Last Updated: August 31, 2021
Investing your hard-earned money in properties is a big decision, and the risks are real. To help you avoid costly mistakes, we’ve come up with this guide on real estate investing for beginners.
Unlike stocks, a real estate venture requires larger initial capital, which makes this type of investment daunting at first. But knowledge is power. Once you have enough information, you will become more confident and even find pleasure in it.
We’ll look at the best ways to invest in real estate, so you have the highest chance of succeeding. We’ll also guide you through the pitfalls, obstacles, and problems you may face as a real estate investor and how to deal with them.
Without further ado, let’s get into why you’re here — learning how to get started in real estate.
How to Invest in Real Estate
You can think of real estate investing as a Monopoly game — to win, you have to buy property, generate money, and avoid going bankrupt.
Of course, real life is a lot more complicated than a board game, but if you think of it this way, you’ll be less nervous about getting into real estate.
As is the case with all investments, you need to always be careful. Yet don’t let your caution prevent you from having fun. Property investment can be lucrative and quite enjoyable, as long as you’re well-informed and don’t take unnecessary risks.
There are many ways to invest in property. The most common is buying and renting out or selling it. This is a tried-and-tested method that shows great results when done right. But is it the best way to get started in real estate investing?
There are actually four investment routes available to every aspiring real estate entrepreneur:
- Buying rental properties
- Flipping houses
- Buying real estate investment trusts (REITs)
- Real estate crowdfunding
Each option comes with benefits and drawbacks, which we will discuss thoroughly.
Buying Rental Properties
This is the traditional way to earn a stable income from real estate. It’s as simple as it sounds — you buy a property and rent it out. Of course, there are many important details, but since it is pretty straightforward, this is one of the best forms of real estate investing for beginners.
The first thing you should consider when buying a rental property is its condition. If in a good state, you can lease the asset at a higher price. Also, don’t forget that whether you rent out apartments, houses, or commercial spaces, some codes and laws require proper maintenance from you.
Another way to approach this kind of real estate investment is to buy a duplex house or a multi-family unit and live in it while renting out a part of it.
The main benefit of buying real estate is that your property can go up in value as time goes by. It could also be a reliable and constant income source if you’ve got regular or long-term tenants. Should you decide that it’s time to move on, you can sell the property again, likely at a considerable profit.
But there are also drawbacks when you invest in rental property. The asset may stand for quite a while before it gets rented. You are responsible for it, so if there is damage or maintenance required, you will have to cover it. As the landlord, you will also have to pay property taxes and insurance. And if you’re not a people person, you may find it difficult or uncomfortable to deal with tenants.
But if buying property sounds like the perfect investment for you, there are many great real estate investing app options to get you started.
How to buy rental properties
One example is Roofstock, which offers a marketplace where you can buy properties and property shares. Although it requires a large initial investment amount, Roofstock can help you build a diverse rental property portfolio.
A feature that makes this platform stand out is the ability to invest in out-of-state property without leaving the comfort of your own home. While some investors won’t be comfortable buying property they haven’t personally seen or stepped foot in, many find online real estate investing convenient.
Overall, Roofstock is a useful platform that makes investing in rental property for beginners a lot smoother and less complicated.
This is a very different way to invest in properties and is a lot more hands-on and involved than the other options you have.
While buying and renting is a long-term investment, flipping houses is more short-term and temporary. The idea behind this approach is to buy a property and renovate it to boost its value. Once you revamp it, you sell the asset for much more than its purchase price.
Although less common, this is one of the more fun real estate investment strategies. The main benefit of flipping houses is that it could offer very high return on investment (ROI). If you already have experience working with construction companies, painters, plumbers, etc., you’ll have an excellent head start.
Flipping houses can be quite risky, though, as the property can end up costing a lot more than you’ll get for it once done with the renovation. As long as you do your homework and make sure you only buy profitable properties, this form of investment is an excellent way to earn money and have fun.
On your journey to discovering how to become a real estate investor, you’ll find the option of buying REITs (real estate investment trusts). These are companies that own or operate real estate such as shopping centers, hospitals, residential buildings, warehouses, etc.
Many REITs are traded on stock exchanges. You can buy shares of the trusts that you find most appealing. This is a quite affordable option as a single REIT share is usually below $100.
For many investors, this is also the easiest way to go about investing in property. You can find many real estate investment companies willing to help a beginner make the most of buying investment trusts. RealtyMogul is one of them. The platform provides small to medium investors access to assets with higher liquidity potential. Rather than tying their money down for 5 to 10 years, RealtyMogul offers a unique buyback program. It’s ideal for investors who want to hand over their real estate portfolio to a team of professional investment advisors.
RealtyMogul is available to both accredited and non-accredited investors, which means it opens doors to investments for beginners who are keen to buy REITs. With these trusts, you earn dividends on the shares you own, and they’re usually paid out quarterly. You can also sell your shares for a higher price to make a quicker profit.
This might be not the most hands-on investment option but can be highly lucrative. Of course, no investment is risk-free, so make sure you know everything you can about the REITs you want to invest in.
Real Estate Crowdfunding
Real estate crowdfunding is a rather new and modern way to invest in real estate. As such, not everyone is aware of it, and many miss out on the opportunities up for grabs there.
If you choose this investment strategy, you basically pool your money with a group of other entrepreneurs, and together, you invest in a property. There are two ways that you can get involved in real estate crowdfunding – equity or debt investing.
Now, you may think that investing in debt sounds counterproductive, but this just means you are investing in a property’s mortgage loan. When the loan is paid back, you get a share of the interest. Although not at the top of the list of real estate investing for beginners, this is definitely an option worth considering.
With equity investing, you are directly investing in a property, getting a share of the ownership and receiving part of the income or profit the asset generates. This form of investment can be a bit riskier as you’re investing in an individual property, but it can be exciting and rewarding as well. You can cash out your shares after a specific time if you want to move on to another investing method.
Since real estate crowdfunding is still somewhat new, there isn’t much data and statistics to help you make the right decisions. This makes it one of the riskier investments for beginners, but some platforms can offer professional assistance. Fundrise and RealtyMogul are just two examples of property investments companies that make real estate crowdfunding a little easier and more convenient.
Fundrise makes property investing accessible to small and mid-range investors with an account minimum of just $500 for the Starter portfolio. Note that at this level, you have no say in how your money will be invested. Those who want a specific portfolio have to deposit at least $1,000. For more information, head over to this comprehensive Fundrise review.
Real Estate Investing Tips for Beginners
Popular culture has made property investment look very glamorous — we often see TV shows presenting it in a glitzy and exciting manner. Real life, however, is a different story. These shows are not realistic in most cases and can give aspiring investors the wrong idea and advice.
Our list of tips will guide you in the right direction, even if they’re not as fancy.
Have a Plan
It may seem like something that should be the first thing you do, but many investors don’t have a detailed business plan for their investment.
Sit down and think about why you’re investing in property. What are your short-term and long-term goals? Do you want to invest in one kind of real estate or have a diverse portfolio?
From there, you can work on your ‘how’. That’s when you’ll use the information shared here and get an idea of which methods you want to use.
For an aspiring investor, it’s important to attend events where you can expand your network and rub shoulders with others in the industry. The right connections can give you additional guidance and let you in on industry secrets.
These professionals are useful for letting you know about opportunities that you otherwise would never hear of. Sometimes, the best real estate investments come from hearing about it while networking.
It’s vital to know as much about this kind of investment as you can and keep learning. You can never know “enough” because there will always be new data or information to improve your chances of success.
You can buy books about property investments, subscribe to industry newsletters, and read ongoing blogs that will keep you up to date.
Beginner’s Guide to Investing
Becoming an investor can be quite an intimidating experience. It might feel like everyone else is a professional, and you’re just “the new guy”. That’s why we aim to provide you with a good starter kit. So far, we gave you a few tips that will make your investment journey easier. Now, we’ll give you some more particular guidance that will serve you well as you learn how to become a real estate investor.
The 1% Rule
This rule is specific to buying and renting and implies if you can rent out a property for 1% of its buying price, it will likely be a good investment.
Your buying price should include expenses such as renovation and damage repair.
When you keep this rule in mind, you will know how to buy real estate and make a good profit in the form of a stable long-term income.
Consider the Location
A famous phrase in the real estate world is “location, location, location”, and it’s accurate. Where you buy property matters and affects how well your investment pays off.
If a property is in a high-cost living area, you might not be able to get as much profit. For example, if you buy an $800,000 house and rent it out for $2,000 a month, you’re not getting that 1% return that you should.
Play It Safe
Wondering how to invest in rental property as a beginner? Play it safe, and don’t take significant risks, at least at first. Make sure you don’t have any credit card debt and pay off any other arrears you may have.
Also, ensure the first property you invested in was worth it before going on to the next one. Get used to playing around in the market and do ample research. Once you’re more confident, you can take on additional investments and consider taking well-calculated risks.
Pros and Cons of Investing in Real Estate
All real estate investments come with benefits and disadvantages. Here’s a look at the most common ones:
The positives will show you just why property investments are so popular. Perks such as tax breaks make real estate lucrative and very attractive for all kinds of investors.
There is a much lower risk associated with real estate than other investments, such as stocks. Financial markets can be quite volatile, while property price fluctuations aren’t that dynamic.
You are allowed to deduct many expenses from your taxes if you’re actively investing in real estate. This includes property tax, depreciation, and mortgage interest.
Good Long-Term Returns
In general, you will find that property investing is more positive in the long run since properties’ values tend to go up over time.
Although it can be challenging to decide on the best places to invest in real estate, one of the biggest attractions of this venture is that it comes with a steady income. It’s long-term, so you won’t have to move on to the next investment soon.
There are a few pitfalls that you should watch out for when you invest your money in real estate. You can avoid them, though. So don’t shy away from this kind of investment just yet.
Tenant Management Can Be Tough
Keeping tenants happy and making sure everything runs smoothly can be challenging. Problems such as late payments, maintenance issues, and deposit disputes can pop up unexpectedly and require your time and effort to resolve.
Lower Potential Returns
When compared to stock investment, you won’t get as high returns from property investment. The equities market may be riskier, but the pay-off could be higher.
When starting, you’ll find that even the best real estate investment is quite cash-heavy. You need to have considerable initial capital to get going.
Unlike stocks, your investment in real estate is not liquid, which means you can’t cash out as quickly. For some investors, this can be a turn-off, especially if they like the thrill of quick returns. It won’t be as easy to sell your property as it’s to sell shares if you need to get your hands on some of your invested money.
Is Real Estate a Good Investment?
Your journey to becoming a successful property investor is a long but fruitful one. Whether or not real estate is a good investment depends on how you approach it. Your execution will also affect your results, so always think carefully and plan well.
There are certainly benefits, such as a constant and reliable income, and several tax breaks. But the pros are balanced by drawbacks like the expensive start and non-liquid investment of property.
With that said, if you’re determined, prepared to learn continuously, and committed, you can successfully invest in property.
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Real Estate Statistics
The first step in becoming a good real estate investor is doing lots of research. You need to know the ins and outs of the sector before diving into it. Of course, there is a lot you will only learn through hands-on experience, but be prepared, and you’ll have more success.
Secondly, you should be building contacts. This will serve you well in the future. You’ll never regret having a good network.
Thirdly, you need to create a good plan and stick to it. You may want to adjust things as you go on, but don’t forget your initial goals and ideals.
Rental property investment starts after you’ve done all the planning and research you need. Then, you can approach a company that will guide you or find properties on your own.
For beginners, it’s best to make use of professional input and advice until you’re more comfortable with this kind of investment.
Starting out in the real estate investment world can be expensive, but that doesn’t mean you can’t try with little money. Investing in rental properties is one of the most popular ways to get started because you can get away with having a more modest initial amount.
Another budget-friendly way to start is to move to a bigger place and then rent out part of it. This can be your first move in the investment industry.
You can also consider real estate crowdfunding, which only requires a small amount of money. Sometimes, you can invest less than $500. REITs are also a great way to become a real estate investor when you don’t have a lot of cash on hand.
When it comes to real estate investing for beginners, some of the best options are:
- rental properties
- real estate crowdfunding
As long as you’re planning well, sticking to your budget, and willing to learn, you can go all the way from a rookie to a seasoned property investor, even using a more advanced strategy, such as house flipping.