges and the funds tend to hold fewer properties.
A couple of examples include Fundrise which I’ve been using since October. I started with $1,000 and have collected $20 in dividends and $24 in appreciation, so a 4.4% return in four months. What I really like about Fundrise is the transparency. You get updates on all the properties, the platform shows you which investments are debt and which are equity. You can even click through to get a full description of each property including a market analysis and the financials.
Fundrise has different property portfolios you can choose from, some focused on higher dividends while others target price appreciation. The platform has a new program, it’s 90-day guarantee. Get started with as little as $500 and try it out for 90-days. If you don’t like it, Fundrise will give you a full refund.
Another platform I’m using is Streitwise, a private REIT focusing on non-gateway markets, so smaller markets with a value focus. The minimum is a little higher, so you’ll need that full $1000 to get started but the fund fees are low here and it’s paid a 10% annualized dividend since inception. The 1st Streit Office REIT has a good mix of tentants with properties in Missouri and Indiana.
Pros of private REITs is that you get professional management and I feel like management can do a better job with these smaller funds. They don’t have the billions to invest like with publicly-traded REITs so they can pick and choose the best projects for a higher return.
Cons though are that minimums will be higher here, so you’re looking at $500 to $1000 to get started and there’s less liquidity with these. With a public REIT, you can buy and sell in an instant just like any stock. With these private REITs, you might have to wait for quarter-end to withdraw your money or for the lock-up period to expire.
Buying Property with $1000 or Less
Next we get into the direct investment strategies and are first is to seek money partners.
I really like this alternative and have been on both sides of the table. Here you’re finding an investor to put up part or all of the cash investment while you manage the properties.
This is more common for shorter-term investments like flipping a property or a development deal. I’ve seen it for longer management structures as well but it’s pretty rare.
With this kind of deal, it helps to have some experience and know some of the investors in your area. You develop a reputation as a good property developer, build that reputation with local investors then just scout properties to buy.
A lot of times, you’ll set this up as a limited liability company with both of you owning the property. The investor fronts the money to buy and rehab, you put in the management and sweat equity and then split the profits in a sale. After that, the LLC dissolves or you move on to the next investment.
Pros here are the lower capital commitment though most investors expect you to put some money into the project as well. You get another set of eyes on the project, that investor approval really helps to thin out the weak projects.
Cons are the experience and time it takes to build those investor connections and get to yes. Most investors aren’t going to trust their money to just anyone and you’ll have to provide constant updates on the progress.
Tax liens are one of the best passive income sources you can find with property or really any investment.
So anyone that owns their home knows the county collects taxes on every property in the district. If those taxes aren’t paid, a lien is put on the property and it can’t be sold until everything’s caught up.
Well the county needs cash to fix that pothole on Elm so it’s going to sell the lien to an investor at an auction. The investor buys the lien and collects an interest rate plus the lien amount over a period of years.
What’s great about these is that the county collects those back taxes and passes the amount owed on the lien directly to the investor. If the lien isn’t paid, you might pick up the property for pennies on the dollar.
Twenty-nine states sell tax liens while others sell the deed outright and some to a mix approach. We’ll look at the process for liens because that’s the lowest risk and a great investment.
Understand also that you don’t need to be a resident of that state to buy tax liens. In fact, I used to go to Cook County in Chicago and Fulton in Georgia all the time to buy liens.
The interest rate you collect on liens ranges from 10% to as high as 36% in some states and the time owners have to redeem the liens can go as long as four years. That means you could lock in that interest rate for years.
Tax liens work in a couple of different ways depending on the county. If a property owner falls behind on taxes, the county puts the lien on the property and puts it on the list for an annual auction. Now you have to register for these auctions and grab a list of properties, sometimes months in advance so make sure you’re planning ahead.
When you get to the auction, it will either be a bid down on the rate or a bid up on the price. So each property will be called and investors will bid the rate on the lien down or they’ll bid the cost of the lien up. Both processes are basically the same and just mean you’ll get a lower rate than the maximum allowed but you’re still looking at 12% or higher for most liens.
Pros of tax lien investing are the high rates you collect, I’ve earned as much as 24% on some of these liens. It’s also almost completely passive since 90% of these things get paid off by either the homeowner or the bank.
Cons though are that it takes some research time to sort through all the properties and you might have to travel to different counties or states to find enough to invest all your money. Some of these liens are in the thousands of dollars and you’ll need to keep up with subsequent taxes.
House Hacking for $1000
House hacking is my favorite way to get started investing in rentals and I’ve got a twist to make it low cost.
This is where you buy a duplex or triplex house, live in one of the units and rent out the others. Since the property is owner-occupied, you can get approved for lower-down loan programs like a HUD loan.
So technically this isn’t something you’re going to start with $1000 but I had to include it because it’s such a great opportunity to get started. You’ll need just 3.5% down payment on a HUD loan which can be less than ten grand even for a really nice property. Rates are low enough right now that a lot of times, your tenant rent will almost completely cover the mortgage payment.
This is a great way to start real estate investing, getting that first property without a big down payment. You do this for five years, refinance the property for cash out and will have enough to buy another investment.
Pros of house hacking include those low down-payment programs and really low interest rates right now. It’s easy to start and management is easier because you’ve got just one or two tenants and they live next door.
Cons are that it’s going to take some saving to work up that down payment but it’s still less than half what you’d need to put down on a regular loan.
3 Best Strategies for Investing in Real Estate with Little Money
Now any of these strategies will get you started real estate investing but I want to share three secrets to success that will help you no matter which direction you choose. These three tips will not only help boost your returns but they’ll avoid a lot of the biggest mistakes made by property investors.
First is to negotiate like you don’t want the property.
When you’re talking about properties starting at two or three hundred thousand, even negotiating 5% off the price is going to save you more than ten grand. You need to use every trick in the book.
First is just to know how much similar properties have sold for in the area. The seller or agent is going to provide their list but this is always cherry-picked to show the highest price.
Instead, visit the county assessor’s website and make your own list. Properties sold in the area, roughly same age, same use and size. Then put together a median for the per square foot value and start negotiating at 85% of that value.
Starting the negotiations, remember you can ask for property improvements, closing costs, all kinds of things besides just the price. Use these as ammunition to lower your total cost.
My next tip here is to consider both commercial and residential property in your mix.
Residential rentals are by far the most popular property type but don’t overlook commercial investment. In my experience, commercial properties like retail and office space require less management and the tenants don’t tear up your place. You can even sign a lot of these on a triple-net lease which means the tenant pays for all maintenance and services, you just sit back and collect the checks!
Third, use a mix of direct and indirect real estate strategies. Starting out, you might not have a choice. Invest in those indirect strategies while you build your down payment. Even when you’re able to buy that first property though, investing in these real estate funds gives you instant diversification across property types and different cities. There’s no management time for a fund investment and you’ll get the tax write-off with a direct property investment…it’s really the best of both worlds!
Real estate is my favorite asset class for long-term wealth building but it can be tough getting started, especially on just $1000! Learn how to take advantage of indirect investments while you build your down payment to buy property directly. Grow your real estate empire one property at a time!