Real estate investing is a great choice for people who want to see their net worth grow. Thanks to the cash flow and price appreciation that owning property can provide, many investors have become incredibly successful using one or more strategies to capitalize in the real estate market.
For investors who are just starting out, real estate can be intimidating and tricky to navigate. Many of the property investment entrepreneurs that you see online or on social media have years of experience and seem to know exactly what to do. This may leave a beginner to wonder: Without such knowledge and confidence, do I even stand a chance at being a successful real estate investor? - Absolutely!
There are several ways that beginners can do well for themselves by investing in real estate. Though some strategies may require more risk than others, investors who take the time to understand what's involved can optimize their chances for success and mitigate the potential downside.
In this post, I'd like to review some of the best strategies for new investors to get started in real estate. We'll also go over why investing in properties is important and what someone can do to make their first purchase.
Real Estate Investing for Beginners
One of the great things about investing in real estate over the years is how much it has evolved. No longer does every opportunity involve managing tenants or tying up tens of thousands of dollars. That's welcomed news, especially for those people who are just getting started in this market.
Below are some of the best strategies for newcomers to try who want to start making money off of real estate.
Crowdfunded Real Estate Investing
Crowdfunded real estate is one of the simplest, hands-off ways to make money off of investment properties. Beginners can take part on some platforms for as little as $10.
What is crowdfunded real estate? Anyone who's ever heard of sites like GoFundMe or Kickstarter is already familiar with the concept of a crowdfunding platform. This is when someone has a project or cause they'd like to sponsor, and they post it to a crowdfunding platform looking for strangers to provide financial support.
Over the last decade, real estate entrepreneurs have adopted this business model to attract investors for their ventures. People can contribute relatively small amounts of money to take part in major commercial developments such as operating warehouses, apartments, and office buildings.
The benefit to investors is both dividend payments and share price appreciation. Beginners can expect to collect dividends between 4 and 10 percent just for being a shareholder. And when they're ready to withdraw their funds, there's a good chance those shares will have increased in value.
The main negative to crowdfunded real estate is that it’s a long game. To discourage early withdrawals, money that’s been invested for less than five years will be charged a small penalty.
REITs are another favorite strategy among both beginners and experienced investors for capitalizing on commercial property.
A REIT is a "real estate investment trust" which is a company that buys, holds, and manages large-scale commercial real estate. A REIT portfolio might include:
- Shopping centers
- Medical facilities
- Cell phone towers
Investors can participate in a REIT by buying shares (similar to stocks). REITs may be public or private, meaning the shares are either bought and sold in the open market or through the company directly.
Similar to crowdfunded real estate, REITs are well known for paying handsome dividends. Depending on the type of REIT, an investor can expect to earn a yield of 4 to 8 percent per year.
REITs are convenient investments because they can be bought and sold anytime the investor wishes. However, there's less transparency than with other investments about what the company is actually investing in or how the funds are being managed.
Rental Property Income
Many real estate investors got their start with rental properties. A rental property can be a house, condo, or any other unit that's leased out to tenants. Leases can be either long-term (such as 12-month contracts) or short-term (such as Airbnb rentals that last one week or less).
The major appeal to investors who are new to real estate is that if you play your cards right you might be able to make the investment property pay for itself. The typical rental property business model is to collect more rent than the unit costs. This is so that the owner can use that rental payment to cover the cost of the mortgage while also making a small profit.
While there's a potential for high reward, rental properties also come with a high upfront cost of a 20 percent down payment. For instance, a modest $150,000 property will require at least a $30,000 down payment plus additional funding for repairs, insurance, taxes, etc. For many beginners, that's a serious investment that’s not to be taken lightly.
One lesson that successful investment property owners preach is to be as hands-off as possible and use a property management service. This is a service that takes care of all the day-to-day activities like dealing with tenants and maintenance on the property. When an investor frees themselves up from these responsibilities, they'll be able to repeat this model over and over again and add multiple properties to their portfolio.
Real Estate Appreciation
Alongside having monthly cash flow, another reason many investors will buy investment properties is for the potential price appreciation. This is when the owner is able to sell the property at a higher price than what they paid for it.
Appreciation is exactly how real estate mogul and Shark Tank judge Barbara Corcoran got started:
“Buying real estate has made me rich — mostly through necessity, not by design. I bought my first itty-bitty studio after scraping together a few bucks because I needed to live somewhere anyway. A few years later, the studio doubled in value, giving me enough cash to plunk down 50 percent on a one-bedroom apartment. That soon rolled into a two-bedroom, then a three-bedroom, and finally landed me in my 10-room penthouse on Fifth Avenue in New York City. Buying that tiny studio was the most important decision I made because it got me in the game.”
Again, if the investor has tenants living in the property, then they can use the cash flow it generates to pay the monthly mortgage. That means they’re effectively using the tenant’s money to slowly build equity.
The trick to appreciation is timing. Ideally, if the investor can buy during a buyer’s market and then unload it during a seller’s market, then they'll be sure to maximize the potential profit.
Investors who may be on the fence about buying a rental property can ease into the process by leasing out a portion of their homes instead. This is a strategy that's become known as house hacking.
A good candidate for house hacking would be someone who owns a house with rooms or floors that they never use (such as a duplex, finished basement, or converted garage). The owner could put the space up for rent or advertise on Airbnb.
With the income that's generated, the owner would be wise to use those funds to cover their own mortgage. Similar to a rental property, they’d be converting the tenant's rental payments into home equity.
Investors who want to actively work with properties but not actually buy them might want to try wholesaling.
Wholesaling is when an investor finds a property and gets the owner to agree to a price. They write up a contract, and the wholesaler then works on finding an interested buyer at a higher price. Once this connection is made, the contract is reassigned to the buyer, and the wholesaler collects the difference as a finder’s fee.
Real estate wholesaling is something that even beginners can try if they've got good sales skills. However, it will help to have an eye for a good deal and an established network of buyers.
Why Invest in Real Estate?
There are several great reasons why a beginner would want to invest in real estate. However, depending on which method is chosen, there can also be risks that are unlike those of typical paper investments like stocks. Therefore, an investor needs to understand both sides before deciding how they’d like to proceed.
The Pros of Investing in Real Estate
Here are some of the benefits of investing in real estate:
- Provides cash flow. Rental properties, REITs, and crowdfunded real estate all produce income. This can be a welcomed alternative to other assets that have to be sold before any money is generated.
- Less risk and volatility. Whereas the stock market tends to fluctuate with the events in the news, real estate values are steadier and more reliable.
- Investment diversity. Owning real estate can also be a good way to hedge against market losses.
- Potential tax deductions. For rental properties, many of the expenses such as mortgage interest, insurance, and maintenance costs can be used to offset your taxes.
- Good long-term returns. Because most properties tend to trend upward in value, most investors will be able to earn gains when they eventually sell after holding for several years.
The Cons of Investing in Real Estate
Of course, real estate investing isn’t without risk. There are several downsides that investors need to be fully aware of.
- Capped growth potential. Whereas some stocks have the potential to double in value in just under a year, this is highly unlikely with real estate. Growth is typically much slower.
- Upfront cash. Especially for rental properties, having tens of thousands of dollars ready to go for a down payment will be a huge barrier to entry for some investors.
- Poor liquidity. Since real estate is a long game, most strategies will require an investor to tie up their money for years with little possibility of cashing out early.
- Dealing with tenants. Investors who decide to go with rental properties need to be prepared to become landlords and all of the good or bad that comes with it.
7 Steps to Getting Started with Real Estate Investing as a Beginner
Don’t let the world of real estate be intimidating! Even the showy investment property gurus on YouTube and social media started from square one at one time. The most important thing is to get started and see where the journey takes you.
For investors who are just starting out in real estate, then here are seven steps to help streamline the process.
1. Define Your Goals
What is it that you hope to accomplish?
- Making a little side income?
- Diversification from a typical stock and bonds style portfolio?
- Building an empire of a dozen or so investment properties?
An investor needs to start with the end goal in mind so that they take the right path to get there.
For instance, someone who wants to be more hands-on with real estate will most likely get bored with a passive strategy like investing in REITs. However, the opposite is also true: Someone who’s scared of owning physical property might be a great candidate for crowdfunded real estate.
It’s all about the investor knowing themselves, what they’re comfortable with, and where they’d like to take this process.
2. Evaluate Your Current Financial Situation
Ask yourself: How much money do I have to invest?
If an investor has tens of thousands of dollars sitting idle, then they should have enough capital to purchase a good rental property. However, if they’ve got less than this, then perhaps buying shares of REITs or crowdfunded real estate might work better.
At the same, an investor should also ask themselves: How much am I willing to lose?
This is always an important consideration in any investment because there’s never a guarantee that you’ll make your money back. It’s not nice to think about, but the harsh reality is that lots of people have bought rental properties at the wrong time for the wrong price, and then sold them for much less than they put into them.
As with all investments, never bet the whole farm. Only allocate an amount of money that you’re comfortable potentially losing.
3. Educate Yourself on Real Estate
Even though you can’t learn everything you need to know about real estate from a book or website, it sure does help you to understand the basics and build a good foundation.
There are hundreds of great websites and YouTube videos with people giving away free advice. These are often tips that they’ve learned from the mistakes that they’ve made, and they put this content out there so that other people won’t fall into the same traps.
It’s definitely worth it to absorb as much of this information as possible. Not only is it free, but it will help you to be better informed with all the little nuances of real estate that you probably didn’t even know existed.
4. Formulate a Plan
Once an investor is sure about their goals and which path they’d like to take to get there, the next thing is to start putting together a plan. This isn’t going to be just rough ideas or assumptions. It’s time to lay out an actual business plan with facts, numbers, and other details.
For instance, someone going the rental property route will want to determine:
- Which specific property do they want to purchase
- The going rate for rent for other comparable units in the area
- How much upfront investment will be needed to buy the property and make repairs and where that money will come from
- The expected ROI (return on investment)
- How tenants will be acquired, how long they will rent, etc.
- Who will manage the property once it's occupied?
- How many other units in the area command for rent?
The goal of this step is to think through the process step by step and anticipate issues before they happen. This way you’ll be better prepared to handle them when they really come up rather than be caught off guard.
It’s helpful to imagine that you’re going to pitch this to a business partner or bank. Whether you really are or not doesn’t matter. Sometimes taking a moment to explain your plan to someone else can be a good litmus test to see how well you’ve truly thought things through.
5. Pull the Trigger
Planning is very important. But it's also easy to succumb to what’s known as “paralysis by analysis”. This is when a person gets stuck in the decision-making process indefinitely to avoid taking action.
As an investor, you don’t want to let this happen. You’ll only start to make money once you actually make your move. So, believe in your plan and go for it!
6. Evaluate Performance
Once the investment is made, it's not a one-and-done process. You’ll want to make sure you’re making money over time and reaching your financial goals.
For example, with a rental property, the owner will want to compare the income they’re receiving against the ongoing expenses such as the mortgage, taxes, insurance, and maintenance. If a profit isn’t being made consistently, then it may be better to cut your losses before the venture drains you financially.
7. Get Expert Guidance
Something that will help you to become a better real estate investor is to build your team and network of resources.
Your team will be the people you trust to help you make important decisions like business partners, lawyers, tax professionals, etc. Your network might be other investment property owners or groups where you can make connections or lean on each other for advice and support.
Someone else you’ll want in your corner is an expert coach who can provide you with guidance. This is exactly what the Market Insiders program aims to do. It connects entrepreneurs with industry experts so that they can have weekly conversations about their plans and get real-time feedback.
Beginners Can Invest in Real Estate
Real estate investing isn't just for the rich and wealthy. There are several ways that beginners can get into the game and start making money. But they must understand the risks and factors involved so that they'll optimize their chances for success.
People who want to be more hands-on, they could choose to buy rental properties and wait for them to appreciate. Investors who'd rather be more passive and not deal with physical properties could buy shares of REITs and crowdfunded real estate. A good compromise between the two might be trying house hacking or even wholesaling.
Beginners will want to consider investing in real estate because of the diversification, cash flow, and strong potential for long-term returns. However, they also have to be prepared to manage tenants, make large upfront investments, and lock up their money for potentially several years.
For those people just starting out, the first step will be to define their goals and how much they'd like to invest. At the same time, they'll want to take the time to become as educated as possible.
After creating a plan and making their purchase, the investor should monitor the situation to make sure they're meeting their financial goals. They'll also want to get guidance and advice from professionals who can help navigate the experience.
Ultimately for a beginner, putting your money into real estate is a lot like any other investment. The more you can do to understand the dynamics of the situation and what you're comfortable with, the more successful you'll be.