Like the idea of steady investing every month in real estate, but don’t know how to do it?
Many investors (myself included) use dollar cost averaging to invest in stocks. It’s easy, because you can buy shares in an ETF for $50-100. That’s a lot harder to do with assets that cost hundreds of thousands.
But you can still dollar cost average your real estate investments, even if you only have $10 or $100 each month to invest. And to demonstrate how quickly you can grow your wealth with regular investments, we created a free dollar cost averaging calculator.
What Is Dollar Cost Averaging?
Dollar cost averaging means investing the same amount in an asset on a regular basis. That could mean weekly, biweekly, monthly, or even daily.
For example, you could invest $100 every week in SPY, an exchange-traded fund (ETF) that mimics the S&P 500. I invest money every week with a robo-advisor (I use Schwab, it’s free) that spreads my money across U.S. and international stocks in all sectors and market caps.
The idea is simple: by investing on a regular schedule, your portfolio will perform just like the overall assets you’re investing in. Think of it as the opposite of trying to time the market — you instead aim to mirror the market’s returns.
Sound boring? Most good investing advice is boring. Don’t pick and choose individual stocks, don’t day trade, and don’t try to time the market. Much smarter and better-informed investors get it wrong all the time, so why do you think you can beat them? It’s pure hubris.
All right I’m off my high horse, back to dollar cost averaging.
Can You Dollar Cost Average with Real Estate?
Theoretically, you could buy a rental property every month if you had many millions of dollars. But I don’t have that kind of money, and you probably don’t either.
Here’s the thing though: you don’t need to buy an entire property by yourself. You can buy fractional shares in properties, funds that own many properties, or loans secured by properties.
And that means you can invest as little as $10 at a time. Which in turn means you can dollar cost average every week (or every other week, or every month, yada yada yada).
You have plenty of investment options at your disposal, too. So much so that it can feel overwhelming. But I’ll share exactly how I dollar cost average in real estate, and you can form your own investing strategy.
Ways to Use DCA in Real Estate Investing
Some arrogant investors dismiss the importance of diversification. They say things like “If you know what you’re doing, you can earn far higher returns in a single niche than by diversifying.”
They’re not wrong, per se. If you’re an expert in a certain field, you can earn higher returns there than the typical investor aiming for historical average stock returns, for example. But it leaves you vulnerable to shocks in that sector.
Take me in 2008 as a cautionary tale. I knew more about real estate investing than the average person. But I still got my clock cleaned by the 2008 housing bubble collapsing.
Besides, even if you only invest in a single sector, you still want as much diversification as possible within that sector. If you love rental properties, you still want to own as many as possible, across as many markets as possible.
As you look to diversify, consider dollar cost averaging with these real estate investing strategies.
The most obvious way to dollar cost average real estate investments is just to buy shares in public REITs.
Real estate investment trusts, better known as REITs, are companies that either own properties or debt secured by real property. They trade on public stock exchanges, so you can invest for the cost of a single share (often $10-20). That means you can also sell shares at any time, so they’re among the most liquid real estate investments available.
But that liquidity comes with a few downsides. First, publicly-traded REITs are far more volatile than actual real estate asset values. Second — and relatedly — they correlate more closely with stock markets than actual real estate prices. That correlation defeats much of the purpose of diversifying your assets.
Still, public REITs offer a simple, affordable way to dollar cost average real estate investments.
What the #%& are real estate syndications, and do they really earn 15-30% returns?
Real Estate Crowdfunding REITs
Not all REITs trade on public stock exchanges. Over the last 10-15 years, another type of REIT has emerged: private REITs offered by real estate crowdfunding platforms.
Instead of buying and selling through your investment brokerage account, you buy shares directly from the company. When you want to sell, you can redeem your shares with the company directly as well.
Which they don’t always let you do right away. Some require a minimum holding period, and charge you an early redemption fee if you sell your shares too quickly. That makes private REITs less liquid than publicly-traded REITs.
But it also makes them less volatile. The share prices tend to move based on the underlying asset values, rather than seesawing alongside stock markets.
Like public REITs, crowdfunded REITs are funds that either own properties or loans secured by real estate. Some real estate crowdfunding investments like Fundrise own a mix of REITs, secured loans, and individual properties. When you buy in, you buy a tiny slice of all of them.
Crowdfunded Real Estate Loans
Some real estate crowdfunding websites let you invest in a pooled fund that owns many loans backed by real estate. Examples include Concreit and Stairs by Groundfloor, which both pay 4-6% interest and let you withdraw your money at any time. Both also let you invest with as little as $10, and set up automated recurring investments. Read: dollar cost averaging.
While 4-6% interest may not sound exciting, the liquidity means I can keep part of my emergency fund in these investments. Given the low loan-to-value ratios and broad exposure, these pooled investments have remained stable and consistent.
Others let you pick and choose individual loans to invest in. Groundfloor follows this model, with each loan typically paying 8-14% interest. They grade loans by risk, with higher-risk loans paying higher interest (duh).
You can invest as little as $10 toward any given loan, set up automated recurring transfers, and automatically invest in new loans that become available. For example, I set my account to invest $20 apiece in all B, C, and D grade loans as they go live.
Fractional Ownership in Rentals
Several real estate crowdfunding platforms have launched in recent years that let you buy fractional shares of rental properties.
The largest example is Arrived, which has bought and offered hundreds of properties. They price shares at $100 apiece, letting you buy fractional ownership in rental properties for as little as $100. I’ve invested in properties on Arrived myself, and have had a positive experience so far.
The greatest downside to Arrived is that there’s no secondary market for selling shares early. You have to hold shares until Arrived sells the property, typically 5-7 years after buying it.
Two other crowdfunding platforms do offer secondary markets for buying and selling shares. Ark7 lets you buy shares for $20 and sell them after a minimum holding period of just three months. Lofty offers shares for $50 and lets you sell them at any time, but charges a 2.5% fee.
In all platforms, you collect rental income in the form of dividends while you own the property.
Arrived and Ark7 also offer short-term vacation rental properties, in addition to long-term rentals. So if you’ve ever wanted to own an Airbnb property, you can do so with as little as $20.
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Fractional Ownership in Apartment Buildings (Real Estate Syndications)
While you need more money to invest in real estate syndications than crowdfunding, you can also earn enormous returns. Most syndications aim for 15-30% returns and often exceed those targets.
If you’re not familiar with them, real estate syndications work like this. A commercial real estate investor finds a deal, borrows 50-75% of the purchase price, and puts up some of their own money as a down payment, but still needs more capital to cover the rest of the down payment, closing costs, and renovation costs. So they raise money from passive investors like you and me, offering us fractional ownership in the property.
These properties are often apartment complexes that need updating. You can think of them as glorified flips, where the syndicator renovates the outdated units over the course of a couple of years, raises the rents, and sells them for a huge profit. But syndications could include commercial office buildings, industrial real estate, mobile home parks, self-storage facilities, even agricultural land.
As a passive investor (known as a limited partner), you collect distributions from the rental income. When the property sells, you get a hefty payout.
Alternatively, the syndicator could refinance instead of selling. In that case, you get back some or all of your investment capital, but keep your ownership interest. You keep collecting passive income, even though you potentially got all your money back. When that happens, you earn “infinite returns” on your investment, since you no longer have any money tied up in the property.
There are two downsides to syndications: they’re not liquid, and they typically require $50-100K as a minimum investment. That would quash your ability to dollar cost average — unless you join a real estate investing club like ours. We pool our funds together to meet that minimum, so each person only has to invest $5,000 per deal.
This is my main form of dollar cost averaging in real estate: every month I invest $5K in a syndication. I now have fractional ownership in thousands of units.
Dollar Cost Averaging Calculator
Curious about your future returns when you dollar cost average?
Try playing around with this free dollar cost averaging calculator to see just how quickly you can grow your wealth. If you really want to see your money explode, try plugging in 15-30% returns on monthly $5,000 investments like we aim for in our Co-Investing Club.
Isn’t math more fun when you’re calculating your future riches?
With enough passive income, you reach financial independence and can retire early. In other words, you buy back control over your time, for the rest of your life.
Final Thoughts on Dollar Cost Averaging in Real Estate
Forget trying to time the market. Smarter people than you or me mess it up all the time.
Instead, focus on steadily investing in real estate (and stocks, for that matter) every single month. Keep plowing money into the market, and over time you’ll earn compounding returns with exponential growth.
Don’t believe me? Run some numbers for yourself in the dollar cost averaging calculator above. Try stocks and fractional rental properties at 10% returns, or real estate syndications at 15-30% returns to see some wild growth.
Have questions about the dollar cost averaging calculator or how DCA works? Or want to share your plans for dollar cost averaging in real estate? Fire away in the comments below!
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About the Author
G. Brian Davis is a real estate investor and cofounder of SparkRental who spends 10 months of the year in South America. His mission: to help 5,000 people reach financial independence with passive income from real estate. If you want to be one of them, join Brian and Deni for a free class on How to Earn 15-30% on Fractional Real Estate Investments.
It took me 20 years to reach financial independence through real estate investing. Just be very good at your numbers and adhere to your goals which actually is the result of your dollar cost averaging computation.
Congratulations on reaching financial freedom Scott!
A good investor crunches the numbers before investing!
My concern is, would the DCA be of value if the dollar value goes down. Would there be another formula for that?
Stock and real estate investments are largely inflation-resistant, so they simply adjust upward in value when inflation surges. That protects your investment portfolio during times of high inflation (like right now).
Minimizing the impact of market volatility on my investments and helping me build a diversified portfolio over time are the benefits of dollar cost averaging. There’s a reason why the average retail investor underperforms the S&P 500 every single year. They can’t help trying to pick stocks or time the market.
I use dollar cost averaging with my stock investments, never occurred to me to try it with my real estate investments. Thanks for the idea, going to experiment a little with real estate crowdfunding, then maybe graduate to investing with you guys in your real estate investment club
Glad to hear it Annabelle!