How to Invest $30k in Real Estate – What’s the Best Approach?

How to Invest 30k in Real Estate

Investing in real estate is a smart move.

There are all kinds of reasons why you might use your $30k to invest in real estate. Our top three are:

• Leverage – when you invest in property you can gain leverage through a loan or mortgage to increase the amount of your investment.

• Financial security – houses will always be in demand, which means your money is safely tied up and can be accessed through the easy process of selling.

• Beating inflation – hedge against inflation by investing your money in property. As the cost of living increases, so will the cash flow you receive from your property.

If you want to figure out how to invest $30k in real estate, you’re in the right place. This article will take you through the best options, giving you all the facts you need to make a decision.

Use the money as a down payment for a rental property

One of the best ways to use your $30k in real estate is to use it for a down payment on a house that you can rent out to earn money.

The average American pays about 6% for their down payment, which means you could purchase multiple buy-to-let properties with your $30k investment. However, some mortgages will require a 20% deposit and putting a larger upfront payment down will lower the interest rates and reduce the amount of money that you have to borrow.

As a real estate investor, there are a few ways that your investment will earn you money.

Cash flow: the difference between the rental income that you receive from tenants each month and the operating expenses for the house (mortgage and maintenance) is your net cash flow from the rental property. Let’s say you purchase a $150,000 home to rent. If you rent it for $1,500 per month and your mortgage and expenses total $1,300, your annual income from this rental property would be $2,400 per year. Whilst this may not sound like much, there are other ways that renting a house can earn you cash.

Appreciation: national appreciation values average around 3.5 to 3.8 percent per year. So, in five years your $150,000 could be worth $178,500, giving you an appreciation profit of $28,500 if you sold the property.

Beat inflation: as inflation rises, so do property values. This means that landlords earn a higher rental income over time.

You may want to consider hiring a property manager for your rental property. Here are a few pros and cons to consider.

Pros:

• Avoid time consuming admin tasks associated with property management.

• Property managers take care of finding new tenants so you don’t have to worry about your property being vacant.

• No hassle of finding reliable professionals to carry out repair and maintenance work.

• You won’t have to deal with late rent payments.

Cons:

• The cost of hiring a property manager will eat away at your profit. The fee can range between 6-12% of the rent plus any expenses occurred.

• You have less control over your property.

• Sometimes, property managers have screening processes that are too strict, which may mean turning away tenants who do not pass.

Invest in a vacation rental

A vacation rental is a great place to start if you’re new to property investment. They can be a great way to earn consistently and build up wealth over a long period of time.

Pros of investing in vacation rentals:

• Vacation rentals are a good income generator. If you invest in a property that is situated in a popular destination, you can expect to earn profit for most of the year.

• You may benefit from tax deductions for mortgage payments, property taxes, rental income and insurance premiums.

Cons of investing in vacation rentals:

• Operating expenses such as maintenance and utilities take away from your monthly profit.

• Some cities and states have strict regulations around rentals, especially for short-term rentals. Always check the laws in the area of the property before investing.

• You may end up paying more to mortgage the property because they often come with higher interest rates.

Flip houses

Also known as ‘fix and flip’ and ‘fix to sell’, flipping houses is basically where you purchase a property that needs renovation work and buy it for a low price. You can also flip houses in an area where home values are rapidly rising. Once you renovate the property to the required standards, you sell it for a higher price to make a profit. It’s becoming an increasingly popular way to invest money in real estate.

Whilst this can be difficult to get started with a $30k investment, you could consider partnering with another investor to start your flipping venture.

Here is an example:

Property purchase price: $200,000

Renovation costs: $30,000

Other costs: $20,000

Property sale price: $300,000

Profit: $50,000

Here are some top house flipping tips and mistakes to avoid.

Tips:

• Do your market research. You won’t know if you’re getting a good deal on a house or not unless you know what other houses are worth in the area.

• Factor in the cost of renovation. The deal may seem good but will it still be profitable once you have paid for all the work that needs doing? Always get a professional opinion if you’re not sure about the amount of work involved before making any financial commitments.

• Stick to your budget and choose the right investment partner. It can be tempting to install all of the latest technology in a home renovation, but is it needed? The key to house flipping is maximising your profits. You’ll need a team of trusted people around you to make house flipping work, including your investment partner. It’s important that you both share the same vision for the house to prevent overspending.

Mistakes to avoid:

• Rushing your refurbishment project. Picking the right property and renovating it is a time consuming process that shouldn’t be rushed. Mistakes can happen when you try to speed up the process, which will ultimately affect your total profit.

• Trying to do everything yourself. Unless you’re a qualified plumber and electrician, there are parts of the work that you will need to hire professionals for. Attempting work yourself may result in paying more money to fix your mistakes.

• Forgetting to buy property insurance. Property insurance will reduce the risk of house flipping projects by covering you for any damage caused by theft, fire or floods.

Consider a real estate partnership

A real estate partnership is a group of two or more investors who contribute mutual funds into purchasing a property together. The property is either then renovated and re-sold or leased to tenants where the rental income is split between the investors.

There are lots of options when it comes to finding yourself a real estate partner. From family members and friends to local governments, you can partner with anybody who shares your passion for property investment. It’s important that all investors share the same vision for the property that they are going to invest in, so get to know each other first before making any financial commitments.

Pros of real estate partnerships:

• Partnering with professionals to invest in property can help you divide the workload and save money on contractors for any work that needs doing.

• You can choose how much capital you want to invest in the property.

• Real estate partnerships give investors a higher return on their investment compared to other property investment options.

Cons of real estate partnerships:

• Some investors may invest larger amounts of money into the property than others, causing a disproportionate level of involvement that could cause disagreements.

• If a partner wants to exit the investment early, other partners may need to contribute the additional funds to pay the investor off.

• There are often legal fees associated with real estate partnerships because an operating agreement will need to be drawn up by a lawyer.

Explore REIT investing opportunities

REIT stands for Real Estate Investment Trusts but what exactly is a REIT and how do they work?

REITs are essentially companies that invest in real estate. Investors buy shares from the REIT, sharing the ownership of the investment property. REITs allow multiple investors to combine their resources to benefit from the dividends.

They are a good way for investors to start or build their real estate portfolio with less risk than financing properties as a landlord. REITs are traded on the stock market, which makes the process of buying and selling them much easier and can be either domestic or commercial properties.

Whilst $30k isn’t enough to buy a house outright, it is more than enough to get yourself a slice of the property market and get some return on your investment.

As with any investment, it’s important to consider the pros and cons.

Pros of investing in a REIT:

• In some states, REITs are exempt from tax, making it a more tax-efficient way to invest in property as it allows you to maximize your profit.

• You can access the money that you have invested in a REIT quickly if you need to.

• There’s no need to worry about the day-to-day management of the property or have to do any maintenance work yourself.

• You won’t need to spend extra money on the cost of legal expenses associated with buying a house as they are covered by the REIT.

• Investing in a REIT will give you access to higher value properties than you would be able to consider as a sole applicant.

Cons of investing in a REIT:

• The return that you can expect from investing in a REIT is smaller than other property investment options, especially if the property market isn’t doing very well.

• You won’t fully benefit financially from a property’s appreciation because it is shared with the other REIT investors.

• REITs don’t offer a tangible investment that you could leave to your children. However, it is possible to share your REIT investment because it works in a similar way to purchasing stocks and shares in a company.

Give real estate crowdfunding a go

If you want to invest in bigger residential or commercial properties, real estate crowdfunding may be the right option for you.

It’s becoming an increasingly popular way of raising enough money to buy a property to either rent out or sell on. The money is usually collected via a website which is used to attract investors. Different websites will focus on different things, for example buy to let opportunities or development opportunities. There are some fees to be taken out of the final profit before it is then shared evenly between everyone who took part.

Here’s what you need to know.

Pros of real estate crowdfunding:

• Crowdfunding is a good opportunity for people to invest in real estate with smaller amounts of money.

• This method of real estate investment allows you to diversify your investment portfolio and minimize the risks that come with only investing in one property.

• Crowdfunded real estate often results in higher profits than other property investment opportunities.

Cons of real estate crowdfunding:

• Each investor will put in a small amount of funds, which means there will be a large number of investors that you need to split any profit from the property with.

• The biggest downside to real estate crowdfunding is that you can’t access your investment quickly if you need the money back. Most of these opportunities will have target investment periods of between three and five years.

• It can take a while to see any return on your investment.

Things to consider before investing in any real estate

You should never rush an investment, especially if you don’t fully understand where your money is going. Here’s a list of points to think about before handing over your money.

The type of property that you want in your portfolio – there are four types of real estate that you can invest in: residential, retail, commercial and industrial. Residential is the safest real estate opportunity because the return is almost guaranteed, but it does have a lower profit margin compared to the other property types. High risk, high reward. Never invest more money than you can afford.

Your personal finances – if you are financially healthy enough to spare your $30k investment, then investing in real estate is a good option. However, if you have debt or your outgoings are more than your earnings you should fix your personal finances before parting with your money. Your current credit score will also affect your buy-to-let mortgage options.

Consider location carefully – if you want to succeed at property investment, location is key. Do lots of research on the area and check out the local transport links and education facilities to get a good idea of the amenities nearby.

Look at rental properties through the eyes of your prospective tenants – when looking at potential buy-to-let real estate, ask yourself if they would find it appealing. This will help you make good investment decisions when it comes to making any home improvements.

The real estate market – the property market can change, affecting your investment. For example, if property prices are low it’s a good time to buy one, but not sell one.

Your expected return on investment – if you’re investing in property to earn money immediately you will need to consider buy-to-let investment properties. However, if you want to receive maximum return on your investment, most real estate opportunities are long-term.

Real estate law – it’s really important that you’re familiar with the laws in the area you’re purchasing property in, and the taxes that you will be expected to pay. Lawyers can offer personal financial advice and help you familiarize yourself with the property process and steps that you need to take in order to avoid paying fines.

Want to know more about investing and home ownership? Visit our personal finance blog for the latest tips and advice on how to make the most of your money.

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