1. Line up financing options
Whether you're a pro or a beginner, real estate is an expensive investing option. If you don't have enough cash on hand, you'll also need to line up financing to get started.
First, you'll want to have a good credit score to get a loan. The better your credit score, the better chance you have of getting good mortgage terms. Your credit score determines not only if you will get a mortgage, but also the conditions of that loan. Check out a service like Experian Boost™ to raise your credit score if needed.
Next, if you're purchasing a rental property, plan on having enough financing and cash for:
- Mminimum down payment of 20%: There are no zero-down mortgage programs for investor properties. You should plan on having a minimum down payment of 20% of the property's purchase price.
- Initial cost of upgrades and repairs: Buy below market value to get some instant equity, but be prepared that bargain-priced properties typically need repairs. You'll need to bring the property up to the point where it can be profitably tenanted.
- Licensing and inspection fees: Most states require rental properties to be inspected for safety hazards and licensed.
- Cost of vacancy: There'll be months, during tenant turnover, for example, where you won't receive a rental income. You still need to pay the mortgage, taxes, insurance, HOA, and other holding costs.
- Repair costs between tenants: It might be a minor paint touchup and a general housecleaning, or you might need to make extensive repairs and pay a junk service to remove an entire house full of left-behind tenant personal belongings.
- Ongoing maintenance costs: Tenants are paying your rent to provide a safe place with working appliances and systems. You need a budget to maintain and eventually replace major systems such as HVAC to keep the house in rent-ready condition.
Even if you don't want to be a DIY real estate investor, some of the best crowdfunding opportunities require a significant amount of capital as a minimum investment. Many also require investors to be accredited, that is, an individual with an annual earned income exceeding $200,000 and a net worth greater than $1 million excluding the person's primary residence). Once you've achieved accredited investor status, your moneymaking potential can increase substantially.
2. Passive real estate investing
For real estate investing beginners, a passive strategy might be a good way to get started. The benefits of passive investing are that you can do it from your computer. Of course, as you would with any investment, you need to do your research and due diligence, but with passive real estate investing you don't need to visit or manage any properties physically.
Invest in a REIT (real estate investment trust)
A REIT (Real Estate Investment Trust) is a corporation (actually a trust) that's formed to use investors' money to acquire, manage and sell income-producing properties such as shopping malls, commercial buildings, and health-care facilities. REITs are required by law to distribute 90% of its taxable profits annually to shareholders. This comes in the form of dividends, often quarterly. Like investing in a real estate mutual fund, your REIT investment is professionally managed, SEC-regulated, and highly liquid. (Shares can be bought and sold on the major stock exchanges.)
Companies we like that sell REITs include: Fundrise and Streitwise.
Invest in real estate mutual funds
Real estate mutual funds are a popular way to add real estate diversification to your portfolio without actually owning property or understanding much about buying, selling, and managing specific properties.
- Your investment is pooled together with others, and you're issued shares of the fund. All purchases, activities, and disbursements are overseen by a fund manager.
- Analytical and research information is done by professionals. You simply buy and sell shares much like you would any other mutual fund on the stock market exchanges.
REITs and real estate mutual funds are the most passive ways to invest in real estate, and make an excellent option for someone who only wants portfolio exposure to real estate and is not looking for a side job.
Invest in properties via real estate crowdfunding
Crowdfunding Real Estate investing can be very passive as well. But the due diligence you should do is more involved than simply buying shares of a mutual fund or REIT.
- Crowdfunding platforms provide an online marketplace for investing in a variety of real estate opportunities.
- There are hundreds of real estate crowdfunding platforms to choose from.
- You can invest in everything from high-quality real estate loans to single-family homes or commercial properties.
Crowdfunding sites allow individual investors entry into bigger deals (both residential and commercial) that were previously available only to those with substantial amounts of money to invest. Like investing in mutual funds or REITs, many crowdfunding deals offer very affordable minimum investments. The biggest advantage crowdfunding provides is that you can invest in specific properties and exclusive deals with very little money.
While online crowdfunding platforms make investing super easy, many platforms require investors to be accredited. And for a good reason. You are responsible for doing thorough due diligence. So, you must analyze the documents provided. You also need to find and study any relevant information not provided. And don't forget to research the crowdfunding management personnel and policies.
Real estate crowdfunding is a passive investment; you won't have to quit your job and become a landlord, but you can still reap the rewards of real estate investing. One of the crowdfunding services that shines is CrowdStreet, which allows you to invest in real estate with as little as $25,000.
Purchase pre-vetted rental properties
Another alternative to traditional real estate investing, is a platform called Roofstock. You can use this platform to purchase pre-vetted rental properties. These are “turnkey” opportunities — you don't need to do any rehabbing or fix any toilets in the middle of the night. Simply use the Roofstock database to select and purchase a rental property that is already cash-flow positive.
Invest in real estate limited partnerships
Real Estate Limited Partnerships (RELPs) are another way to invest passively. Because some real estate investments require a large amount of money — building a shopping mall, for example — partnerships are a common way to raise funds needed.
- A RELP is an entity formed to develop or purchase and hold a portfolio of properties, typically for a finite number of years.
- Experienced property managers or real estate development firms run these, and outside investors provide financing for the real estate project as limited partners.
- As a limited partner, you would receive periodic distributions from income generated by the RELP, and you'd receive a more substantial payoff when the properties are sold, and the RELP is dissolved.
- While being a limited partner is a passive activity, your investment is typically very illiquid.
- RELPs are typically private investments and not sold on the stock market exchanges, Nor do RELPs widely promote their available deals. Due diligence is critical.
Join real estate investment groups
Real estate investment groups are sort of like small mutual funds for rental properties.
- A company will buy or build some apartments and then allow investors to buy them through the company.
- As a single investor, you can own one or multiple units.
- The company operating the investment group collectively manages all the units. It takes care of maintenance and operations in exchange for a percentage of the monthly rent.
This is passive in that investors don't worry about placing tenants or managing their units. But you must do your due diligence before investing. This includes verifying all fees, services, and tenant screening processes, as well as the integrity and experience of the group's managers.
3. Active real estate investing
Many real estate investors like myself, take an active role to achieve higher gains. Beginners in real estate investing can choose from several common strategies, which include:
Buy and hold for rental income
Owning rental property is where many investors who want to be more hands-on start. The approach is to acquire and manage residential property for a profit. The most important considerations are the property location and market rental rates. You want to choose a location where market appreciation is likely. And you want to make sure you can charge enough rent to make a profit after covering all your expenses. Expenses include mortgage, interest, maintenance, HOA or condo fees, property taxes, insurance, vacancy, utilities, and other direct and indirect expenses.
Rental property investors typically look for properties that hit the “one percent rule.” This means that the monthly rent covers 1% of the acquisition price plus rehab costs. So, if your all-in cost to get the property “rent-ready” is $150,000, your monthly rent should be at least $1,500. Of course, this is a generality. In many locations, the numbers work out differently, based on a lot of factors that need to be carefully considered.
Buying a rental property requires a more sizable investment. You'll need 20% of the purchase price as a down payment. And you'll want to be sure you have the know-how and time to do it successfully. Even if you intend to hire a real estate agent to find the property and a property manager to run the month to month activities, there is still a lot to know before jumping in and purchasing a rental property.
Fix and flip
At the far end of the Passive/Active real estate investing continuum is fixing and flipping properties. Made popular by the many home improvement reality shows, flipping has sparked a lot of appeal from would-be “do it yourself” real estate investing beginners.
- You buy a property that's undervalued, most often because it is in poor condition.
- You then repair and improve it and sell it for a profit a few months later.
- To be successful at flipping, you need a broad skill set, experience, and access to substantial money.
- You need to find and acquire properties below market value, manage a successful, swift, and cost-efficient rehab and resell quickly.
The transaction costs are high on both sides of the table.
- First, you have fees both when you buy the distressed property and when you sell the improved property.
- Then there are transfer taxes, title research and insurance, closing costs, and agent commissions.
- You're transferring the title of ownership twice in a short amount of time, but there are no price breaks.
- The county and state tax the transfer on both transactions.
- Title insurance has to be purchased both times.
- All costs, including acquisition, rehab, and transactional fees, need to be carefully estimated and factored into the initial property price.
Flipping is the riskiest real estate investing strategy. One oversight, such as a structural issue, could wipe out your profits and then some. Fix-and-flips also offer the potential to make a large profit fairly quickly. Flipping isn't ideal for many beginners or those looking for a smaller initial investment. To get the best deals, flippers need access to large sums of cash to purchase a distressed property outright, ample funds to do the rehab, and enough cash flow in their business to hold the property until it's sold.
Wholesale properties
A wholesaler finds distressed properties with motivated sellers and matches them up with investor rehabbers, without ever taking the title of the property themselves. Those signs you sometimes see on the side of the road that says “Cash for your house, any condition” is likely placed by a wholesaler who is making a quick $5,000 to make the match.
I've personally found the benefits of active real estate investing make it well worth my time and effort. (I currently own a portfolio of 8 rentals, and I flip 1-3 properties each year.) Benefits include the potential for much higher gains (property appreciation), reliable monthly rental income, control over my investments, tax benefits, and the pride of accomplishment.
More: Real estate investment strategies every investor should consider
4. Become a real estate expert
In a lot of ways, real estate investing is a trade that you learn (1) by doing and (2) from working with others. That said, that is no excuse for you not to study up and educate yourself as much as possible. It is important if you decide to pursue an active real estate strategy trade that you learn by: (1) studying and analyzing (2) doing, and (3) working with others.
- Take a real estate course: There's no shortage of real estate courses online if you want to pay to get up to speed more quickly. Check out trusted Udemy; this online learning platform offers hundreds of courses on REI, and many of these are only $10 per course. Not a bad deal.
- Watch lots of YouTube videos: What can you NOT learn from YouTube? YouTube has thousands of videos from professionals and amateurs alike, sharing real estate stories and doling out advice. You can literally watch a video on how to replace a garbage disposal, pausing it every step of the way while you do it.
- READ! This is a no-brainer. YouTube and online courses are great, but to become an expert, you need to study. A classic book we like is Rich Dad Poor Dad by Robert Kiyosaki. It doesn't focus on any one strategy, but it certainly touches on the philosophy of real estate investing.
No matter the strategy you choose, you need to know to learn ALL about your investing area. At a minimum, you need to research:
- Property values: The only way to know if you're getting a good deal is to know the prices that nearby similar homes sold for in the last six months. Find and hire a local real estate agent who works with investors to set up targeted MLS searches for you.
- Market rents: If you're intending to buy and hold for rental income, you need to know the property's rental income potential. There are tons of free sites where you can study local market rents – and an agent can help you.
5. Connect with other real estate investors
- Frequent online forums: I highly recommend the BiggerPockets Forums as a place to connect virtually with other real estate investors. You can post a question, and the community is so open and helpful you'll likely get a response within a day. I recommend setting alerts for topics related to your investing strategy and the local area. Use the forums to set coffee dates with other investors there. Having a network of go-to specialists is key to being successful.
- Go to local REIA (Real Estate Investor Association) meetings to learn and network: Chances are there are local REIA meetings in your town with a mission statement “to develop, support and promote local real estate investor organizations while serving the interests of the real estate investment industry through networking, education, support, leadership on legislative issues.” Typically run by experienced investors anxious to share their wisdom, I highly recommend you join and attend.
- Meetup.com: What I love about Meetup.com is there is very little virtual connection…you actually have to MEET UP. There is no end to the variety of clubs and groups available on Meetup.com. The invites describe the planned topic, and I can easily see the bios of other investors who are planning to attend to decide if it's worth my time to go.
6. Understand the risks in real estate
No article about real estate investing is complete without mentioning risk.
- Like stock trading, the housing market fluctuates. The biggest gains are realized when you buy low and sell high.
- Unlike the stock market, the transaction costs of real estate are high, and selling is a process that takes time, which makes investment properties illiquid asset.
- Real estate investing isn't for day traders!** It's a long-term investment, which means you need to buy value and hold for appreciation, rental income, or both.
- The biggest risk is buying the wrong property and paying too much for it. If you buy a house to live in for 20 years, it may not matter if you overpay for it, but for investment properties, you need a return on your investment, and the numbers work best if you buy at below-market prices.
It's also important to be aware of the laws involved in the landlord-tenant relationship. Even though you are the owner of the property, your options are often constrained by state and local law.
These laws vary by state, so be sure to look up the various rules regarding the eviction process, security deposits, and insurance policies.
Also, make sure you do a background check on prospective tenants to find out their credit score and any criminal record.
More: What are the risks of rel estate investing?
Real estate investing is hard work
There are a lot of books and programs out there promising you that you can get rich in real estate without having to do anything. They are all complete nonsense!
Investing in real estate can be very profitable, but you have to go in with the right expectation and attitude — and then be prepared to work.
If you want to get started in real estate, choose your strategy. Become an expert in your strategy by studying and connecting with others to network and advance your learning. Line up your investing capital. Now you're ready to find and invest in deals!
