Many young or first-time investors think they don’t have the money to invest in real estate. Although real estate is one of the more popular investment options, people often assume only the wealthy can do it.
The truth is you don't need a lot of money to get started.
In this article, we'll give you several suggestions for investing in real estate with only $5,000. We’ll cover different methods and strategies to get the most out of this limited amount of capital. From crowdfunding opportunities to creative financing solutions, learn how to potentially impact your financial future with a relatively small amount of money.
How to Invest in Real Estate with $5K
Despite the common misconception that you need a lot of financial capital to begin investing in real estate, you can start with as little as $5,000. Your chances of success can increase if you diversify your investments — especially should some deals not go as planned!
Here are 11 ways to invest in real estate with just $5,000 or less.
1. Real Estate Investment Trusts (REITs)
REITs are an appealing option for those with $5,000 to invest because REITs are similar to stocks. You can purchase shares in real estate and diversify your portfolio by investing funds in theaters, malls, mortgage debt, and more.
To be considered a REIT, 90% of the company’s revenue must be distributed yearly to investors. According to Kiplinger, REIT dividends averaged roughly 3.4% as of August 2022, which was more than twice the yield of the S&P 500.
Pros
- Higher dividend yields compared to stocks
- Access to a variety of residential and commercial real estate asset classes
- Higher liquidity, REIT shares are easy to buy and sell online
Cons
- High risk and high fees
- Best as a long-term investment
- Performance influenced by economic trends, both positively and negatively
2. Real Estate Debt
Investing in real estate debt involves directly buying mortgages, notes, or bonds that are secured by real estate assets or participating in a real estate debt fund. This investment option allows investors to potentially earn returns without managing rental properties or rehabbing fixer-uppers.
Investors can leverage their $5,000 by investing in real estate debt and potentially earn higher returns than other investments. Since these investments are typically liquid and don’t require long-term commitments, it's an attractive option for those who want to invest in real estate but don't have large amounts of capital available.
Investing in real estate debt also offers diversification benefits because you can spread your investments across multiple loans rather than putting all your funds into one property. This approach can help reduce the risk of losing your entire investment if a borrower defaults on their payments.
Pros
- Receive fixed, regular payments over a period of time; investors get paid back their principal investments plus interest
- Benefit from potentially higher returns than traditional bond investments due to the leverage effect from investing in mortgage-backed securities and other types of debt instruments related to real estate
- Experience less volatility when investing in debt funds due to their low correlation with the equity markets
Cons
- Less control over where and how your money gets invested; you must trust the fund manager’s investment decisions
- Some debt funds have a high minimum investment or may be limited to accredited investors
- There is a risk that borrowers may default on their loans, resulting in lower returns or even losses for investors
If you're considering investing in real estate debt, check out Concreit. The Concreit app offers a more liquid alternative to investing in mortgage notes directly and is managed by a team of experts who carefully select each investment for the portfolio.
Concreit offers weekly dividend payments, and you can cash out anytime after an initial 60-day settlement period, with no minimum investment time required.
Start investing in fractional real estate with Concreit
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3. House Hacking
House hacking is when you generate revenue from your home, like renting a spare bedroom. You can then use this extra income to pay your mortgage faster, do a cash-out refinance, and buy another rental property.
House hacking is helpful for novice investors looking to get their feet wet and learn the ropes in the real estate business, whether it’s as a passive investor or an active landlord.
To make the most of house hacking, you must invest in a reasonably priced home and rent out one or more rooms to generate an income. Consider factors such as property taxes, the job growth rate, and neighborhood atmosphere when looking for your ideal property. Be sure it has all the features you'd want in a place to live.
Pros
- Build equity while paying your mortgage off faster
- Use the home you own or currently rent
- Grow an investment portfolio over time
Cons
- Potential for extended periods of vacancy
- Managing tenants
- Possibility of unpaid rent and needing to evict tenants
4. Become a Real Estate Agent
They say there's no better investment than in yourself, so becoming a real estate agent could be a beneficial way to invest some of your $5,000. According to the National Association of Realtors (NAR), the median gross income was $54,330 in 2021. That's a potential return of 10 times your investment when measured by potential gross earnings.
You can invest some of your $5,000 to pay for real estate licensing courses and become a part- or full-time real estate agent. If you’re a good salesperson, you could make 1.5–6% on each property sold, depending on the market you're in and the price of the property you're selling.
Some perks of being a real estate agent include meeting new people, being your own boss, and having nearly unlimited income potential.
Pros
- Flexible schedule
- Helping others (and yourself) find a dream home
- Potential for higher income with good sales skills
Cons
- Working more hours without a schedule
- Slow periods without income
- Dealing with challenging personalities
5. Seller Financing
Seller financing allows a buyer to put forth a small down payment and borrow the rest of the purchase price from the seller over time. It's an attractive option because it eliminates the need for a bank loan, which can be difficult to obtain if you don't have good credit or enough cash on hand.
The terms of the agreement are typically flexible and can include interest rates, balloon payments, and deferred payments, allowing buyers to purchase properties without going through traditional lenders. Buyers also benefit from not having to pay closing costs or other fees associated with obtaining a loan from a bank.
Pros
- No need for a traditional lender
- Flexible payment terms
- Avoid closing costs or other fees associated with bank loans
Cons
- Subject to predatory sellers (due diligence required)
- High interest rates, depending on the type of loan
- Possible foreclosure if payments not made as stipulated
6. FHA Loans
Using FHA loans is a way to invest in property with either a small or no down payment. Rather than needing a lot of money, you just need a good credit score.
FHA loans are common with first-time buyers since down payments can be as little as 3.5%, which means you can finance more than 90% of the property’s purchase loans.
FHA loans do require you to use the home as your primary residence for the first year. After the first year of purchase, you can turn your home into a rental property. You can also use federal loans to house hack, living in one section of the property while renting out the rest.
Pros
- Lower credit score requirements
- Low down payments
- Higher debt-to-income ratio accepted
Cons
- Loan maximums
- Mortgage insurance premium payments
- Sellers rejecting FHA offers
7. Real Estate Crowdfunding
Real estate crowdfunding is a type of real estate partnership where you can access properties that might otherwise be beyond your reach, such as single-family home developments, apartment buildings, and mixed-use buildings. Investors and developers connect via online crowdfunding sites and make deals.
Crowdfunding is a passive way to invest your money that doesn’t require physical involvement. The investment sponsor handles all of the management responsibilities and profit distribution. You can invest in both equity and debt.
Pros
- Affordability (for crowdfunds with low investment minimums)
- Passive, hands-off investment
- Portfolio diversification geographically and across different real estate asset classes
Cons
- Lack of liquidity, investments possibly locked for years
- Detailed tax reporting, depending on crowdfund structure
- Project performance dependent on crowdfund sponsor follow-through
8. Wholesaling
Wholesaling is similar to house flipping but relies more on the property’s potential than how well you can wield a hammer.
Wholesalers search for a house owned by a motivated seller, put the property under contract with a small refundable earnest money deposit, then assign that contract to someone else. The end-buyer eventually purchases the contract from the wholesaler, with the wholesaler earning a fee for their time and trouble.
Pros
- Little cash required
- Credit not a factor
- Great introduction to the real estate market
Cons
- Difficulty finding potential sellers and buyers
- Income is not guaranteed; you risk losing money earned if the contract isn’t assigned and the project doesn’t close
- Requires having an in-depth knowledge of the local real estate market and expert negotiating skills
9. Find a Real Estate Partner
While $5,000 is more than enough to open up some creative real estate investing opportunities, if you’d like to invest in a bigger project, consider finding a business partner.
You can search the internet and network to find a partner that makes sense for you. For instance, you could partner with a contractor willing to fix up a property in exchange for a share of any profits.
Pros
- Split the responsibilities to leverage the strength of each partner
- Develop your network of real estate connections
- Build a solid real estate portfolio over time
Cons
- Sharing profits
- Potential conflict if partners disagree
- Defining and assigning responsibilities may be challenging
10. Private Money Lending
Private money lending involves providing loans to real estate investors for their projects. You can become a private money lender by pooling together your capital with other investors and offering loans at competitive interest rates.
Depending on the loan terms, you could earn significant returns from your investments while helping others achieve their property ownership dreams.
Private money lending offers investors a way to use their funds without having to be actively involved in every aspect of rehabbing or managing rental properties. It's also another opportunity to build relationships in the real estate community and grow your network.
Pros
- High return on investment potential (depending on the lending interest rate)
- Mitigate risk by partnering with other investors
- Develop relationships with other real estate investors and borrowers
Cons
- Needing to vet the borrower and the property
- Risk of foreclosure if borrower defaults on loan
- Potential legal issues related to lending regulations
11. Lease with Option to Buy
Leasing a property with an option to buy lets investors buy property relatively cheaply.
An investor will rent a property from an owner with the intention — but not the obligation — to eventually buy it. The landlord or owner will put a portion of your rent toward the purchase of the property and may require a small down payment.
Leasing to buy is another attractive option for those getting started in the real estate investment business. You get to know the property before you try to rent it out. By renting the property first, you learn what already works, what you need to work on, and how to maintain it.
Pros
- No requirement to buy the property
- Potentially lock in the price before buying
- Building equity month after month
Cons
- There is the potential to lose money if you agree to a purchase price ahead of time and the market goes south
- The owner/landlord may require a higher monthly payment than if you were renting without the option to buy
- You’ll have to maintain the property and manage tenants if you buy it and turn it into a rental
