How much do I need to invest in real estate?

How much money do you need to start investing in real estate?

Most investors will want a 20% down payment and money for repairs for property Improvement. Therefore, most investors should aim to have about 30% of the property price before investing in real estate. Alternatively, you can invest in real estate cheaper by purchasing Real Estate Investment Trust, real estate crowdfunding, or exchange-traded funds.

Real estate has been a long-time wealth builder for thousands of people. Plenty of people quit their job every year because of their real estate Investments.

You can be a real estate investor yourself, but it will require a lot of research and education.

Luckily for you, I will show you how much you need to start investing in real estate. I’ll show you some options and things to consider before purchasing any real estate. You will be well on your way to figuring out what type of real estate investor you want to be.

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How much do I need to invest in real estate?

Real estate investors can purchase physical real estate with no money down or 20% down by obtaining a loan. Most real estate investors will purchase property with $20k to $30k for down payment and initial repairs. Alternatively, investors can invest in real estate companies for the cost of one share.

Purchasing a property with little money

Some Real Estate Investors will choose to purchase property with no money down. In this case, the real estate investor is going to have to pay Private Mortgage Insurance (PMI).

Purchasing a property with private mortgage insurance means you aren’t risking any of your own money. However, your monthly mortgage payment is going to be more expensive than if you had just paid 20% down.Therefore, you will have to factor in private mortgage insurance when ensuring your property is cash flowing.

You will also want to consider that most properties will require some initial work or maybe in need of repair. You won’t always see what needs repair until you purchase the house.

In this case, you should also consider adding some money onto your loan for repairs. For example, you might only need a loan for $100,000 to purchase a single family home. However, you might ask the loan amount to be $115,000 to give you money for repairs.

Purchasing a property with 20% down payment

Most Real Estate Investors will try and pay 20% down payment towards their loan. Paying 20% down will help you avoid private mortgage insurance. Most Real Estate Investors are aiming to keep their down payment as low as possible, typically between $20,000 and $30,000.

Keep in mind, you will want some cash on hand for any repairs that need to be made to the property.

Real Estate Investors will often give low-ball offers to try and reduce their purchase price. For example, a property might be listed for $110,000. You make an offer at 80% of the listing price or $88,000.

You might be thinking that nobody’s going to accept 80% off the listing price. However, it is up to the property owner to accept your offer and you will find people who will accept your offer. Keep in mind, you will also get a lot of people countering or rejecting the offer.

Assuming the property owner accepts your $88,000, you would owe $17,600 as a down payment.

However, you may have budgeted $30,000 for your down payment. Because your payment was only $17,600, you have an additional $12,400 left over. You can use this money to make repairs or increase the value of your home through cosmetics like painting.

Purchasing Real Estate as a hands off investor

You can also be a hands-off investor, but your return on investment won’t be nearly as large as investing in physical property yourself. However, you can invest with an individual real estate company or Real Estate Investment Trust (REITs).

How much should I save for my first real estate investment?

First time Real Estate Investors should aim to save about 30% of their initial investment purchase. You will want to have a 20% down payment and additional money for repairs, making the place look better, vacancies, and other expenses.

The best thing a new property owner should do is create a mock budget for their first property. You want to get an idea of the monthly expenses and potential cash flow the property can provide. Take your time when creating your budget because you don’t want an unexpected expense. 

Additionally, you will want to account for vacancies. Unfortunately, you will not have 100% occupancy of your property. Most property investors estimate an 80% occupancy rate.

What are the best real estate investments for beginners?

The best real estate Investments for beginners include real estate investment trusts, exchange-traded funds, crowdfunding, and purchasing physical real estate. Investors who don’t want to have hands-on experience should consider investing in REITs. Alternatively, you can make more money by purchasing physical real estate, but you’ll have to put in more Sweat Equity.

Real Estate Investment Trusts (REITs)

Real estate investment trusts are real estate companies who invest in real estate. You can purchase ownership in these real estate companies and receive a dividend payment for your ownership. Real Estate Investment Trust trade like normal stocks on the stock market.

In order to purchase a real estate investment trust, you will need a brokerage account. For example, Robinhood is a brokerage account where you can buy a Real Estate Investment Trust.

You will then want to find out which companies you want to invest in. For example, Realty Income is typically seen as a good REIT to invest in. The current share price is about $68 and they have a 4.36% dividend yield.

Therefore, You will receive $4.36 in dividends for every $100 you have invested in Realty Income.

Real Estate Exchange Traded Funds

Real estate exchange traded funds are a diversified basket of real estate investment trusts. Essentially, you can purchase one fund and have exposure to hundreds of different real estate companies. As with a REIT, you will receive a dividend payment for owning the exchange traded fund.

For example, VNQ is the Vanguard Real Estate ETF which you can get for a low-cost expense ratio of 0.12%. The current yield for VNQ is about 4%.

The main reason to invest in an exchange traded fund is diversification. VNQ currently has 168 different real estate companies contained within the fund. Therefore, you can invest in real estate and rest easy, knowing you have diversification.

Real Estate Crowdfunding

Real estate crowdfunding is when you open up an account with a real estate company. You gave your money directly to the real estate company who then invests your money. Crowdfunding is less diversified than investing through the stock exchange and less liquid than purchasing stock or ETFs.

Physical Real Estate

The best potential reward in most work involved is purchasing physical real estate. You are the owner and manager of your own investment. There is less diversification and more risk involved by purchasing your own property. 

Summary: How much do I need to invest in real estate?

As you can see, you can invest in real estate with little to no money down. However, you may want to invest in physical real estate with a 20% down payment and money for repairs. Additionally, you can take advantage of real estate investment trust, crowdfunding, and exchange-traded funds, which can be purchased for less money than physical real estate.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.