A lot of big investors love real estate. Those investors include numerous insurers, public pension funds, and internationally recognized money management firms. In fact, the “billion-dollar club”—institutional investors who have allocated at least $1 billion to real estate class—have a combined $2.53 trillion invested in real estate.
But you don’t need to run a Global 2000 firm to invest in real estate. Nor do you need a billion dollars.
Many successful individual investors also incorporate real estate into their investing strategies. They see real estate as a way to diversify their portfolios and become less reliant on the usual stocks and bonds, which tend to be driven by the ups and downs of the public markets. As a tangible asset, the long-term value of real estate is instead more driven by localized supply and demand, physical upgrades to the property, and the metro’s changing demographics.
So how much money do you need to invest in real estate? Depending on the project, you may need as little as $500 to invest in a “fix-and-flip” single-family property, or you could easily invest $100,000 into a major office-to-residential rebuild project. It all depends on the kind of real estate investment you’re looking at.
Residential Real Estate Investing
When most people hear the words “real estate,” they tend to think of residential real estate. After all, most of us have personal experience with the residential real estate market. If you’ve ever had a mortgage, congratulations—you’re a real estate investor.
So how much do you need to invest in residential real estate? Well, according to HousingWire, the median down payment for a house in the U.S. is a little over $15,000. For individuals who can afford the initial down payment, it’s not unreasonable to consider rental properties as a worthwhile investment.
You’re probably also familiar with the idea of “flipping houses.” The quick buying, remodeling, and selling of residential properties is a popular TV show format, and many individuals, especially those who like hands-on projects, could find this kind of real estate investing incredibly appealing.
But flipping isn’t as easy as just buying and selling houses. And being a landlord comes with its own set of concerns. Due to the time, energy, and complexity involved, residential real estate investing might not be the ideal option for every investor.
Limitations of Residential Real Estate Investments
1. You own all of it. That $15,000 down payment is just the initial mortgage payment. You’ll continue paying the rest of the mortgage off, and even with a tenant, it could be several years before your rental property is paying for itself. You’re also on the hook for any closing fees associated with the sale, annual property taxes, maintenance costs, repairs, and more. As the sole owner, you’re also the only one legally responsible for the property.
2. Houses require a lot of work. Residential real estate investing can be extremely hands-on, especially if you’re interested in flipping fixer-upper properties. You’ll either need to handle the repairs/remodel yourself, or hire a crew to do the work. If you’re renting out the house to tenants, you’ll need to make yourself available as a landlord (or hire a property manager) to ensure the property remains in good shape, any issues (broken appliances, frozen pipes, leaking roof) are addressed in a timely manner, and rent is being paid on time.
3. It’s feast or famine. Either your rental property has a tenant, or it doesn’t. You can’t earn any rental income until the major remodeling projects are done, and you actually get a tenant. Every month your property isn’t rented means you’re not earning income.
Residential Real Estate Is More Expensive Than Most People Realize
For these reasons and others, residential real estate can be an expensive and frequently unpredictable investment option. When it comes to how much you’ll really need to invest in the property, you’ll likely need to set aside far more than the $15,000 needed for a down payment. And you can’t afford to “set it and forget it.” As Joseph Hague writes in “I Owned Six Homes and Lost It All With Real Estate Investing” (emphasis added):
“My biggest real estate mistake is a trap many fall into and one created by the get-rich books and promoters. These books present real estate as a passive income source where all you do is finance a portfolio of rental properties and wait for the tenants to pay off your mortgage.
The truth is that renting single-family houses is about as far from passive income as you can get.”
The Alternative: Commercial Real Estate
Investing in real estate doesn’t have to mean owning a house. In fact, single-family residences are just a small category in a much larger investment market. Many individual investors who successfully turn real estate into a source of passive income are investing in commercial real estate.
What Is Commercial Real Estate?
Commercial real estate encompasses virtually every building that isn’t a single-family residence or duplex.
This includes a wide variety of types of commercial investment properties:
- office buildings
- retail stores
- shopping malls
- factories
- medical offices
- self-storage facilities
- hotels
- apartments
- condominiums
- senior housing
- and more
At a Glance: Residential vs. Commercial Real Estate
Compared to houses, commercial real estate investments are generally:
- hands-off, not hands-on
- stable, not unpredictable
- managed by other people, not by the homeowner
Rather than putting down a mortgage payment, you invest those funds into a property of your choosing. The property may be new, or a redevelopment of an existing building. The project is controlled by an individual or company known as the “sponsor,” who handles the investment from start to finish, as well as day-to-day operations and management of the building. You become a passive investor in the project, meaning you aren’t on the hook for anything of the actual project management. Investors can receive cash flow from monthly rents, and ultimately earn a large return when the property sells.
How Much Money Does It Take to Invest in Commercial Real Estate?
Investing in commercial real estate can be much more affordable than many people think. With a crowdfunding platform, your investment is pooled with dozens (or hundreds) of other investors, so you aren’t the only one financing the project. Here on CrowdStreet, you can invest in a commercial real estate deal for as little as $25,000.
Different Options for Different Investors
With CrowdStreet, you get access to direct investing opportunities. Like choosing individual stocks and bonds, you pick which project you want to invest in, and your money goes directly to the sponsor behind the deal.
Another option is investing in a fund diversified with several properties selected algorithmically to hedge risk.
Finally, some investors who prefer to be totally hands-off may choose to hire financial advisors, who offer guidance and sometimes make investment decisions on their clients’ behalf.
