The biggest barrier for those starting out in real estate investment is simple: money. But it’s not just finding and obtaining the funds needed to buy a property. Rather, many first-time investors struggle to figure out the amount of money they need to invest in order to generate a healthy return.
Now, knowing the amount to start investing in is entirely dependent on your financial goals and whether or not you have a disposable income. Though you can start small via crowdfunding platforms, getting the returns that match your financial goals relies on a well-diversified portfolio, consistency, and understanding the power of compounding.
If you’re looking to grow your wealth, then read on to find out the ideal amount to invest in real estate, as well as factors to consider before starting your journey.
First Things First
Before figuring out the ideal amount to start investing in, here are 3 steps to ensure that you’re able to invest in the first, and right, place!
- Knowing your personal preferences, along with your current and future financial circumstances will help you make your decision. It’s important to have a detailed understanding of your future goals, the timeframe you intend to achieve them, and your risk comfort level for each goal.
- You also need to have a disposable income as you should only invest money that you can afford to lose. Your disposable income is essentially the income you can ‘do what you want with’ after all all your necessities, like rent, bills, groceries, petrol, medical needs, etc., are covered.
- After establishing your disposable income, you need to find a regulated crowdfunding platform allowing you to begin your investment journey with the amount you choose. The platform must be credible, meaning rigorous background checks are carried out on customers, like Know Your Customer (KYC), Anti-Money Laundering (AML) and Customer Due Diligence (CDD), before they’re permitted to browse properties and invest.
Let’s Talk Money
As you read above, making money in real estate crowdfunding, like any type of investment, requires doing a lot of research. You can generate returns in three ways:
- Rental income from the property
- Appreciation of the property
Now, you don’t need to be rich to invest in real estate via crowdfunding, you just need to be smart with your money and willing to invest it. Given that you’re happy to invest in property via crowdfunding, you need to understand the significance of diversifying your portfolio.
Diversification helps you minimize the risk that comes with making a single investment as you can spread that risk across multiple investment properties in different cities, and even countries! Diversifying your portfolio works well in booming real estate markets, like the UAE, or even the UK, for example, where you can invest in as many international properties to further minimize risk.
To better illustrate the benefit of diversifying your portfolio, you could make one investment of AED 100,000 into investment A, or split that amount into AED 20,000 each across five investments. If you only invested in investment A and that investment failed entirely, you would lose AED 100,000. But if you had invested that amount across five investments, and only one failed, you would just lose AED 20,000.
Another thing to keep in mind is compounding, or re-investing your returns. You can take full advantage of your returns by compounding, as it helps you grow your wealth by combining both the initial and accumulated earnings of your investment. Ultimately, you then reinvest the profits from one property into multiple other rental properties.
Consistency Is Key
Some crowdfunding platforms offer low entry points ie. AED 500, but is that the best amount to start with? Sure, it’s definitely worthwhile if you’re willing to invest more money in the future. But if that’s the only investment you’ll make, then the annual dividend, eg AED 50, on such an investment can easily be earned and will in fact take a lifetime for you to make a profit off your investment. Not really worth it!
Essentially, AED 500 is a good starting point, but only if you’re willing to follow up with other investments! Additionally, if you choose to contribute consistently and reinvest your earnings, you will then realize the benefit of compounding.
So, What’s the ideal amount to invest?
For clarity, let’s demonstrate the difference between investing AED 500 and AED 5000 in a single property.
Let’s suppose you invested AED 500 in a 1 million AED apartment with a 7% net yield. You would earn a total income of AED 175 over 5 years. On the other hand, investing AED 5000 in a 1 million AED apartment with the same net yield will get you AED 1750 at the 5-year mark. The higher you invest, the more significant your returns will be, especially if the property appreciates!
You can access the full breakdown of each sum, or any other sum, using our free investment calculator.
Go Big or Go Home?
And there you have it! Now you know the difference between starting small and going big. Investing in real estate properties is a journey with many challenges and obstacles along the way. You don’t need to be an expert in order to succeed in real estate investing and get rich, but you need to take steps to minimize risks and find the investment moves that align with your financial goals.
Though you might consider starting small to minimize your risk, you can be smart with your investment, given you have sufficient capital, and invest a larger amount across multiple properties, even globally, via regulated crowdfunding platforms like SmartCrowd. Otherwise, you can still invest a small initial amount, but be sure to be consistent with your investments and use every opportunity to compound your investments.
As for the ideal amount? It all goes down to you and your circumstances. So, instead of asking about the ideal amount of money you need to invest in real estate, perhaps the better question is: “How much money do you want to invest in real estate?”
Disclaimer: This blog is intended solely for educational purposes and shouldn’t be treated as financial advice. We suggest you always conduct thorough research, perform your own due diligence and consult with financial advisors to assess any real estate property against your own financial goals.