[The following is a guest post by Brian Davis, co-founder of SparkRental, which offers a group real estate investment club with minimums as low as $5,000.]
When it comes to choosing investments, many investors believe they have a special knack for picking the right investments at the right times. But is this really the case?
If you had $50,000 and wanted to invest it in the stock market, what would be your investment strategy? Would you invest all of it at once in a lump sum investment, or spread out the investments over time?
What about $500,000? Or $1 million?
Because you can invest in stocks with small amounts, you intuitively pause to ask that question, particularly when it comes to market timing. But when the minimum investment in real estate is $50,000 or $100,000, we don’t blink at making occasional huge investments.
That doesn’t sit well with me. I’ve worked in real estate since 2003, and have seen my share of boom and bust markets. And today I take a different approach than most real estate investors.
In this article, we’ll dive into…
What dollar cost averaging is
Why dollar cost averaging works
How to use this investment strategy in real estate
Occasions when the dollar cost averaging approach might not make sense
What Is Dollar Cost Averaging?
The practice of dollar cost averaging involves making small, regular investments in the same or similar assets, regardless of market timing. This can help take the emotion out of investing.
Whether in rising or declining markets, you continue investing regularly, even in the face of fear and uncertainty. In fact, dollar cost averaging can be especially powerful in recessions and bear markets, when most investors turn and run the other way.
Why? Because when you commit to the dollar cost averaging investment strategy, you will continue investing when the market or a stock is down, which is precisely when you can potentially score the best deals.
To take it one step further, when you dollar cost average, you might buy more shares of an investment when the share price is low and fewer shares when the share price is high.
By investing in smaller set amounts over time, you’ll buy both when prices are low and when prices are high, which smoothes out your average purchase price and can result in paying a lower average price per share over time.
Further, by investing small amounts rather than a single lump sum investment, dollar cost averaging can help you limit your losses in the event of declining markets.
Note: If you have a workplace retirement plan, like a 401(k), you’re probably already using dollar cost averaging by default for at least some of your investing.
Dollar Cost Averaging For Stock Investments
Investors most typically practice dollar cost averaging with stocks. By investing in the stock market at regular intervals and with fixed amounts, whether prices are low or high, your average price per share might very well end up being lower.
For example, every week my robo-advisor pulls a fixed amount of money out of my checking account to invest in a wide range of index funds. This happens every week like clockwork, regardless of stock prices and market anxieties.
Week to week, the market shoots up, crashes down, then shoots up again. But in the long-term, U.S. stocks average around 10%, depending on which index or time frame you look at. For example, the S&P 500 has delivered an average return of 12.11% over the last 30 years.
By practicing the dollar cost averaging strategy, my returns start mimicking the market as a whole. The peaks and valleys smooth out, and it removes me and my bad impulses from the equation.
In their overinflated confidence, many investors think they can time the market or pick and choose winning investments every time. Spoiler alert: they can’t, and you’re no exception.
But you can’t invest in real estate every month, much less every week, without being ultra-rich… Right?
6 Ways To Dollar Cost Average In Real Estate
I invest in real estate every month. Multifamily, secured debt, mobile home parks, retail, industrial, storage — I mix it up. My crystal ball is no clearer than yours, but I know that over time the law of averages will work in my favor.
If you want to spread your real estate investment capital across not just many investments but also across time more evenly, keep the following options in mind.
1. Publicly-Traded REITs
Public real estate investment trusts (REITs) offer plenty of advantages, starting with strong historical returns. Since 1972, U.S. REITs have paid an average annual return of 10.28%. Much of those returns come straight from dividends, with many REITs paying double-digit yields.
They don’t require a high minimum investment either. You can buy shares in REITs for the cost of a single share, often just $10-20. And then sell them any time, given their complete liquidity.
That liquidity comes at a cost however, in the form of volatility. Actually, that’s not quite right. The volatility isn’t the main problem with REITs — it’s their correlation with stock markets at large. The correlation between U.S. REITs and the broader market is 0.59, similar to telecommunications stocks, energy stocks, and consumer staples.
I invest in real estate as a way to diversify my portfolio. But diversification is only as good as the correlation between assets, or rather, the lack of it.
So while REITs are the easiest way to dollar cost average your real estate investments, they’re not how I do it.
2. Crowdfunded REITs
Not all REITs trade on public stock exchanges. Some offer their shares through crowdfunding.
That comes with its own pros and cons. On the plus side, private REITs’ share prices are far less volatile, and less correlated with stocks. Many offer low minimum investments, such as Fundrise’s $10 minimum.
But every upside comes with an equal and opposite downside. In this case, it’s the lack of liquidity. Most crowdfunding platforms require a minimum hold period of five years. Some also find ways to slip hidden fees in as well, buried in the offering circular or camouflaged among other expenses.
Still, many platforms offer automated investing, making it easy to dollar cost average your real estate investments with small amounts and a low correlation to stocks.
Related: Real Estate Crowdfunding FAQs
3. Fractional Ownership of Single-Family Rentals
Not all crowdfunding platforms feature REITs. Some let you buy fractional shares in rental properties.
My favorite of these is Ark7, with its low share price ($20) and secondary market for buying and selling shares. That gives these investments a rare form of liquidity.
Arrived is another reputable platform, selling shares at $100. In late 2023, they also launched a fund that offers some liquidity, letting investors redeem shares within as little as six months. Just watch out for early redemption fees.
Lofty also offers fractional shares with a secondary market, but when you sell shares, you get paid out in a cryptocurrency. That adds an extra risk and hassle, as you have to then convert that cryptocurrency to a real one.
Side note: We do not work with or get compensated by these platforms; please do your own due diligence before investing with any platform.
4. Secured Debts & Notes
Secured debts offer another form of real estate investing, albeit one with fixed interest instead of equity upside.
A few of my favorite ways to invest in debts and notes include Groundfloor and EquityMultiple. Both other fixed-term notes, including short-term options for a year or less. Groundfloor also lets you pick and choose individual hard money loans to fund, paying interest from 7-15%.
Consider these a rare opportunity to invest in real estate short-term.
5. Co-Invested Syndications
There’s a lot to love about real estate syndications, starting with the typical targeted returns in the 15-25% range. You get all the benefits of owning real estate with none of the hassles of being a landlord.
Unfortunately, it costs as much to invest in a real estate syndication as it does to cover a down payment and closing costs. Not many of us can afford to invest $50,000+ every single month to dollar cost average our investments.
Which is precisely why we created our Co-Investing Club for small-dollar investors. We collectively vet new deals every month in our real estate investment club, with a minimum investment of $5,000 per person. By combining forces, we meet the high minimum investments, which allows all of us to invest in real estate at regular intervals.
And, it also makes for a more thorough deal vetting process, when we bring sponsors on and each get to ask them questions.
Every month, I invest $5,000 in a new real estate syndication. Different sponsors, different markets, different property types. It’s the ultimate way to diversify real estate investments.
6. Low-Minimum Syndications
Just because most real estate syndications require $50-100k to invest doesn’t mean everyone does.
Look no further than, well, Goodegg! Some offerings, such as Goodegg Growth Fund II, allow as little as $10,000.
Other sponsors sometimes let you invest with $10-25k. While it’s hardly pocket change, it’s a lot more manageable than the typical minimum of $50k or more.
As a final thought, don’t hesitate to ask sponsors if they’ll let you invest with a lower amount. I’ve done this and got a standard $50,000 minimum dropped to $25,000 just because I asked.
When Does Dollar Cost Averaging Not Make Sense?
When an investor has a large sum of money all at one time, such as from a large tax refund or an inheritance, data has shown that dollar cost averaging that money into an investment will underperform a lump sum investment.
The idea here is that, with lump sum investing – that is, investing all of the cash immediately – you get to put your money to work faster. This has been found to be true for multiple asset classes and not just for the stock market.
So, when you are fortunate enough to receive a lump sum (come on, lottery ticket!), it’s a great time to invest capital into real estate, since your money will go to work immediately and you can likely meet those higher minimum requirements.
The extensive data analysis has shown that your capital would likely underperform if you were to try and spread that investment out over time using dollar cost averaging versus lump sum investing. But again, this is largely when you come into a lump sum of money all at once.
What About Direct Property Investing?
With enough money, you could buy a new investment property every month.
That said, investors can sometimes get creative to invest with small amounts. You can negotiate seller financing to cover the down payment, use the BRRRR method to recycle the same down payment repeatedly, or flip houses with no money.
But even when you find ways to invest actively with little cash, it still costs you precious time each month. Time that stocks or the passive investments above don’t require.
I learned long ago not to get “clever” with my investments. I practice dollar cost averaging with both my stock and real estate investments to get out of my own way. I invest every month, and over time I earn high returns. That doesn’t mean every investment performs well, or that I don’t have bad years. But in the long run, I earn much higher returns than the typical retail investor.
So my suggestion? Stop trying to time the market or pick and choose winners to plow huge amounts of money into. Start spreading your investments out across time, markets, property types, and sponsors.
If you’re looking to invest in real estate syndications to help bolster and diversify your portfolio, we invite you to join the Goodegg Investor Club, so we can keep you in the loop on opportunities to invest alongside us.
You can also check out our open deals page to learn more about our current or upcoming opportunities.
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101.
To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.