Having been in the real estate industry for years, I often get asked what my top real estate investing tips for beginners are. I usually start by letting them know they are on the right track, as real estate investing has proven to be the #1 wealth builder. It has been used for generations to diversify real estate portfolios to build wealth, increase monthly cash flow, retire more comfortably and help people achieve their financial goals smarter and quicker. Below are my top tips, followed by answers to some real-life FAQs.
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Tip 1: Clarify Your Real Estate Investment Goals
The first of my real estate investment tips for beginners (which is really the first step for any type of investing) is to determine and clarify your investment goals. When it comes to making big investment decisions, it’s not enough to simply say, “I think my goals are X, Y, and Z.”
Use These 8 Questions to Clarify Your Investment Goals
The following eight questions will help accurately narrow down your goals, set realistic expectations, and keep you on track to make the right real estate investment choices.
- When do you plan to retire?
- When you retire, how much money will you need to cover your bills?
- What are your current retirement income sources?
- How much money are you willing to invest in real estate?
- Do you want to acquire property for future growth or do you need cash flow today?
- Do you have good credit?
- Do you need to plan for college, travel, or your parent’s long-term care?
- Are you looking for a tax break?
Upon answering these eight questions, set a time frame for each goal and do everything possible to stick to that timeline.
Tip 2: Define Where You Are Now
The second real estate investment tip is to examine your current finances. While you might be mentally and emotionally ready to invest, your financial status might tell a different story. Fortunately, the following four questions will help determine your current financial status and whether investing in real estate is a viable next step.
Use These 4 Questions to Help Define Your Current Financial Status
Defining where you are, from a financial standpoint, is easier by answering the following questions, which are designed to help determine your net worth.
- How much do you have left over at the end of the month?
- What is your debt minus the value of your stocks, bonds, equity and other investments you own?
- How much are you paying in taxes and what portion of your taxes could be lowered through the right real estate investments?
- Have you met with a trusted CPA?
Once you’ve answered the above questions, you can start planning your next steps based on the assessment of your monthly cash flow, net worth, and tax liabilities.
Tip 3: Discover Your Purchasing Power
My third real estate investment tip for beginners is to evaluate your current purchasing power. This is an essential step to drafting a successful real estate investment strategy.
Leverage Your Investment Property
The term “leverage” in real estate refers to your ability to leverage an investment property by creating the opportunity for someone else (i.e., your tenants) to pay off the property’s loan. By doing so, your ROI will be higher because you’re able to purchase an investment property with a smaller down payment. The smaller down payment frees up additional cash that can be used to purchase other cash flow real estate investment opportunities.
Financing
Financing can help determine your purchasing power. In fact, you might discover that you qualify for more financing than originally thought. When qualifying for additional financing, you may be able to afford multiple high cash flow rental properties that will increase return on investment (ROI), while generating financial assets.
Tip 4: Determine Your Real Estate Investment Financing Strategies
Now that your goals, net worth, and purchasing power have been outlined, our next real estate tip is to make sure you determine which real estate investment financing strategies you want to pursue.
Use These 3 Questions to Determine Your Financing Strategy
One of the reasons it’s important to figure out your net worth is because this information is necessary to choose the right financing strategy. If you don’t know your purchasing power, it will be difficult to accurately determine how you want to finance your real estate investments.
Once again, asking the following questions can help determine your financing strategy:
- What funds will you use for your down payment and are these funds liquid cash?
- How much of your funds do you plan to put toward your financing strategy?
- What kind of loan will work best for your current and projected future financial situation?
The goal of deciding on a financing strategy is to narrow down what type of properties you’re qualified to purchase. Use the information gathered during your financial strategy session to decide which types of homes to buy, single family or multi-family. Additionally, decide if you want to invest in high-quality homes, homes that need to be renovated, newly constructed homes, foreclosures, etc.
Tip 5: Determine Your Real Estate Investment Purchasing Strategy
My fifth real estate investment tip for beginners is to decide on your purchasing strategy. Clearly defining your objectives and goals will help you find the right opportunities in the right markets at the right times.
One way to determine a purchasing strategy that is right for you is to consider the following scenario. Let’s say you have $100,000 to invest. You could then implement the following investment strategies:
- You could buy one property with cash; or
- You could buy four properties with 20 percent down on each investment.
Next, you might decide to use all the cash flow to pay off one mortgage at a time. This strategy would allow you to pay off the first home in eight years, and the next property would be paid six years later, the third four years after the second property, and so on. With this strategy, you could pay off the four properties within 20 years.
Alternatively, you could buy just one property and use the cash flow to save for your next investment home. This strategy aims to acquire multiple properties while collecting high monthly cash flow.
Tip 6: Decide What Investment Property to Buy
Investing in real estate is about more than simply saying, “I want to invest in real estate.” Instead, ask yourself what type of property you want to purchase.
For example, maybe your investment goals best align with buying one single-family home. Conversely, you might want to buy four houses at once and pay off the mortgages using the monthly cash flow. Whatever you decide, focus on the types of properties that will get you to your financial goals.
Use These 5 Questions to Help You Decide What to Buy
The following questions can help determine your real estate investment purchasing strategy:
- Do you want to buy single-family homes?
- Do you want to buy new homes or resale opportunities?
- Do you want to buy multi-family homes that will have the opportunity for increased cash flow?
- Do you want to consider purchasing apartments or commercial properties?
- Do you want to purchase condos that are highly discounted?
Tip 7: 10 Things to Understand About Buying an Investment Property
As you begin your real estate investment search, it’s important to be aware of what you need to do when buying a property. To help you understand this process, here are some real estate investment tips for beginners to mitigate associated risks and increase your ROI.
1. Always get a home inspection.
Home inspections will alert you to any “red flag” issues of a potential property. These issues are typically associated with repairs or renovations that might be more costly than anticipated. For example, a home inspection might show that the roof needs to be replaced or that mold is in the basement and needs to be removed before you find a tenant. These “red flags” are good indicators of a sound investment versus a high-risk investment. If the issues found during the inspection aren’t enough to walk away, consider making a lower purchase offer.
2. Always order a home appraisal.
Property appraisals are incredibly helpful because they analyze the investment property’s past, current, and predicted future value. You are left “guessing” what the property is worth without a property appraisal.
3. Get a landlord insurance policy.
Before closing on a home, get a quote for a landlord policy. This policy can help protect you throughout your tenure as an investment property owner and/or property manager. By getting a quote and/or the actual insurance policy in advance, you can accurately budget monthly expenses and adjust your real estate proforma to more accurately predict cash flow.
4. Get umbrella insurance for at least $2 million on your primary residence. Make sure it covers your investment property.
It’s no secret that accidents (and inevitably lawsuits) happen in life. Unfortunately, all too often accidents happen when an active insurance policy does not cover property owners. Whether your tenant accidentally burns down the investment property or needs to be evicted for a lease violation, you’ll want to have additional insurance coverage on your primary residence to protect your home in the event of a lawsuit.
Remember, if someone sues you, they have the right to go after all your assets, including real estate investments and your primary residence.
5. Consider placing the properties in an LLC for added asset protection.
As mentioned in the previous step, it’s vital to have the protection needed in case of an accident or lawsuit. An LLC for your rental property offers valuable asset protection and can keep someone (such as a former or current tenant) from taking your investment properties and/or primary residence pending a lawsuit.
When it comes to real estate investing, it’s better to follow the old adage, “Better safe than sorry.” An LLC might just be the piece of asset protection that keeps your properties safe from a costly lawsuit.
6. Talk to the property manager before closing escrow to verify rents.
No matter which real estate investment strategy you choose, speak with a local and trusted local property manager long before closing escrow. The property manager should be able to verify how much the rental property will make monthly rent. Use this sum in your real estate proforma and compare it against your monthly costs to estimate how much cash flow you’ll receive from the property.
7. Have at least six months of cash reserves per property.
Even the strongest real estate markets can dip or take longer than expected to find a quality tenant. Having at least six months of cash reserves for each property will give you a safety net and help protect you from defaulting on loans. Additionally, these reserves will be useful if any unexpected emergency repairs occur.
8. Be aware that using your equity line can affect your credit.
Your equity line can sometimes impact your credit score. Since your credit score will be reviewed when taking out another loan on a future investment property, it’s usually best to get a fixed loan if you plan on using home equity.
9. Before buying, view the property in person or virtually.
It’s always in your best interest to see a property a handful of times before deciding. This can be done in person if you live nearby or remotely. A good rule of thumb is to view the property on different days of the week and at various times. This will give you a sense of what is happening in the neighborhood and what characteristics tenants (and you) may like or dislike.
10. Tap into the expertise of RealWealth.
Join a real estate investing club like RealWealth, which offers tons of real estate investment tips for beginners. Not only do we provide free real estate investing education (webinars, articles, property tours, events), we also connect our members with turnkey property teams selling single family and multi-family investment properties in top markets nationwide so they can start building their portfolio. Join RealWealth today; membership is 100% free. Plus, every member is assigned an investment counselor who can guide and support them on their journey.
What’s Next? Take action!
Now that we’ve reviewed my top real estate investment tips for beginners, it’s time to take action. Here are some steps you’ll want to take.
- Review your financial situation
- Meet with your CPA
- Research real estate markets
- Search available investment properties
- Build relationships with property managers
- Join RealWealth to continue your real estate investing education
- Talk with lenders and get pre-approved for financing
- Get your umbrella insurance policy ready
- Set up an asset protection plan
- Schedule a strategy session with a RealWealth Investment Counselor
When it comes to real estate investing, the most successful investors surround themselves with a trusted team of advisors and industry professionals who can help them achieve their unique objectives and goals. Every RealWealth member has an investment counselor for support and guidance and access to our list of recommended lenders, lawyers, 1031 exchange facilitators, and more.
Real Estate Investor FAQs
1. Scenario: I bought a 3b/2b house in a nice neighborhood for $161,000, now worth $415,000. I am happy and ready to sell and reinvest. What are my next steps?
First and foremost, this is a fantastic scenario. The next steps would be to look into completing a 1031 tax code, whereby you would avoid paying capital gains on the property. So long as the property is a) qualified for a 1031 exchange and b) you reinvested the monies earned in the home’s sale for a new investment property. Speak with your RealWealth investment counselor to learn more about the details of a 1031 exchange and available investment opportunities upon the sale of the property.
Read this article by RealWealth’s Joe Torre to see how you can double your portfolio with a 1031 exchange.
2. Is financing acquired in the name of the individual or in the name of the legal structure used, i.e., LLC? Can the mortgage be transferred from an individual name to an LLC?
The optimal loan to receive is one that is insured by the government (aka a conventional loan). Unfortunately, these types of loans have to be in the name of an individual and cannot be transferred into the name of an LLC. A mortgage can’t typically be transferred from an individual’s name into an LLC. You can learn more about this by reviewing our free online resources about asset protection.
3. What if you don’t have a large amount of money to invest, like $100,000? Are you excluded from having a strategy session?
Absolutely not. Even if you don’t have $100,000 to invest, you can still have a valuable and informative investment strategy session. This phone call can help guide you through your next steps so you can prepare and be ready to invest.
4. I have 2 – 3 properties in Portland. What are the next steps?
Talk to your investor counselor to determine your potential return and the best steps for your individual objectives and goals.
5. Can you talk about self-directed IRAs? What type of real estate investment meets the requirement of self-directed IRAs?
This is an excellent question for your CPA! Each type of IRA has different rules regarding real estate investments and taxes. For example, Roth vs Traditional IRAs have different tax rules and regulations regarding real estate investments. Check out this article for more details on How to Use a Self-Directed IRA to Invest in Real Estate.
6. Can you discuss the importance of location? How close do you need to be to your investment properties?
How close or far you are from your investment property is up to you. With modern technology and local property management teams, there is no longer the need to live close to your investment property. All of the investment counselors at RealWealth have out-of-state investment properties and can share their experiences with you during your strategy session. The one thing that is important with out-of-state investing is to work with a trusted team that actively manages your investments in your best interest.
7. What are HELOCs, and can they be counted as 10 mortgage properties?
No. A HELOC is not a property, it is a second position loan against an existing property.
8. What are the best cities for real estate investors?
RealWealth has a great list of resources about the best cities for real estate investments. We suggest starting with our guide on the best places for rental properties. Then, when you join RealWealth, you receive additional information about the property teams we work with and why these markets are good for investors. In general, a city with population growth, job growth, and affordability offers more opportunities for investors and home appreciation.
Final Thoughts
Real estate investing represents a fantastic opportunity to explore new financial avenues, diversify your portfolio, and plan ahead for retirement (or other financial goals). By following the real estate investing tips for beginners above, you can start charting a path to real estate investment success.
