One of the best things about real estate is that there will always be a demand for a place to live, regardless of a pandemic, epidemic, recession or depression. Savvy real estate investors know never to stop looking for good investment opportunities. If you are new to the game, you may be wondering how to get into real estate investing. We’re sharing what you need to know to succeed in any real estate market.
How To Get Into Real Estate Investing
Phase I: Come Up With a Strategy
We all probably know those people who got lucky and bought a house during a great time–a buyer’s market. They probably have a ton of equity in it, which means it was a good buy. But, for those of us who wish to rely on something other than luck, I’d stress the importance of putting together a step-by-step plan with the help of an experienced real estate investor. This will help you avoid painful and often costly mistakes as a new investor.
1. Determine Your Investment Goals + Time Frame
A trusted CPA or accountant, ideally with experience in real estate, can make a huge difference when you’re first trying to figure out how to get into real estate investing. Other new investors have found it extremely helpful to network with other investors and find a real estate mentor willing to help them develop a plan of action.
These experts can help you define your investment goals and the timeframe to achieve them. Generally, real estate is a very safe long-term investment. Thanks to factors like appreciation and inflation, for example. While people have found success in many short-term real estate investment strategies (i.e., flipping, short-term rentals, etc.), it almost always comes with a lot more risk–especially if you’ve never done it before.
2. Determine Your Risk Tolerance
Whenever you make a big financial decision, like buying a rental property, it’s important to have enough cash reserves in the bank. We’ve recently been reminded by COVID-19 that you never know what could happen. A tenant’s ability to pay rent can change at the drop of a dime. It’s so important to have at least six months of money in the bank to cover your rental property mortgage in the event of vacancies and other unexpected expenses.
If you can’t afford to lose your investment, then your risk tolerance would be considered low. If your investment tanks and finances remain relatively unaffected, at least for a while, your risk tolerance is much higher. Understanding the level of risk you can tolerate will help you figure out how much money you should invest.3.
3. Decide How Much Money You Want to Invest
If you’re new to investing in general, it’s a good rule of thumb only to invest as much as you comfortably can. The last thing you want to do is throw too much money into an investment and ruin yourself financially if it falls apart.
Assuming you’re just starting in real estate, you don’t have to buy a rental property to invest. However, it can be really affordable as some markets have investment properties in a strong B neighborhood for as little as $100,000. However, if you’re not ready for that yet, there are several different ways to get into real estate. Many online platforms offer options to buy a percentage of a larger real estate fund. Some offer minimum investments as low as $500. More on that later.
4. Decide What Type of Real Estate You Want to Invest In
You can buy several different types of real estate. Each one is slightly different and is explained below.
Residential
Residential real estate has a bunch of different subcategories. They include single-family (SFH) and multi-family homes (MFH). Fixer uppers and foreclosures can also fall under this category. If you’re a first-time investor, an SFH will be cheaper than buying a multi-family home and, in good markets, have a better appreciation. SFHs are also easier to sell when the time comes.
There are, of course, disadvantages to single-family homes, including a higher cost per unit between tenants as there is more square footage. There tends to be more demand for these types of homes, making it difficult to get a good deal when multiple offers exist on one property.
Multi-family real estate has more than one unit. You could invest in duplexes, triplexes, fourplexes, townhomes, condos or apartments. Owners of multi-family real estate have a better opportunity to make more money, quicker. Buyers also only have to get one insurance policy, one mortgage and one property tax bill. Whereas investors that own more than one SFHs must carry multiple mortgages, insurance policies, and pay property taxes on every rental.
For example, let’s say you own four townhomes. Every year, you raise the rent by $50 per month. Instantly, you would be getting $200 more a month every year. It’s much easier to scale profits with multi-family homes.
The biggest issue with investing in multi-family homes is that they are more expensive upfront. As a beginner in the real estate investing world, it may be a better idea to start small and work your way up to bigger deals as you gain experience.
Commercial
We won’t get too much into the details of investing in commercial real estate because it’s not all that common for people looking to get into real estate to jump right into the deep waters of buying a commercial property.
Commercial real estate includes offices, warehouses, industrial buildings, and retail. One major benefit of commercial real estate is that tenants usually stay longer. On the other hand, it can take more time to replace a tenant in commercial properties.
Land
Investing in land is a less expensive way to get into real estate investing, especially long-term. Expenses will be low because you won’t be paying a mortgage, property insurance or utility bills. The only bill you have to cover is a property tax, which should be pretty minimal.
Many people who get a good deal on land may choose not to build on it. As long as a property can be built on the land at some point, it should appreciate in value long-term, assuming you recognize what a strong housing market looks like (which we’ll discuss in the next phase). Buying land is also a super passive or “hands-off” type of real estate investment.
5. Decide if You Want to Be an Active or Passive Real Estate Investor
If you’ve ever invested in anything, you probably have an idea of what it means to be a passive or active investor. There’s no “best” type of investor. Instead, it’s all about preference. Some people prefer a more hands-on, active approach, while others may like the freedom and time that passive investments provide. Next, we’ll discuss the differences and help you decide the best fit for you.
Passive Real Estate Investments
Passive real estate investing is a hands-off approach that typically comes with less time and stress. Basically, someone else manages your real estate investment. However, these investments can come at a price because you won’t be actively handling your property.
- REITs or Real Estate Investment Trusts can be a great option for new investors who may not want to part with a large sum of money. REITs let investors buy a portion of a real estate investment property with the idea that a percentage of any return would go back to them. If you’re only looking to invest between $500 or $5,000, check out REITs. They’re easy to find and set up online.
- Turnkey Rentals—Turnkey rentals are ready to rent. Oftentimes, these types of rentals will be managed by a property manager or management team where the owner would pay a fee every month. While that takes money out of the investors’ pocket, it’s worth it if you can’t or don’t want to manage the property. Plus, a lot of expenses, including property management fees, are tax deductible.
- Buy-and-hold single-family rentals—This type of investment is considered passive, assuming a property manager or management team oversees day-to-day operations and responsibilities.
Active Real Estate Investments
Active real estate investments can produce better returns, but they require a lot more time, energy, and experience. Real estate professionals and landlords are considered active investors.
- Flipping Houses—A flipper’s strategy includes buying a house, fixing it up, and then turning around and selling it for (hopefully) a profit. This is a very active and hands-on strategy and usually comes with a good amount of risk.
- Become a Landlord—If you don’t want to hire a property manager and manage the rental yourself, go for it! Just make sure you do a ton of research and understand what you’re getting into. Being a landlord isn’t for everyone.
Phase II: What to Look For in a Rental Property & Rental Market
1. Key Indicators of a Healthy Housing Market
There are a few key indicators you should always look for in a strong housing market: population growth, appreciation or equity growth, and job growth. If all of these statistics are trending up, chances are it’s a strong housing market. A few other factors to consider when looking at different markets are median household income, median home prices, and average monthly rents.
2. Due Diligence Will Tell the Story
- Get an inspection & appraisal – Even if you aren’t financing the property, it’s best practice to order a third-party inspection and appraisal.
- Verify Rents in the Area – Reach out to other property managers in the area with rentals similar to the one you’re looking to purchase. They can help verify how much rent you can expect from your investment property.
- Get the right insurance.
- Get pre-approved – It’s also usually a smart idea to get pre-approved on a loan within your budget before finding a rental property.
Check out more due diligence tips for smart buyers.
3. Analyzing a Property
Even though the property will be inspected and appraised by professionals, it’s your job to take it a step further and look at all the other characteristics of a good rental property. Consider the following:
- Neighborhood and area
- Size/square footage
- Size of lot
- When the house was built
- Amenities and features (balcony, deck, fireplace, swimming pool, etc.)
- Proximity to local amenities
- Recent improvements
Here are more tips for analyzing a real estate market like an expert.
4. Do the Numbers Work?
In other words, will the property most likely do what you want it to do–based on your long-term investment goals?
A great way to determine whether a rental property is a good investment is to perform a comparative market analysis or CMA. You would compare the rental property you’re considering with other similar properties. A CMA won’t provide you with a definitive number, but it will give you insight into the value of houses similar to yours in the area.
Rental property expenses are often challenging to predict, especially for investors just getting into real estate. Buyers must account for property taxes (which vary by city and state), potential vacancies, expected and unexpected repairs, etc. A good rule of thumb when writing out a list of property expenses is to overestimate and over-prepare by keeping enough cash in the bank.
Take the information you gathered while performing your due diligence, CMA and property expenses and bring it all together. This will give you a better idea of whether the rental property you’re looking to buy is a good investment or not.
How to Make Money in Real Estate Investing
Real estate can be an incredible vehicle to build real wealth and gain financial independence. There’s a number of ways an investor can make money through real estate, which we’ll break down next.
1. Appreciation
Investing for appreciation involves buying in a growing market and building equity over time as the property increases in value. This type of investing inherently comes with more risk because property values in your market can never be guaranteed to rise. However, with proper due diligence, the risk can be more manageable.
2. Rent
Investing in property to make money from rent is another way to build equity and potentially cash-flowing income. There’s still a moderately high risk involved with rental income, but again, there are ways to reduce risk.
3. Interest
Investing in debt or for interest can produce ongoing income with less risk. If you can lock in a low interest rate for 30 years and hold onto the property long-term, returns will likely be much higher.
Do Cash Buyers Have an Advantage Right Now?
Cash buyers may hesitate to drop a lot of money when the economy is unstable. But some real estate experts say that if you’re a cash buyer, it could be a great time to find a deal on a home.
Borrowing money to buy a house can take a long time, whereas buying in cash typically pushes the deal through quickly. If a property has been listed for a while, the seller will probably be more inclined to negotiate a great deal on a cash offer. Because of all the stress and chaos the Coronavirus has caused, people may jump at the chance to offload the property and walk away with some cash.
Clint Coons, founder partner of Anderson Law Group and expert in business and real estate taxes shares, “Right now, from an investment standpoint, there are lots of deals to be had, especially if you’re a cash buyer.”
Another Option: Join RealWealth
Sorry for the shameless self-promotional pitch, but I couldn’t leave it out. At RealWealth, we simplify the process of investing in real estate. Here’s how it works:
We offer hundreds of free educational resources and connections with vetted turnkey property providers. Plus, our membership is 100% free, yes, free! Join RealWealth today and start your real estate investing journey.
What’s Next?
Learning how to get into real estate investing, especially now, shouldn’t be scary or daunting. Armed with your knowledge and research, your next step may be to reach out to experts with a proven track record of successful real estate investments and ask for help or advice. Anyone can get into real estate investing, it’s just a matter of having the right knowledge, help and tools to be successful.
