Real estate has traditionally been thought of as a good investment. Ultimately, real estate is a good investment for people who enjoy it. If you love learning, treasure hunting for deals, analyzing properties, and working with a team of people, real estate might be a great investment strategy for you.
Is Real Estate a Good Investment?
Real estate appreciates over time
Some (not all) real estate investments require a large sum to get started
Tenants and markets can be unpredictable
You get to help make dreams come true.
Buying and selling can be stressful for clients
More control over investment asset
Requires lots of studying
You can make your own mark on a property
It takes time to develop property, so the market may have fallen by the time you come to sell
Even if you enjoy real estate, it may not be a good investment for you right now. If you’re not financially stable enough to afford a down payment, closing costs, and basic repairs in addition to your personal living expenses, you should wait.
There are plenty of investment options to grow wealth. Real estate is just one of them. If you’re at a place where you’re investing for retirement and you want to take your wealth-building to the next level then it’s worth learning how to start investing in real estate.
Although there are more cons than pros listed above, it all comes down to your personal circumstances. If you walk the path of a property developer then it’s best to be prepared for both the good and the bad.
A Guide to Real Estate Investing for Beginners
Before you get on Zillow and start browsing foreclosures, know what to look for from other experienced investors. Mistakes in real estate can cost you tens of thousands of dollars or more.
You can avoid some of those losses by gleaning the wisdom of those who’ve gone before you. Read books on real estate investing, listen to podcasts, find a mentor, and start networking with other investors in your area.
Figure out what you want from real estate. Are you looking to earn extra money while keeping your full-time job? Do you want to make enough to retire early? Or do you want to build a business that employs people?
Write down long-term and short-term goals that you can control. Getting clear on your business and income goals will help you choose the right real estate investment strategy and keep you from making deals that could tie up too much of your time or money.
Single-family homes aren’t the only way for individual investors to get into real estate investing. Based on your income and time goals, choose a strategy that’s right for you.
Real estate crowdfunding is the most passive way to invest in real estate and a great way to start if you don’t have a lot of capital. Instead of asking one investor to lend a lot of money, crowdfunding allows large developers to raise capital through lots of smaller individual investments.
House hacking is where you live in the property while renting out parts of it, essentially living for free or very little. Because you’re occupying the property you don’t need to put a 20% down payment on it, so it’s easier to get started.
There are several ways to house hack including renting out rooms in your house, buying a multifamily property and renting the other units, or renting space or rooms on Airbnb.
House flipping is a fast-paced strategy. Investors buy a property at a discounted price, fix it up, and sell it as quickly as possible. While it can be a good way to make a profit, you need more money upfront to be successful.
With this method, an individual, or wholesaler, finds a deal and puts a contract on the property with the seller. They then find a buyer for the property, usually another real estate investor, and assign the contract to the buyer for a higher price.
The buyer pays the wholesaler and the wholesaler pays the seller, keeping the difference. This is kind of like a finders fee.
There are no renovations, additions, or even money invested in the property. The profit is lower, but the opportunity is high if you’re good at finding deals. It requires a lot of patience, researching, and building a network of investors who want deals.
Buy & hold: Single-Family
In this strategy, the investor buys a single-family property, rents it out, and holds on to it for a long time. You can fix it up with less expensive features than if you’re flipping, but you won’t get a large cash return as quickly.
Many people get into this strategy of real estate investing by renting out their primary residence after they move. If you’re not ready to invest now but know you want to in the future, treat your next home purchase like an investment.
Lisa Harrison was glad she turned her home into an investment property.
“It reduces anxiety because you don’t have to go through the process of finding and bidding on a property,” she said. “Also, you’ll likely already have a mortgage on it so you get to skip that hassle, too. But for me, the best thing about turning a current home into a rental is that you’re familiar and comfortable with the property. You know all the quirks and how to deal with them.”
Buy & hold: Multi-Family
Multi-family properties have two or more separate living units in one building. You can get a conventional mortgage for properties up to four units. You can also house hack by living in one unit and renting out the others.
Buy & hold: Vacation Rentals
If you want to know how to get into real estate that doesn’t involve flipping or managing long-term tenants, vacation rentals could be a good option for you. Airbnb has made the vacation rental business easier than ever to get into.
Every strategy of real estate investing has its own starting price point. Wholesaling and crowdfunding require almost no upfront capital while flipping in some popular markets might require 100% cash transactions.
Now that you’ve chosen a strategy and have a savings goal, it’s time to make a plan for getting there. Creating a business plan before you buy your first house will get you into the right mindset for investing. Your business plan should include:
- Desired market
- Property criteria
- Marketing plan
- Financing options
- Exit strategies and backup plans
There are plenty of ways to save up for your first rental property. You can cut expenses and save a portion of your income, get a side hustle, raise funds, or sell your stuff.
If you want to speed up your journey, you can partner with another investor and split the costs. If you have the time to find and close deals and do more of the groundwork, consider partnering with someone who already has money to invest but maybe doesn’t have or want to spend the time to do the work.
Whatever the mix, a partnership can save you time, money, and open up the door to more financing opportunities. If you go this route, hire a neutral attorney to legally protect yourself and your business.
When a property meets your location standards, it’s time to determine if it’s a good deal. There are a few rules you can run the property through to determine if the property makes sense and the maximum price you can buy it for.
1% and 2% rules: Monthly rent should be approximately one or two percent of the purchase price respectively.
50% rule: You can expect that 50% of your after-mortgage income will go to property-related expenses.
70% rule: You should only pay 70% of what the after-repair value is. Used primarily by house flippers.
After reading books, listening to podcasts, talking with a mentor, and analysing lots of locations and deals, the time will come for you to buy your first investment property. And you have to be ready to do it fast.
“You have to already know the intention of the property, your financial capabilities, your funding source, and how you are going to analyse a property,” said real estate investor Cody Laughlin. “The big money is made in being patient and analysing a lot of deals through the same criteria and objectives until you find a great opportunity.”
You’ll have to be prepared to negotiate with the seller, a home inspection, and appraisal. Then you’ll choose your financing option. A conventional mortgage is the most popular route, but you can also get a cash-out refinancing of your current home, a hard money loan, or a portfolio loan.
Now the real work begins. If you’re flipping the house. you’ll need to work quickly to increase your profit. This might include hiring a contractor to oversee work.
If you’re planning on turning it into a rental property, then you’ll need to figure out how you’ll manage it long term. If it’s nearby, you can choose to self-manage. However, if the property is far away or you just don’t have the time, you may want to consider hiring a property manager.
Even once you purchase your property it’s still important to keep saving for it.
“Each property is different. Some require higher maintenance reserves or some have extremely high property taxes,