Starting Real Estate Investing With Just $500

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The real estate industry is really thriving at the moment, and a lot of investors are eager to get their share of the opportunity. But one myth that have prevented most people from going into the real estate business is the huge investment capital that some feel is compulsory to start with. Is this really the case?

Many people who have reached financial independence have done so investing in real estate (in fact, it’s one of the most common ways to become a millionaire). This might seem like an impossible achievement if you’re only looking at the end result, but by starting out with small steps and making continued forward progress, you can make your way to “real estate mogul” even if you only have a smaller dollar amount to start investing with.

The truth is that with as low as $500, you can invest in the real estate industry. While starting out, you might not make huge profit with your little capital, but it will add up at the end. This article will explain how you can get started in the real estate business with as low as $500.

Why Should You Invest in Real Estate
Why Rental Properties Are Not Good Investments
How to Start Investing in Real Estate for $500 or Less

Why Should You Invest in Real Estate

The benefits of investing in real estate are numerous. With well-chosen assets, investors can enjoy predictable cash flow, excellent returns, tax advantages, and diversification—and it’s possible to leverage real estate to build wealth. Thinking about investing in real estate? Here’s what you need to know about real estate benefits and why real estate is considered a good investment.

Cash Flow

Cash flow is the net income from a real estate investment after mortgage payments and operating expenses have been made. A key benefit of real estate investing is its ability to generate cash flow. In many cases, cash flow only strengthens over time as you pay down your mortgage—and build up your equity.

Tax Breaks and Deductions

Real estate investors can take advantage of numerous tax breaks and deductions that can save money at tax time. In general, you can deduct the reasonable costs of owning, operating, and managing a property.

And since the cost of buying and improving an investment property can be depreciated over its useful life (27.5 years for residential properties; 39 years for commercial), you benefit from decades of deductions that help lower your taxed income. Another tax perk: you may be able to defer capital gains by using a 1031 exchange.

Appreciation

Real estate investors make money through rental income, any profits generated by property-dependent business activity, and appreciation. Real estate values tend to increase over time, and with a good investment, you can turn a profit when it’s time to sell. Rents also tend to rise over time, which can lead to higher cash flow.

This chart from the Federal Reserve Bank of St. Louis shows average home prices in the U.S. since 1963. The areas shaded in grey indicate U.S. recessions.

Build Equity and Wealth

As you pay down a property mortgage, you build equity—an asset that’s part of your net worth. And as you build equity, you have the leverage to buy more properties and increase cash flow and wealth even more.

Portfolio Diversification

Another benefit of investing in real estate is its diversification potential. Real estate has a low—and in some cases negative—correlation with other major asset classes. This means the addition of real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk.

Real Estate Leverage

Leverage is the use of various financial instruments or borrowed capital (e.g., debt) to increase an investment’s potential return. A 20% down payment on a mortgage, for example, gets you 100% of the house you want to buy—that’s leverage. Because real estate is a tangible asset and one that can serve as collateral, financing is readily available.

Competitive Risk-Adjusted Returns

Real estate returns vary, depending on factors such as location, asset class, and management. Still, a number that many investors aim for is to beat the average returns of the S&P 500—what many people refer to when they say, “the market.” The average annual return over the past 50 years is about 11%.5

Inflation Hedge

The inflation hedging capability of real estate stems from the positive relationship between GDP growth and the demand for real estate. As economies expand, the demand for real estate drives rents higher. This, in turn, translates into higher capital values. Therefore, real estate tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.

Real Estate Investment Trusts (REITs)

If you want to invest in real estate but aren’t ready to make the jump into owning and managing properties, you may want to consider a real estate investment trust. You can buy and sell publicly traded REITs on major stock exchanges. Many trade under high volume, meaning you can get into and out of a position quickly. REITs must pay out 90% of income to investors, so they typically offer higher dividends than many stocks

Why Rental Properties Are Not Good Investments

One of the most common pieces of financial advice our clients hear from their friends and family is to invest their excess cash in rental properties. Unfortunately, this is terrible advice for all but a lucky few.

There are four big reasons for this: it likely won’t generate the income you expect, it’s hard to generate a compelling return, a lack of diversification is likely to hurt you in the long run and real estate is illiquid, so you can’t necessarily sell it when you want.

Before you buy a rental property as an investment, consider the reasons you’re unlikely to come out ahead.

Income isn’t guaranteed

A popular reason we hear for wanting to invest in real estate is a desire for additional income. Unfortunately most real estate investments, especially residential properties bought for investment, don’t generate positive cash flow for quite a while. That means you have to fund losses each year. Allow me to illustrate with an example.

Imagine you bought a house or condo for $500,000 and financed it with a mortgage of $400,000 at a 30 year fixed rate (with no points) of 3.8%. Your monthly payment would be $1,864. Your monthly real estate taxes would probably be at least $400.

You should also factor in monthly upkeep and insurance, meaning you’d need to charge a monthly rent of almost $3,000 just to break even. For a condo, you’d have to add in homeowner association (HOA) fees. There aren’t many $500,000 homes that can command monthly rent of $3,000 in the areas where our clients live.

Eventually, with annual rent increases, you could break even, but it would be a while before you’d generate the income you originally sought with a real estate purchase. Raising rent can also be a challenge in cities like San Francisco that have rent control laws and limit your ability to ask your renter to leave if they don’t pay their rent on time.

It’s hard to generate a compelling return

Another reason we hear for wanting to own real estate is it is “understandable” compared to trying to invest in stocks or bonds, which many people believe requires a knowledge of financial markets. People who are unsure of how to start investing often perceive investing in stocks or bonds as overly risky and worry they won’t be able to time the market correctly.

This fear is further stoked by pundits who claim the market is under- or overvalued, despite overwhelming research that market timing is irrelevant to earning a good return. Buying a diversified portfolio of low cost index funds requires very little expertise, especially when managed by an automated advisor like Wealthfront.

In contrast, people think buying an investment property must be like buying a home — something with which most Americans have experience. But buying a home is very different than buying a property for an investment return.

Not all home values appreciate, and that’s OK as long as you can afford your monthly payment and enjoy where you live. But an investment property that doesn’t appreciate represents an enormous opportunity cost because your down payment could have been invested elsewhere.

Generating a compelling return on an investment property requires significant appreciation. That’s because as we explained above, it’s difficult to charge enough rent to offset the full cost of carrying the property and the real estate broker commission.

Again this is best illustrated with an example. Let’s assume you could charge a rent of $2,000 on the previously described $500,000 property (which is pretty steep relative to the mortgage payment) and increase it by 2% per year due to inflation. Let’s further assume the property appreciates at 3% per year (a rate greater than inflation, which is unusual by historical standards), which means it would be worth $580,000 if you sold it after five years.

After deducting a 6% real estate commission, the compounded return on your equity investment would be only 4.1% — and that assumes your rental property was occupied for all five years which is often not the case. The lower the occupancy rate, the lower your return.

Just because something is easier to understand doesn’t make it better. For comparison, Wealthfront’s average portfolio earned just under 8% net of fees over the past eight years. And the Wealthfront return is far more tax efficient than the return you would receive on real estate due to the way dividends on your Wealthfront portfolio are taxed and our tax-loss harvesting.

In order to improve upon that 4.1% return, you need to have a nose for the neighborhoods that are likely to appreciate most rapidly and/or find a terribly mispriced property to buy (into which you can invest a small amount of money and upgrade into something that can command a much higher rent — even better if you can do the work yourself, but you need to make sure you are being adequately compensated for that time).

The challenge is, despite what you may hear or read, a minority of even professional real estate investors outperform the average return for the real estate market over the long term. And we’re talking about people who have large staffs to help them find the ideal property and make improvements.

It’s better to diversify your investments

You should think of investing in an individual property the same way you should think about an investment in an individual stock: as a big risk. You are unlikely to outperform the market unless you have an information advantage, which you probably won’t have unless you are a real estate professional or are willing to put lots of time and energy into finding a property.

The idea of trying to choose the “right” individual property is alluring, especially when you think you can get a good deal or buy it with a lot of leverage. That strategy can work well in an up market. However, 2008 taught all of us about the risks of an undiversified real estate portfolio, and reminded us that leverage can work both ways.

Investing in a risky asset class like real estate requires diversification to generate a higher long-term return because you never know when a particular real estate strategy or type of property will fall out of favor. The benefit of a real estate index fund is it’s comprised of many Real Estate Investment Trusts (REITs), each of which is diversified among many properties.

That said, diversifying your real estate portfolio is not enough. You also need to diversify across types of investments, or asset classes, to maximize your long-term, risk-adjusted return. Real estate is a great component to have in a portfolio because it can act as a hedge against inflation (real estate tends to be more correlated to inflation than other asset classes), but it generally is not very attractive on its own.

Liquidity matters

The last major argument against owning investment properties is liquidity. Unlike a real estate index fund, you cannot sell your property whenever you want. It can be hard to predict how long it will take for a residential property to sell (and it often feels like the more eager you are to sell, the longer it takes). Institutional investors generally believe they should earn an extra 3% to 5% annually on their investment to justify having their money tied up.

Trying to earn 3% to 5% more than you would on your index fund is almost impossible except for a handful of real estate private equity investors who attract the best and the brightest to do nothing but focus on outperforming the market. Do you really believe you can do it when professionals can’t?

Our advice on rental property investing is consistent with what we advise on other non-index investments like stock picking and angel investing: if you’re going to do it, treat it as your “play money” and limit it to 10% of your liquid net worth.

If you already own a property that is bringing in more rental income than you’re paying in carrying cost in a neighborhood that is appreciating, then congratulations! You probably don’t need to hurry and sell. However, if you own a property that rents for less than your carrying cost, then we would strongly urge you to consider selling the property and instead invest in a diversified portfolio of low-cost index funds.

How to Start Investing in Real Estate for $500 or Less

1. Get Educated

The best approach is to learn all that you can with the free resources available for your immediate consumption. You need to learn the basics, but you also have to ask the right questions when presented with information.

While you may be bombarded with images of expensive real estate investment seminars, that is not a requirement to be successful in real estate investing. You can learn the basics from useful free guides online to get a jump start on the basics. There are plenty of real estate books, podcasts, and free information online as a good place to start. You can also speak with other real estate investors.

Here are the main types of properties and investments available for real estate investment. Each type of investment has its own nuances that you should understand before you invest.

Vacant Land
Single Family Homes
Small Multifamily Properties
Large Multifamily Properties
Commercial Real Estate
Mobile Homes
Notes/Paper/Mortgages

Once you learn about the different types of options for the real estate listed above, you will want to think about the one that fits your budget, time, and requirements.

You will also want to learn how to properly evaluate a neighborhood in order to make the best investment. You may not be familiar with the city or locality where you are investing, so you will definitely want to check out how to evaluate the locality or neighborhood you are investing in to make an informed decision.

2. Set Your Goals

After doing your homework, you will have a range of the initial investment you can expect to make in getting started. It’s possible to get started with just $500 (or even less in some circumstances). But you should also have a goal and know yourself.

How much risk do you want? How much work do you want to put in?

Write down your goal. Next, reverse-engineer what you need to do to get to that point – what is the initial investment amount required to get started?

3. Find The Cash For Your Down Payment Or Investment

At some point, you are going to come to the realization that you have to put away your disposable income so that you can fund your real estate investing dreams. You can do so even if you earn a meager salary, or even if you are a starving college student. You can do this, and the important thing is to begin with the end goal in mind.

You can raise funds quickly by working on your side hustle or following your new budget.

4. Explore Your Real Estate Investment Options

It is important to understand your options, as some have higher risks and higher investment requirements.

Traditional Real Estate Investing

The first option is in traditional real estate investing, which involves buying rental properties and renting them out to tenants.

Traditional real estate investing is a popular way to grow your wealth, but it also comes with some cons that you should look at before you make the leap.

Traditional real estate investing requires searching dozens of listings and visiting several properties before you decide on the right property suitable for rental purposes.

Aside from that, you will also spend a considerable amount of time searching for tenants, showing the property to tenants, and staging the home when showing the properties to tenants. Maintenance and property management are often overlooked duties that are vital to successful rental real estate investments.

If you decide to purchase the home as an owner occupied home, there is an additional risk where you are responsible for a large mortgage loan on the property with a substantial risk in the event of a decline in the housing market.

While these risks are not enough to turn someone off entirely from traditional real estate investments, you have to know what you are getting yourself into before you make the decision.

A newer option to get started down the traditional real estate path is Roofstock. Roofstock allows you to buy cash-flowing single family homes across the United States. You can fully purchase your rental properties online, and they have tools to help you manage them as well.

Crowdfunded Real Estate

If owning and managing your own rental property is not appealing to you, but you still want to grow your portfolio through real estate investing, crowdfunded real estate investing may be a better option for you.

When you participate in crowdfunded real estate investing, you are part of a group of people who pool their money with other investors, and then lend or invest that money with experienced rental real estate investment property owners.

You stand to profit from the experienced investor’s skills with a minimal investment of time with minimal risk, depending on the investment.

One of the benefits of this option is that you can track statistics online to review an investment’s earnings history information. You can also manage your investment online, and you will get a summary with year-end tax information as well.

Crowdfunded real estate investing is a very popular option because you do not have to search for property, get a mortgage loan, screen or manage tenants or manage the property. More importantly, someone else is responsible for the property loans. Your risk and workload are minimized, yet the potential for profit still exists.

Prior to crowd funding, private securities could not be marketed publicly under the Securities Act of 1933. As a result, it was difficult to get information about private securities investments unless you associated with wealthy real estate investors who invested in six-figure deals.

Today, crowdfunding gives investors access to a variety of investing deals, despite your background, resources, or level of experience.

While crowdfunding is an attractive option, you need to research the company and the options to make sure that the company is legitimate and also a good fit. You need to know the minimum investment amount to make sure that the deal will work for you. You will want to know how long they have been in business, as well as their guidelines for borrowers and investors. Lastly, you need to know the fees being charged for their service.

Here is a company that is highly recommended:

RealtyMogul

RealtyMogul is one of the largest crowdfunding companies with some attractive features:

Well-vetted properties (only 1 out of 1000 deals meet their criteria)
Residential and commercial real estate offerings
$1,000 minimum investment
REIT offerings designed for passive income and growth
Residential and commercial real estate offerings
1031 Exchange Opportunities

Understand The Risks Of Real Estate Investing

You have to understand the risks before making the investment. One of the key risks involved is buying a property and having to sell it at a significantly lower price due to market conditions or other conditions outside of your control.

Another common mistake includes the timing of purchases and sales may result in substantial losses or losing out in a deal or the market picking up ahead of your prediction forcing you to buy the same product that was available for a bargain at a premium.

If you’re owning the rental, maintenance and other large expenses can also be a challenge.

Be Aware of The Tax Implications

From the onset, you will want to be aware of tax implications of the real estate investment properties. One of the key determining factors is how the property is classified, and how it is used.

You do not want to part with a major chunk of the returns you earn from an investment as taxes. The one and the only way to ensure this is by understanding the tax implications of any property investment well in advance. An important part of how the property is classified is how the property is treated under rental real estate activities.

Go through the existing tax schedules and also get a clear picture about the varying rates that apply. Always speak to a tax professional if you have questions or concerns.

Try Virtual Real Estate Investing for Free

Have you heard of the online world, Second Life? It’s a virtual world (not a game, the company asserts) that lets you have a virtual family, own a virtual home, buy virtual goods and even get a virtual job.

It became massively popular at the turn of the century, and — even if you haven’t heard about it in a while — it’s still a thing.

The world runs on Linden Dollars, which you can earn through virtual jobs or by selling your virtual possessions and creations. Or you can buy them directly with your real money.

You can also purchase virtual real estate to sell or rent out.

Ailin Graef (known by her SL avatar Anshe Chung) became the virtual world’s first millionaire flipping real estate. She’d invest real money — which goes a lot further in the virtual world than the real one — and earn real money in return when other users bought or rented her properties.

The world is free to join, and you start with a free starter pack of clothing and useful items. If you want to earn money through a virtual business, you’ll need to build up your Linden Dollars and start investing.

Buy Land on eBay for $100

Ebay has long been a place for people to sell their weird and outlandish goods, so we’re not surprised to see users selling land for mere pennies.

Most of these thrifty plots probably aren’t worth much — now. But if you choose wisely and hang onto it long enough, a new mall or Walmart might move into town one day and need that little vacant strip.

Set your budget and search on eBay for something like “vacant residential lot” or “vacant commercial lot” to find your next investment.

Don’t forget to factor in additional costs, like title-transfer fees and annual property taxes when you’re thinking about how much this land could be worth over time.

Invest in Real Estate Around the Country for Just $500

Want to try real-estate investing without playing landlord? We found a company that helps you do just that.

And you don’t have to have hundreds of thousands of dollars, either. You can get started with a minimum investment of just $500. A company called Fundrise does all the heavy lifting for you.

Through the Fundrise Starter Portfolio*, your money will be split into two portfolios that support private real estate around the United States.

This isn’t an obscure investment, though. You can see exactly which properties are included in your portfolios — like a set of townhomes in Snoqualmie, Washington, or an apartment building in Charlotte, North Carolina.

You can earn money through quarterly dividend payments and potential appreciation in the value of your shares, just like a stock. Cash flow typically comes from interest payments and property income (e.g. rent).

(But remember: Investments come with risk. While Fundrise has paid distributions every quarter since at least Q2 2016, dividend and principal payments are never guaranteed.)

You’ll pay a 0.85% annual asset management fee and a 0.15% annual investment advisory fee

Invest in REITs

A real estate investment trust (REIT) is a company that will own and probably manage any income-producing real estate. The real estate will typically be in the commercial space like apartments, office buildings, shopping centers, etc.

There are two variations of REITs as well: publicly traded and private.

Publicly traded REITs are those in the stock market, you’ll find fund options in your investment account. So this means you can opt to invest in a REIT in your brokerage account or retirement accounts. For example, Vanguard has VNQ (ETF fund) or VGSLX (Index Fund). These tend to follow the trends of the stock market.

Private REITs aren’t traded on the stock market and generally are for accredited investors only. Meaning the minimum investments are quite high and you need a big net worth. Although, stREITwise is a company looking to change that, their minimum investment in a private REIT is $1,000.

DiversyFund

Looking for another option to invest in real estate with little money? Well, DiversyFund is a potential platform for you. This platform is similar to Fundrise in that it allows you to invest in commercial real estate with a minimum investment of $500.

But they offer one major difference — DiversyFund is a no-fee platform. The reason being is they actually own the properties they invested in. This way, they do not have to go through a third-party for management of properties. Instead, they are paid through acquisition/developer fees and aren’t paid until investors are.

The only downside to DiversyFund currently is their real estate investments are limited and the company is relatively new, starting in 2017. But so far, their historical returns have been over 17%.

Conclusion

If you have been wondering how to invest in real estate with little money, then the above should get you on the right track. And as you can see, there are many ways to get started without actually buying physical properties.

Eventually, you might want to move on to owning property and having rentals. But with the changing regulations and new technologies, anyone can invest and build a strong real estate portfolio without a major down payment.