At the risk of stating the obvious, real estate costs a lot.
That makes it expensive to invest in, and difficult to diversify among real estate investments. The median home price in the US is around $350,000, so an investor who buys a median property with a 20% down payment would need to come up with $70,000. And that doesn’t even include closing costs or property updating costs!
So what’s an investor to do if they want to add real estate investments to their portfolio, but only have $1,000 to invest?
Here’s how to invest $1,000 in real estate, whether you’re just getting started or simply want to diversify your existing investments.
Yes, real estate is expensive. But in today’s world, you have plenty of options to invest $1,000 in real estate without hassling with 20% down payments.
The following types of real estate investments don’t require much cash, allowing you to get started with just $1,000 to invest.
1. Fractional Ownership in Properties
Several platforms let you buy fractional shares of individual properties.
The best known of these is Arrived Homes. They buy single-family rental properties in suburban neighborhoods across the United States, and you can buy shares in those properties at $10 increments. The minimum initial investment: just $100 per property.
Each quarter, Arrived Homes pays out dividends to you based on the net rental income collected for the property. After five to seven years, they sell the property, and you collect your share of the profits.
Accredited investors can also buy fractional ownership in rental properties through Roofstock One.
If you prefer commercial or mixed-use properties, accredited investors have a few options to choose from. Reputable crowdfunding platforms include EquityMultiple, RealtyMogul, and CrowdStreet. All let you buy fractional shares in apartment buildings, parking garages, mixed-use buildings, and other alternative investment properties that you wouldn’t be able to afford on your own. Like Arrived Homes, you typically collect dividends on the cash flow generated from each investment property.
Non-accredited investors can expect a harder time buying fractional ownership in individual properties however. If you’re not an accredited investor and you want to buy partial ownership in commercial properties, try public or private REITs.
2. Publicly-Traded REITs
The most traditional option on this list, anyone can buy shares of real estate investment trusts (REITs) through their regular brokerage account.
These companies trade on public stock exchanges, which makes them extremely liquid. You can buy and sell instantly, unlike brick-and-mortar real estate that takes months to buy or sell.
And you can buy with an extra $100 sitting in your bank account collecting dust, so there’s no financial barrier to entry.
A combined strength and weakness of publicly-traded REITs is their dividend yield. The Securities and Exchange Commission (SEC) requires all publicly-traded REITs to pay out at least 90% of their profits each year to shareholders, in the form of dividends. That keeps their dividends high, but it also makes it hard for REITs to reinvest their profits and build their portfolios. In turn, that limits their growth potential.
Their liquidity also cuts both ways. Because they trade on public stock exchanges, they tend to move in disturbing correlation with stock indexes. That largely defeats the purpose of diversifying into another asset class.
Consider VNQ, the Vanguard Real Estate Index Fund ETF Shares, with broad exposure to US REITs. In the pandemic-induced stock market crash of 2020, shares fell 44%. But US real estate values didn’t fall at all — quite the opposite. From March 2020 to March 2021, US home values actually rose 13.3% per the S&P CoreLogic Case-Shiller 20-city home price index. By late May 2021, share prices in VNQ hadn’t even fully recovered their 2020 peak, despite such strength in US housing markets.
In short, publicly-traded REITs make for easy, liquid real estate investments that you can buy with $1,000 dollars or $10. As a starting point for investing in real estate, consider these top REITs for beginners.
Just understand that publicly-traded REITs don’t provide much in the way of diversification.
3. Real Estate Crowdfunding: Private REITs
The most common type of real estate crowdfunding investments work similarly to REITs: pooled funds that own real estate directly or lend money secured against real properties.
However, they come with two distinct differences. First, they don’t trade on public stock exchanges — you buy shares directly from the crowdfunding platform. That makes them far less liquid, and also far less volatile. They don’t move in sync with stock indexes, so they provide real diversification.
In fact, most real estate crowdfunding platforms require you to hold shares for at least five years. You can usually sell shares back to them before then, but at a discounted price.
The second difference is that crowdfunding platforms don’t have to classify their investments as REITs. That means crowdfunding platforms don’t inherently need to distribute 90%+ of their profits back to investors each year, and have more flexibility to reinvest them to keep growing their portfolios.
That can mean lower dividend yields, but it also means far greater potential for share price appreciation.
My two favorite crowdfunded REITs are Streitwise and Fundrise. Both allow non-accredited investors to invest, unlike many real estate crowdfunding companies. Streitwise specializes in commercial real estate, specifically office buildings and mixed-use properties in “non-gateway markets” (read: second-tier cities like Indianapolis and St. Louis, rather than the New Yorks and San Franciscos of the country). They’ve paid out 7-10% dividend yields every year since inception.
Fundrise specializes in residential apartment buildings, although they also own some commercial properties and single-family rental properties. You can choose between several REITs, some more dividend-oriented and others more growth-oriented. In addition to owning properties directly, they also lend money against real estate for even more diversification.
For full disclosure, I own shares in both, and have been largely happy with them. Fundrise lets you invest with just $10, although Streitwise recently raised their minimum investment to $5,000. On the plus side, Streitwise maintained their 8%+ dividends throughout the coronavirus pandemic — a time when most commercial real estate struggled. They also now allow you to invest via cryptocurrencies in addition to cash transfers.
4. Real Estate Crowdfunding: Loans
Some crowdfunding companies offer a different model, investing in real estate-secured debt rather than property ownership.
Consider Concreit. They operate a pooled fund with over 150 real estate loans, all short-term. Unlike every other real estate crowdfunding platform, they let you pull out your money at any time, with no loss of principal. That kind of liquidity is unheard of in real estate investing, outside of public REITs. Concreit pays an annual dividend yield of 5.5%, with payments every single week.
Other crowdfunding platforms let you put money toward individual mortgage loans secured by real property. My favorite of these is Groundfloor. It allows non-accredited investors, so you don’t need to be wealthy to invest. In fact, their minimum investment is only $10. Who doesn’t have an extra $10 lying around? Skip a couple of lattes this week and test out a new real estate investment.
They operate as a hard money lender, issuing purchase-rehab loans to flippers. Flippers borrow short-term loans from them to buy and renovate properties, then pay it back when they sell the property 6-12 months later. Or refinance with a long-term rental property loan, if they follow the BRRRR strategy.
You get to pick and choose which Groundfloor loans you want to put money toward, in increments as low as $10. They grade the loans based on risk, from A-F, with higher risk loans paying out higher interest rates. Annual returns range from 7-15%, depending on the risk level. You can spread your money around to as many loans as you like, to diversify and spread both your risk and returns.
Alternatively, Groundfloor now offers a similar pooled fund model as Concreit. It pays 4-6% interest, and offers even better liquidity than Concreit, letting you pull out your money at any time with no penalty.
Time for the same disclosure: I myself invest my own money in Concreit and Groundfloor loans. And again, my experiences have been positive.
