How to Invest in the Real Estate Market With Only $10,000

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You don't need hundreds of thousands to invest in real estate.

Yes, you can invest in real estate with only $10,000. Hard assets, such as real estate, are highly valued for their long-term ROI. A common misconception is that investing in real estate requires a large amount of cash (> $10,000). In reality, there are multiple options for getting exposure to real estate with only $10,000. Some methods don’t even require purchasing actual properties.

Investing in Real Estate with Low Cash Reserves

When purchasing a property, you must first determine what is the minimum amount of capital needed to purchase a property. This means you must determine what percentage of the property’s price you will be putting as a down payment.

In Canada, when buying a house worth $500,000 or less, your minimum down payment must be at least 5% of the purchase price of that home. It is important to note that you will be required to have mortgage insurance (CMHC) when putting a down payment below 20% on a property.

In the United States, the standard down payment is 20% of the asking price; however, there are other ways to purchase a house with as low as 3.5% down payment. For example, the Federal Housing Administration (FHA) loan is a great option for individuals with good credit scores. If you are interested in purchasing a $120,000 property with only $10,000, an FHA loan could allow you to make the purchase. 

An aspect of home buying that is often forgotten is the closing costs. Some of these closing costs include legal fees, land transfer tax, inspection fees and government registration fees. You can calculate your projected closing costs using a closing cost calculator.

Does the fact that you can buy a small property (with less than $10k) make it a wise choice?

Should you jump at every available opportunity that presents itself? Everybody gets excited when the lottery hits a new high, but are the odds really in your favor? Some factors associated with buying a cheap property should set your alarm bells ringing. Cheap properties tend to be cheap for a reason. They could be falling apart and in need of repairs, have special assessments that need paying, or be in horrible neighborhoods. 

Ever wondered why real estate agents chant the mantra “location, location, location”, and cite this singular factor as a deal-breaker when buying a house? It’s because a strong determinant of the value of your house over time will be its location; with the value rising and falling in tandem with the value of other properties and social amenities (e.g. schools, recreational) facilities around the home. As well, in a below-par neighborhood, there are increased chances of you renting out the property to ‘questionable’ tenants. Since you can’t change the location of the home, you never get to correct this mistake once it’s made. 

Are There Better Options? 

Definitely. The best real estate investments are those located in prime locations; but how do you get your foot in the door of such great investments? One viable means of achieving this for the investor with limited funds is to partner with big players in the industry via a Real Estate Investment Trust (REIT). But what exactly is a Real Estate Investment Trust?

Real Estate Investment Trusts  (REITs)

Typically, a real estate investment trust refers to a company which has ownership of, operates, or finances income-producing real estate. Investing in a REIT presents the opportunity to be part of the ownership of valuable real estate and to access dividend-based income made by the trust, depending on your shares in the REIT. The two major types of REITs are Equity REITs and Mortgage REITs.

Equity REITs are the most common form of REITs. The main focus of Equity REITs is owning and managing income-producing properties, such as shopping centers, office buildings, and apartment buildings. Once the expenses associated with running the properties have been taken care of, equity REITs usually distribute the rest of their cashflow or earnings to shareholders as dividends. This type of REIT can either be listed (on major stock exchanges), publicly registered without being listed, or privately held.    

Mortgage REITs (mREITs) on the other hand are known to invest in either commercial or residential mortgages, commercial mortgage-backed securities (CMBS) or residential mortgage-backed securities (RMBS). Investors can buy shares of listed mREITs directly or via a mutual fund or ETF. Generally, mortgage REITs are known to provide high dividend yields to investors. Unlike Equity REITs, when you invest in a mortgage REITs, you aren’t really investing in physical properties. Instead, you are investing in mortgages in a way that’s kind of similar to mortgage-backed securities.    

Advantages of REIT over Buying Real Estate

Already close to 87 million adult Americans and 44% of American households own REIT stocks either directly, or via investments in mutual funds, target-date funds or Exchange Traded Funds (ETFs). Why are REITs so popular?

The advantages of REITs over purchasing physical real estate properties include:

  1. Not having to manage the property yourself.
  2. Exposure to partnerships with big players, who have decades of expertise and can negotiate effectively.
  3. Liquidity – REITs can be easily bought and sold like other stocks, mutual funds and ETFs. This allows investors to instantly rebalance their exposure to real estate at any given time.
  4. Save money on closing costs, which can be used to invest in more shares of the REIT.
  5. No liability – you’re on the hook for mortgage payments even if you go underwater on your mortgage, but the maximum you can lose by investing in a REIT is your initial investment with no repercussions on your credit score.

Conclusion

There are several options available for investing in real estate with $10,000. You can either purchase a small property, or invest in a REIT. Although it is possible to directly purchase properties with low amounts of capital, investing in REITs has several advantages that make it the superior option. They allow you to invest in real estate while avoiding the stress of choosing a property, managing it and having your funds perpetually tied down.

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