You can do it, but how can you invest in real estate with 5K? It depends on how you invest in real estate and your risk tolerance. You can either invest in physical real estate (highly leveraged and risky) or opt for something more liquid such as Real Estate Investment Trusts (REITs).
Both options have pros and cons, so let’s consider what each offers when investing $5,000 or less. We’ll discuss finding deals on both types of investments with limited capital. So whether you’re looking to start small or want extra cash flow without taking too much risk, this post will provide insight into how you can invest in real estate with 5K successfully.
Can you invest in real estate with 5K? The Physical Real Estate Option
Investing in physical real estate can be a great way to generate additional income streams. The Lever Rank of physical real estate investments varies on the lower end of our ranking system. Here are the latest rankings:
Using your real estate for vacation rentals can be very profitable and a great way to make more money from a property you own.
- Great Way to Increase Returns
- Many Vacation Rental Platforms
- Significant Capital to Start
- Increased Maintenance Costs
- Requires a Lot of Work
- Exposure to Risk
- Requires Staffing to Scale
- It is a Job
Being a landlord and collecting rent as a residential property owner is probably one of the oldest and most stable forms of business income.
Just don't overpay for your properties.
- Consistent Demand
- Mature Business Model
- Favorable Tax Treatment
- Significant Capital Required
- Concentrated Capital Risk
- Legal Risks
- Tenant Risks
- Repairs and Maintenance
A triple net lease (commonly referred to as NNN or “triple net”) is a rental agreement (typically commercial) in which the tenant is responsible for property taxes, insurance premiums, and structural maintenance and repairs to the property (in addition to rent).
A triple net lease removes most of the risk of being a landlord because the tenant is now responsible for everything – the landlord receives the rent check.
- Tenant Responsible for All Expenses
- Favorable Tax Treatment
- Long-Term Leases
- Significant Capital Required
- Concentrated Capital Risk
- Tenant Credit Quality
- Re-Leasing Risk
- Illiquid
But can you invest in real estate with 5K? Understanding the benefits and risks of investing in physical real estate with $5,000 and strategies for making the most of this investment is essential.
Benefits of Investing in Physical Real Estate:
Build Equity Over Time
One of the main advantages of investing in physical real estate is that it provides an opportunity to build equity over time. As you pay down your mortgage and increase your property value through renovations or other improvements, you can access more money from your investment when you decide to sell.
Monthly Income Stream
Rental properties provide regular monthly income (when the property is rented) through rental payments from your tenants.
Tax Advantages
Physical property ownership allows you to take advantage of tax deductions related to owning a rental property, such as depreciation expenses and deductions for repair and maintenance costs.
Risks of Investing in Physical Real Estate:
It’s important to understand some risks associated with investing in physical real estate with $5,000 or less.
Leverage
With only $5,000 as a down payment, you are highly leveraged. For example, suppose the market takes a downturn (you quickly become “underwater”) or interest rates rise significantly. In that case, it could make it difficult for investors who have taken out mortgages on their properties because they may not be able to afford their monthly payments anymore or sell the property. The 2008 US real estate market crash is a perfect example.
Maintenance Costs
Potential maintenance costs are always associated with owning any property, which can quickly eat away at profits if not managed properly. Foundation, roof, or sewer issues can be costly to remediate ($10,000+), and if you do not have ready access to funds can make your property uninhabitable.
Exposure Beyond the Investment Amount
With direct property ownership, you have risk exposure beyond the invested amount. For example, if there is an accident on the property, you can be sued for more than the $5,000 invested or the property’s value. If you are foreclosed on and personally signed for the loan, the bank will go after you for the difference between what the property sells for at foreclosure auction and the loan amount.
Liquidity
Physical real estate investments are illiquid, and you cannot get your money out quickly.
Strategies for Investing in Physical Real Estate with $5,000:
Can you invest in real estate with 5K yet minimize some of the risk associated with ownership of physical real estate? Some options include:
Partnership Investments
One option would be partnering up on deals where two people put together equal amounts between them (10K total) but split ownership 50/50 so each person only has half the risk but still gets all the rewards. Some crowdfunding sites enable you to partner with multiple investors on a specific property.
Owner-Occupied Property
A popular way to start direct real estate investing is to buy a duplex where you occupy half the property and rent the other side. You can typically get a lower interest rate loan since you are occupying the property and you get the income from the other side. A bonus would be if your tenant covers the mortgage and expenses for the whole property – then you are living rent-free and can put your rent towards other investments. You leverage the tenant’s payment to build your income and net worth.
Investing in physical real estate with $5,000 can be a great way to diversify your portfolio and generate additional income streams. However, it is crucial to consider the risks associated with this type of investment (which is a lot) before taking the plunge. Next, we will look at investing in Real Estate Investment Trusts (REITs) with $5,000 as another option for creating an additional income stream.
Can you invest in real estate with 5K Using Real Estate Investment Trusts (REITs)?
Investing in Real Estate Investment Trusts (REITs) with $5,000 can also be a great way to generate additional income streams. REITs own and manage real estate investments, such as apartment buildings, commercial properties, office buildings, or shopping centers. They allow investors to diversify their portfolios while also earning dividends from the rental income generated by the tenants of the properties the REITs own. Investing in REITs is one of our favorite sources of Levered Income and has a corresponding high Lever Rank.
Real estate has always been a popular investment vehicle for growth and income.
Historically, real estate investors were limited to directly buying real estate, managing properties, and collecting rental income.
REITs take all management issues away and give REIT real estate investors liquidity.
This is our favorite way to invest in real estate.
- Requires Little Capital
- Liquidity
- Diversification
- Professional Management
- Better Returns than Direct Investment
- Price of Investment Moves with Stock Market
- No Depreciation Deductions
- Typically Non-Qualified Dividends
Benefits of Investing in REITs:
Hands-Off Investment
One of the most significant benefits of investing in REITs is that it provides investors access to professionally managed real estate investments without purchasing and managing the physical property themselves.
Regular Income Streams
Most REITs pay out regular dividends. This can be attractive for those looking for steady residual income streams. Some REITs, like Realty Income, pay monthly dividends, mirroring what you would see in a physical real estate investment.
Limited Risk
When you invest in REITs, your risk is limited to your investment.
Liquid investment
REIT investments (publicly traded ones) are liquid, and you can sell at any time simply by putting in a market order.
Risks of Investing in REITs:
Market Risk
Like any investment, there are risks associated with investing in REITs, including market volatility and changes in interest rates which could affect dividend payments over time.
Management Risk
Management of the REIT can determine a REIT’s performance over time. Poorly managed REITs have poor returns and dividend histories. I always look for internally managed REITs versus an external manager that can have conflicts of interest.
So can you invest in real estate with 5K and not have the risk and responsibility of managing a physical property? Yes, you can. Investing in REITs with $5,000 can be a great way to start investing in real estate. You can invest in individual REITs like Realty Income mentioned above, REIT index funds like VNQ, or even REIT CEFs (Closed End Funds) like AWP. Here is a comparison chart showing the examples:
Important Note: These are examples only to show options and are not investment advice or a buy recommendation in any way. You should thoroughly research any investment before investing and consult a financial advisor if needed.
How can you invest in real estate with 5K? Finding Deals on Physical Real Estate with $5,000 or Less
When investing $5,000 or less, physical real estate and REITs can be great options. You can get started investing in REITs for the cost of a single share (some REITs are less than $10 per share). However, finding deals on physical properties can be a challenge. To help you find deals available for your budget on physical properties, here are some tips:
Where to Look for Deals on Physical Real Estate
The first step in finding good deals is knowing where to look.
Online Agent Listing Websites
Online listings such as Zillow, Realtor.com, or Trulia are great places to search for physical real estate investments. An example search on Zillow for Akron, Ohio, sorted by lowest price, returned some lower-cost physical properties:
A $5,000 down payment on some cheap ones would reduce leverage, but they may need repairs. Using these types of tools, you can scan neighborhoods, see estimated financing costs, and more. You can sort through to find ones that have work already done, but then the price is a bit higher.
For Sale By Owner Listing Sites
Another approach is to search listing sites that are “For Sale By Owner” (known as FSBO), meaning that no real estate agent is involved. You may find a mispriced opportunity as the seller may not have gotten a professional appraisal before selling the property. Here is an example scan for For Sale By Owner:
Searching Foreclosures
Foreclosures are a great way to find lower-priced properties, but you must have all your financings in place before attending the auction. Foreclosure.com is a great place to find foreclosures in your area.
Online Aggregator Sites
Online aggregators like Roofstock package investment properties, making it easy for investors to buy properties around the United States. They have a suite of built-in tools to analyze their property’s profit potential. I find their return estimates a bit on the high side. Note that their analyzer only can show a minimum 20% down payment (a loan-to-value ratio that is a typical bank loan minimum for investment properties).
Finding Real Estate Investment Trusts
Where to Find Information on REITs
There are a lot of places to find information on REITs online. REITs are a very popular investment vehicle and have plenty of analyst coverage. Here are some sources to get you started:
Nareit stands for the National Association of Real Estate investment trusts and is the worldwide representative voice for the REIT industry. You can research REITs in their directory and sort by sector, listing status, and stock performance.
The U.S. Securities and Exchange Commission has a section covering REITs with a lot of helpful information.
Additionally, if you have a brokerage account, the research department will have reports on REITs and recommendations.
Final Thoughts
So, can you invest in real estate with 5K?
You can, but I would not invest in physical real estate with that much leverage.
It is too risky and challenging to make a profit. (Kind of a “is the juice worth the squeeze” thing).
There is one instance I would consider it. I might consider investing in a duplex if I needed a place to live. I could live on one side and then rent out the other side. I would ensure that the rent I am currently paying covers the ENTIRE mortgage costs and other expenses associated with property ownership. My tenant’s rent could be used to build up an emergency fund for property repairs.
Why wouldn’t I take the risk of a physical property with only 5k?
Let’s do a “back of the napkin” comparison. For this example, I will compare a physical property investment to an example REIT.
Physical Property
I screened for a single-family home in Akron, Ohio, where I could at least put a 10% down payment, allocate $1,000 in initial improvements, and have some money left over for an emergency fund. Here is an example I choose from the Zillow screen:
Concerns
Some concerns include neighborhood quality, property condition (no interior pictures with the listing), and the amount of work needed to get this ready for rent. A buyer would need to fully investigate the property and area before committing to make an offer.
Assumptions
To make the comparison for this article, and since I am not in Ohio to tour the property, I am making a lot of assumptions here:
-
- Purchase price of $29,900.
- A 30-year mortgage at a 7% interest rate.
- Rental Rate of $450 per month.
- 10% Management Fee.
- A 10% LTV loan is available for the property.
- The home is structurally sound.
- $1,000 is all that is needed for initial improvements.
- 1% annual charge for mortgage insurance.
- Zillow supplied property tax amount of $538 is correct and will not adjust upwards based on the purchase price.
- $600 per year in property maintenance.
- Zillow supplied insurance cost is correct ($126 per year seems incredibly low to me).
- Vacancy Loss is estimated at 12.5% based on neighborhood quality.
I plugged those numbers into my nifty real estate analyzer and got the following:
With this deal, the analysis estimates that you can make a 14.5% cash-on-cash return or $56 per month – IF NOTHING GOES WRONG.
If you need a $5000 roof repair, you will have to find another $5,000 to fix it, which you probably do not have. Even if you can find the money to repair the roof, it will take 7.5 YEARS to break even – IF NOTHING ELSE GOES WRONG.
I have owned and operated rental properties for years, and something always goes wrong.
ALWAYS.
In the last three years alone, I have had to replace a main sewer line (over $10,000) at a property, repair a roof after a windstorm ($8,000), remove graffiti from another ($2,500), and perform foundation repairs at two other ones ($140,000).
Imagine what that does to profitability and returns.
Owning rental properties can be very profitable, but you absolutely MUST understand the risks and have the emergency funds to cover these costs. It is definitely not passive income.
Let’s compare it to a REIT investment.
REIT Investment
Using our Realty Income (stock symbol O) example, on the day of this article, O is yielding 4.51%. Here is a screenshot of O from my Seeking Alpha account:
If you invested 5k in O at a 4.51% yield, you would make $225.50 per year in dividends or $18.79 per month in income. Your risk is limited to your 5K investment, and you may or may not have your dividends reduced or eliminated. Here is a screenshot of the Realty Income home page showing that they have paid 631 consecutive monthly dividends declared.
Comparing the Two Options
For me, the REIT option is a “no-brainer.”
The difference in income per month between the two options ($37.21) is not worth the risk.
IMPORTANT NOTE: This is not financial advice. This is my opinion and my approach. What works for me may or may not work for someone else. It is up to you to research potential investments and risk exposure. Mentions of any stock in this article are as examples only and not a recommendation of any stock.
Good luck!
