How to Invest in Real Estate: Get Started (2021 Guide)
When people talk about investing, the first thing that comes to mind is probably real estate.
If you are interested in generating passive income, real estate investing is one of the best ways to start your portfolio. However, it’s essential for beginners to learn how to invest in real estate to avoid making common mistakes and errors.
Real estate investment is a topic that can get very complicated, especially if you’re someone who hardly knows anything about it. Fortunately, I have put together this complete guide to help you out on your journey to figuring out how to invest in real estate.
Real Estate Investing Tips for Beginners
The real estate industry is highly specialized and technical. There are a lot of buzz terms and different strategies that investors typically use to get the most out of the market. Honestly, it can be overwhelming for even pros like me. In this blog post, I will explain many of these strategies and terms in detail to help anybody who is thinking of getting started in real estate.
Ok, so here’s how to start investing in real estate...
Even if you are entirely new to the market, there are four main things that you must understand to succeed as a real estate investor:
1. Know the costs involved
This is pretty obvious. Real estate investment traditionally has a high barrier to entry. And you will need a substantial amount to use as your initial capital.
2. Select the type of property you want to invest in
As a beginner investor, you must decide whether you will invest in residential, commercial, or mixed-use real estate.
3. Check out the location.
We all know that sometimes pictures can be deceiving, so always make time to have someone check out the location around the property. Prime property in the best locations will attract the highest returns in both rental value and sales.
4. Protect yourself with documents
I always recommend that every investor, whether seasoned or fresh, should have all the necessary titles and documents for your property. Don’t take unnecessary risks or shortcuts – always make sure that you protect yourself.
Short Term vs. Long Term Investments
Depending on your income goals, there are two ways that you can approach the real estate market as an investor. Your real estate investments can either be short term or long term.
Long-term Real Estate Investments
Long-term real estate investments allow you to grow your portfolio and meet your goals several years—or even decades—in the future.
Long-term investment examples
Rental Properties
Buy and Hold Properties
Real Estate Investment Trusts (REITs)
Short-term Real estate investments
These are designed for goals that are closer at hand and can provide access to almost immediate returns. Short term real estate investments are considered safer and are a great place to start if you are a newbie to real estate investing.
Short-term investment examples:
Fix and flip real estate
Wholesaling real estate
Cash Flow
Your cash flow on your property is the amount of profit you bring in each month after collecting all income, paying all operating expenses, and setting aside cash reserves for future repairs.
How do you determine your cash flow?
Well, this might sound difficult, but it isn't, really. To calculate cash flow, you subtract property expenses from your total income. The primary mistake many new rental investors make when calculating their cash flow is to ignore some expenses like:
Utilities
Property management
Repairs
Seasonal expenses
Having a property manager will help you to avoid these common pitfalls.
Property Manager
A property manager will handle all the operations, maintenance, and administration of property rentals for you as an owner. They do things like:
Setting Rent
Collecting Rent
Screening Tenants,
Managing the Budget
6 Easy Ways to Start Real Estate Investing
In this section, I will be discussing the easiest way to start real estate investing. I will cover:
Buying/Owning a Home
Rental Property
Real Estate Investment Groups
Real Estate Investment Groups
House Flipping
Real Estate Investment Trusts (REITs)
Real Estate Crowdfunding
1. Buying/Owning a Home
It is a pretty common goal to want to buy or own a home. However, from an investor's perspective, you should consider that it takes about four years to break even on a home purchase. The average return rate you should expect from owning a home is between 8.6% - 10.0% per year, depending on what city your home is located in.
2. Rental Property
Rental property refers to buildings purchased by an investor and occupied by tenants on a lease or other type of rental agreement. Properties of this kind can provide cash flow and generate value from appreciation. They can either be residential or commercial.
Residential rental properties are one- to four-family homes, including single-family homes, duplexes, triplexes, and quadplexes. On the other hand, commercial rental properties include multifamily (apartment complexes), industrial (such as a warehouse or self-storage), office space, retail space, and multi-use.
3. Real Estate Investment Groups (REIGs)
An REIG focuses the majority of its business on investing in real estate. They typically buy, renovate, sell, or finance properties. Real estate investment groups (REIGs) are perfect for you if you want to own rental real estate without the hassles of running it.
With REIGs, you can own one or multiple units of self-contained living space. The company operating the investment group collectively manages all units, handling maintenance, advertising vacancies, and interviewing tenants. As compensation for conducting these management tasks, the company takes a percentage of the monthly rent.
4. House Flipping
I bet you've heard of this one! As a real estate investor, you can buy houses and then sell them for a profit. This act is called a flip.
To succeed as a house flipper, you need an in-depth understanding of real estate valuation, marketing, and renovation. You will also require sizable capital and the ability to do or oversee repairs as needed.
House flipping is an excellent strategy if you are looking for short-term projects that turn over huge profits. Specializing in flipping will avoid the stress of running a property while rewarding you with a similar ROI.
5. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs are suitable for portfolio diversification to real estate without committing to a property purchase. Also, they are highly liquid because they are exchange-traded. In other words, you won't need a realtor and a title transfer to help you cash out your investment.
If you are investing with a REIT, check that they pay out 90% of their taxable profits in the form of dividends. They must follow this regulation to maintain their status and guarantee the safety of your investment.
6. Real Estate Crowdfunding
As the name suggests, real estate crowdfunding uses social media and the Internet to connect investors to property investments they collectively finance. Real estate crowdfunding platforms are unique to the crowdfunding space, but they might be a worthwhile addition to your portfolio.
Crowdfunding platforms help you to diversify your portfolio and invest in multiple projects at the same time. I also recommend them if you are interested in rental income but are unsure about owning your property outright.
Common Questions About Real Estate Investing
Now that we have covered all the different ways that are available for you to invest in real estate, let us go into some of the more common questions that you might have as a beginner who wants to know if investing in real estate is worth it.
How do I start investing in real estate?
The first thing you must cover is your financial plan. The beginning is the perfect time to create a plan for managing any loans or mortgages you intend to take.
How to Invest in Real Estate with Little to No Money
The golden rule of real estate is OPM. Other People's Money.
If you have zero or little money, here are some options that can get you started;
No Money Options
Investing In Real Estate Through Lease Option
Hard Money Lenders
Forming Partnerships to Invest in Real Estate
Home Equity Loans
Trade Houses
Special US Govt. Schemes Like USDA Loans;
Little Money Options
Purchase Money Mortgage/Seller Financing
Microloans
SBA Loans For Investing in Commercial Real Estate
Owning Shares of Real Estate Investment Trusts
How can I invest in real estate with $500?
For a beginner, $500 is a pretty manageable amount that you can save up over a couple of months. If you have $500 that you can afford to invest right now, look for the best real estate crowdfunding platform available to you.
A real estate crowdfunding platform, or even a REIT or REIG, will give you the chance to be a part of a more considerable investment, start bringing in returns right away, and start saving for a property you can buy independently in the future.
How much money do you need to start investing in real estate?
For your first real estate investment, there are four major expenses you will incur.
These categories include:
Purchase Price
This is what you will have to pay for the property outright if you don't have access to a payment plan or a mortgage
Down Payment
If you have a payment plan, you will only have to pay a percentage of the purchase price as a deposit before you can take control of the property.
Repairs and Maintenance
These come from renovation, upgrades, service expenses, utilities, etc
Reserves
It is always a good idea to have a little miscellaneous fund, which can come in handy for legal fees and other upfront costs.
Is real estate a good investment?
Yes. On a general note, real estate is an ideal investment opportunity. It is one of the few investment classes that can generate ongoing passive income and still prove to be an excellent long-term investment as the value increases over time.
If you check all the boxes and understand all the guidelines outlined in this blog post, it means you are ready to embark on your real estate investment journey. Our goal is to help investors get started and make the best return on their money from every development project they embark on. Get more FREE content on how to invest in real estate by joining our community list.
