How Much Money Do You Need to Start Investing in Real Estate?

You can start with the price of one share of a publicly traded real estate investment trust (REIT), but buying a rental property takes far more. In our worked example below, a $250,000 single-family rental bought with a conventional loan takes about $68,500 in cash: 20% down, 3% in closing costs, and six months of payments held in reserve. Living in a 2-4 unit home you buy cuts that to roughly $26,000 with an FHA loan (3.5% down) on a $400,000 duplex, and eligible veterans can put 0% down with a VA loan if they have enough available entitlement, the amount VA can guarantee. For how these routes compare as sources of income, see what passive income is and what it takes.

What does each way to start cost?

Closing costs typically run 2% to 5% of the purchase price, on top of the down payment, according to the Consumer Financial Protection Bureau (CFPB). They vary with the price, loan type, lender, and location, so the Loan Estimate a lender gives you is the number to plan around.

REITs and crowdfunding

A publicly traded REIT is a company that owns income-producing real estate and trades on a stock exchange. The SEC's investor bulletin says you buy its shares through a broker, the same way you buy other listed stocks, or through a REIT mutual fund or exchange-traded fund. For a listed REIT or REIT exchange-traded fund, the entry cost is one share's price; a REIT mutual fund sets its own minimum first purchase, shown in its prospectus. Non-traded REITs are harder to sell, and the SEC warns that those sold through brokers and financial advisers generally carry high upfront fees that reduce the amount actually invested; read the offering circular for the fees and how you can redeem shares.

Real estate crowdfunding offerings set their own minimums, which you find in the offering documents. Federal rules cap how much a non-accredited investor can put into Regulation Crowdfunding offerings in any 12 months:

• If your annual income or net worth is under $124,000, the cap is the greater of $2,500 or 5% of the greater of your income or net worth.
• If both are $124,000 or more, the cap is 10% of the greater of the two, up to $124,000.

Do not count equity in your primary residence toward net worth for these limits.

Some private real estate deals accept only accredited investors, a status based on high income or net worth under SEC rules, and those deals are closed to most people starting with limited savings. Real estate crowdfunding explains how these platforms pay out and what you give up in liquidity.

Living in a 2-4 unit home: the lowest-cash way to own rentals

Buying a duplex, triplex, or fourplex and living in one unit, often called house hacking, lets you use owner-occupant loans with smaller down payments.

FHA. FHA insures loans on 1-4 unit homes that the borrower lives in. At least one borrower must move in within 60 days of closing and intend to stay at least one year. With a credit score of 580 or higher you need 3.5% down; from 500 to 579 the down payment rises to 10%. FHA adds an upfront mortgage insurance premium of 1.75% of the loan, which can be added to the loan amount, plus an annual premium of 0.55% for most 30-year loans with less than 5% down. For 3-4 units, FHA also requires three months of payments in reserve after closing, and the property must pass a self-sufficiency test: the appraiser's estimate of rent for all units, including yours, minus the larger of the appraiser's vacancy and maintenance estimate or 25%, must cover the monthly mortgage payment.

VA. A VA-backed purchase loan can buy a home of up to 4 units with no down payment, as long as the price is not above the appraised value, you will live there, and your lender confirms you have enough available VA entitlement. If an existing VA loan uses part of your entitlement, the lender may require a down payment. The funding fee on a first use with less than 5% down is 2.15% of the loan (3.3% on later uses); you can pay it at closing or add it to the loan. Veterans receiving VA disability compensation do not pay it. VA says sellers may pay some closing costs. If the lender counts rent from the other units to qualify you, VA requires cash reserves of at least six months of mortgage payments (principal, interest, taxes, and insurance) plus documentation of prior experience managing rentals or use of a property management company. On a $400,000 fourplex at an assumed 7.25% rate, with the funding fee added to the loan, principal and interest run about $2,787 a month; with $400 a month of taxes and insurance, six months of reserves is about $19,100, even with nothing down.

Conventional. Freddie Mac allows loans up to 95% of value on 2-4 unit homes you live in when its automated system approves the loan, so 5% down. For loans sold to Fannie Mae, the lender must verify six months of payments in reserve on any 2-4 unit home you live in.

FHA example, $400,000 duplex: 3.5% down is $14,000. Closing costs at 3% are $12,000. Total cash: about $26,000, with the 1.75% upfront premium ($6,755 on a $386,000 loan) added to the loan. FHA requires no reserves on a two-unit loan approved through its automated system, but one month of payments if the loan is underwritten manually; a lender can set its own higher minimum.

The cash for a first rental you do not live in

On a property you will not occupy, Freddie Mac's maximum loan is 85% of value for 1 unit and 75% for 2-4 units. Fannie Mae requires private mortgage insurance on any conventional loan above 80% of value, so putting 20% down on a 1-unit rental avoids that added cost. Down payment requirements for investment properties compares loan types in more detail.

Reserves are money left in your accounts after closing. For an investment property, Fannie Mae requires six months of the full monthly payment: principal, interest, taxes, insurance, and any HOA dues. Checking, savings, stocks, and the vested part of a retirement account count, but not retirement money you can reach only when you retire, leave a job, or die. Unsecured personal loans and cash-out from refinancing the property you are buying do not. If you already own other mortgaged properties besides your home, Fannie Mae adds a share of their combined loan balances: 2% if you will have one to four financed properties in total (counting the new purchase and a mortgaged home), and 4% for five or six. The reserves stay in your accounts; the lender only verifies them.

Worked example, $250,000 single-family rental:

• Down payment, 20%: $50,000
• Closing costs, 3% (assumed; the CFPB range is $5,000 to $12,500 here): $7,500
• Loan: $200,000 at 7.75% for 30 years (an assumed rate; investment property loans are priced above owner-occupied ones, so use your own quote) = $1,433 a month in principal and interest
• Taxes $250 and insurance $150 a month (assumed) bring the payment to $1,833
• Reserves, 6 x $1,833: about $11,000
• Total: about $68,500, plus whatever repairs the home needs before a tenant moves in

With 15% down, the down payment drops to $37,500 and the loan rises to $212,500 ($1,522 a month in principal and interest). The total falls to about $56,500 before mortgage insurance, which adds to both the payment and the reserves. If you already own one other rental with $150,000 owed on it, add $3,000 (2%) to reserves. How much cash reserves real estate investors need covers what to hold beyond the lender's minimum.

Ways to start with less

1. Buy REIT shares or a REIT fund in a brokerage account while you save for a property.
2. Buy a 2-4 unit home you will live in with FHA (3.5% down), VA (0% down with enough available entitlement), or a conventional loan (5% down). This keeps the down payment far below the 15% to 25% required on rentals.
3. Ask the seller to pay closing costs. VA notes that sellers may pay some of them on a VA loan, which lowers the cash you bring to closing.
4. Keep a personal cushion separate from lender reserves. The CFPB suggests holding back three to six months of your own expenses for emergencies when you set a home budget.

Getting started with real estate investing lays out the steps after you know which route your savings fit.