When it comes to real estate investing, nothing is too much or too little. It all depends on the amount you are willing to set aside for investing, as there will always be a suitable type of investment for every real estate investor.
Real estate investing is a good way to diversify an investment portfolio, create passive income and build wealth. However, it is also a capital-intensive method of investing. Investors who are new to real estate investing may often wonder what the minimum amount is needed to invest in real estate. As a quick guide, these are some methods of real estate investing that range from very capital-intensive to the least capital-intensive:
Traditional real estate investing, such as buying an investment property, would require huge initial capital, and the amount required varies according to the type of investment property. When purchasing an investment property, most buyers would choose to finance the purchase with a loan. A 20% to 25% down payment is typically required, and some lenders may even require a higher percentage of down payment. Other additional costs would include renovation costs, construction costs, and closing costs. Additionally, if the investment property is financed through a mortgage, the lender would typically require the borrower to retain a minimum balance of six to 12 months’ worth of mortgage payment in reserves. These costs will all add to the minimum amount needed to invest in a property through the traditional way.
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Due to the large capital outlay required, traditional real estate investing is usually too costly and financially inaccessible to most investors. Fortunately, there are also alternative methods to invest in real estate with lower minimum investment amounts; these include co-investing in real estate and investing in real estate investment trusts (“REITs”).
Co–investing in Real estate is a relatively new and increasingly popular method of investing in properties. Real estate co-investment platforms allow investors to co-invest in investment properties with a much lower initial capital, compared to buying an investment property. Here’s an example of how real estate co-investing works: a developer plans to buy an office building and renovate it, which would cost $12 million in total, and sell it off for $15 million a few years later. The developer is able to get a loan of $6 million from the bank and has to fork out $3 million themselves. For the remaining $3 million, the developer may raise the sum through an online real estate co-investment platform. A pool of investors will combine their funds to raise the required amount in return for a share of the profits from the sale of the investment property.
Co-investing allows multiple investors to own their desired share of an investment property by investing in a fractional amount of the value of the property r. The minimum amount for co-investing on such investment platforms is generally significantly lower than the capital required to purchase an investment property.
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The least capital-intensive option would be to invest in REITs. REITs are typically publicly-traded on the stock exchange and can be bought and sold easily, like stocks. Investors can invest in REITs for as little as $1,000, which explains why it is so popular among retail investors.
The minimum amount of capital required for real estate investment largely depends on the amount of capital an investor is willing to put in the investment. And this would determine the type of real estate investment method that is suitable for you. Investors who do not have much money to spare for investments may start with REITs, as it requires the least amount of capital, while seasoned investors with deeper pockets may be more open to the option of traditional real estate investing. However, both seasoned and new investors who are looking for diversification beyond REITs and traditional real estate investing may also consider co-investing in real estate through an online real estate co-investment platform.