How to invest in rental property with little money? That’s a question I get asked a lot.
Many people dream of having a second property, be it residential or commercial, to rent out. It’s really nice to have the rent credited to your bank account every month without you having to do anything for it. Now, who wouldn’t like that?
However, can you invest in rental property if you have little money? How much money do you need exactly to be able to invest in real estate that can be rented out? And how do you do that?
Those are some of the questions that I will be answering in this article. So buckle up and read this till the end!
Why Invest in a Rental Property?
Let’s start from the beginning. Why invest in a rental property?
As mentioned earlier, many people dream of buying a second home to rent out. People see that rich people have gotten rich by investing in real estate and want to do the same.
Investing in rental properties is a proven method that has made people all over the world financially independent. If you look further at the richest people on this planet, a large percentage of them have built up wealth by investing in rental real estate.
I am convinced myself that investing in real estate is the best way to become financially independent. I was convinced of this by the book “Rich Dad Poor Dad” by Robert Kiyosaki.
A much sought after search term on the internet is “investing in real estate with little money”.
Why do people still want to invest in real estate when they have little money?
Isn’t it easier to make sure you are in a healthier financial position before you start investing in rental properties? Or do these people have little money and they think that investing in real estate will make them a lot of money?
First, let’s look at what “little money” really is.
What Is Little Money?
Little money can be a different amount for everyone. What is little money for one person can be a large amount for another. If you are a billionaire, $100,000 may be little money and if you have an average income, you’ll find $100,000 to be a lot of money.
Reduce Costs and Increase Income
The same basic principle applies to everyone. If you have little money, you will have to reduce your expenses and increase your income. Regardless of whether you have little or a lot of money, it is always wise to look at your income and expenditure pattern.
I personally believe that everyone should be able to save at least 10% of their net income. For example, you can reduce your monthly expenses by doing things like:
- Switching energy supplier – Switching your energy supplier can easily save you up to $400 per year. That is a max 30 minutes of work that can save you a lot of money.
- Buy second-hand items – Or better yet only buy things if you absolutely need them.
- Save on your insurance – Check all your insurance policies once a year. Do you still need them? Are there cheaper insurance policy options?
- Leave the car – Get a bike and use it more often to travel short distances. If you really want to save a lot of money, you can also get rid of your car. That saves a few hundred dollars per month!
In short, if you apply the above simple steps in daily life, you will quickly have saved a nice amount to be able to invest in real estate.
Since this article is about investing in rental property with little money, I will assume an amount of $5,000 to be the definition of “little money”.
Now the question arises – can you invest in a rental property with as little as $5,000?
How Can You Invest in Rental Property?
Investing in rental real estate is a very broad concept. You can invest in it in many different ways, which is a good thing! So there is something for everyone. You can basically invest in two different ways:
- Invest directly in real estate – You buy a real estate property with the aim of renting it out. With the monthly rental income, you pay the real estate mortgage. The monthly rental income provides your monthly cash flow and over time the value of your investment property increases and you build up capital.
- Investing indirectly in real estate – You buy a (small) interest or share in a real estate fund or a real estate investment trust (also known as REIT).
Below I will explain both options and indicate whether you can do this form of investing in rental properties with little money.
Invest Directly in Rental Property
- Residential real estate – This includes regular houses, apartments, student houses, senior housing, etc. Basically all types of real estate that are rented out for residential purposes.
- Commercial real estate – This is a very broad concept and it covers many types of real estate. Think of retail properties, catering properties, business parks, office buildings and more.
- Parking spaces/Garages – These lie somewhere between residential real estate and commercial real estate. You can use these spaces for storage, your own workshop/office or renting out to others.
Invest in Residential Real Estate
Who doesn’t like the game of monopoly? Investing in real estate – buying properties and renting them out – buying more properties and renting them out again for more profits.
That’s what investing in residential real estate is basically about. Buying houses/apartments and then renting them out. Investing in residential real estate is what most private real estate investors do and is also my preference.
The reason for this is that it is fairly accessible. You do not run too much risk and you can achieve good returns. You can buy and rent investment properties to a specific target group to achieve an optimal return. For example, think of:
- Renting out rooms to students
- Renting out house/apartment to expats
- Renting out homes to seniors
Please note that you must be able to contribute at least 20% equity capital for direct investment in residential real estate. So assuming an investment property of $150,000, you will still have to be able to contribute at least $30,000 of your own money.
So if you want to invest in a rental property with little money (< $5,000), you will either have to continue saving or invest in a different way.
Invest in Commercial Real Estate
You can achieve a good return by investing in commercial real estate. The return you can achieve with investing in commercial real estate is generally higher compared to residential real estate.
However, be aware that the risks involved with investing in commercial real estate are also typically higher! Risk and return go hand in hand.
Please note that you cannot invest directly in commercial real estate with little money (< $5,000).
Invest in Garages
Investing in garages as a rental property is on the rise for the simple fact that they cost way lesser than residential or commercial real estate and they can be a good source of regular passive income.
The average cost of a garage/parking property can be around $5,000 but vary considerably more or lesser than that depending on the location of the property.
With regular real estate prices going higher, these kinds of smaller real estate investments have become very popular in recent times. You can rent them out for a vast number of purposes like general storage, car parking, workspace and much more.
So with your own contribution of around $5,000 you can invest in the purchase of a garage property for rental! So it is a viable option to invest directly in a rental property with little money.
Investing Indirectly in Rental Property
In addition to investing directly in homes or retail properties, you can also invest indirectly in real estate. There are many different options for indirect investment in real estate. See an overview below:
- Real Estate Investment Trusts (REIT) – These are companies that invest in income-yielding real estate like warehouses, hotels, shopping centers, apartments, etc.
- Real Estate Funds – These are funds that invest in REITs and other real estate related stocks.
Real Estate Investment Trusts (REIT)
REIT are companies or corporations that invest and operate income-generating real estate directly. They trade on major exchanges like other stocks.
A number of investors combine their capital to buy commercial rental properties and then make money from their shares through dividends. Apart from the rental income, gains from value appreciation also form a part of the income.
This way you can start investing in rental properties in an accessible way for little money.
Real Estate Funds
Real estate funds primarily invest in real estate operating businesses like REITs. Although some real estate funds can also invest directly in properties.
These funds offer value only through appreciation so they might not be a good option for the short term like REITs. But still, they offer much better diversification options compared to buying individual REITs. If you put in a fixed amount every month in this way, you will see that this has grown into a nice capital in 10 years!
In short, with the option of indirect investments, you can certainly invest in rental properties with little money!
Spreading Risks in Rental Property Investment
Spreading your risks is extremely important when investing! That is one of the weaker points of investing in rental property. Especially if you are going to invest with little money, you will end up putting your entire investment in one specific property. So be very careful with this!
Past performance is no guarantee for the future. Make sure that you apply sufficient diversification in your investment portfolio, whether in real estate or other investments!
As elaborated in this article, you can certainly invest in rental property with little money (more or less than $5,000). You might not be able to immediately invest in residential (houses or apartments) or commercial real estate. However, you can invest indirectly in real estate related funds (REITs and Real Estate Funds) or possibly in garages.
Have you started investing in rental properties? Are there any other tips that you’d like to share? Leave your comments below and let me know how you went about it!