If you are wondering how to get started in real estate, then look no further. With a basic grasp on real estate investing 101 concepts, you’ll be better prepared to dive into the world of real estate investing.
Learning how to start investing in real estate is essential if you want to build a solid portfolio. Today on FI by REI, you will learn about real estate investing 101.
How to get started with real estate, Real Estate Investing 101
When you are first starting out as a real estate investor, you might be overwhelmed with the sheer number of options. Within the world of real estate investing, you have a wide range of investment opportunities. Each presents a different opportunity that might be the right fit for you.
Before you get started, it is important to understand a few things.
Is it hard to get into real estate?
Although buying your first investment property may not be a walk in the park, it is not as difficult as most people think. Yes, it will take time and effort to make real estate investing a profitable endeavor. However, it might not require as much money and energy as you think.
Before you write off real estate investing due to time or budget constraints, take a few minutes to familiarize yourself with real estate investing 101. You might be pleasantly surprised once you know a little bit more about your options.
Understand the types of real estate investments
In Real Estate Investing 101, the first step to becoming a successful real estate investor is to decide what type of investments you want to pursue. In this section, we will cover the most common types of real estate investments.
Of course, there are a few other options out there. But this list should give you a good overview of your options.
A house hack is a real estate investment deal that is great for beginners and experts alike. The idea is that you buy a property with multiple living spaces. Then you rent out the extra space to offset the cost of the mortgage.
Not only would you be able to build equity in a property and potentially bring in cash flow, but also dramatically reduce your housing costs. Since housing expenses are one of the biggest expenses in the average American budget, this can be a game-changer.
Depending on your preferences, there are a number of ways to try house hacking. Whether you want the privacy of a multi-family property or want to share your space with roommates, house hacking could transform your financial picture for the better.
When you think of investing in real estate, owning a rental property might be the first idea that pops into your mind. After all, it is one of the most common forms of real estate investing.
In this case, you would buy the property and rent it out to tenants. You can self manage the property or hire a property manager to make the property more passive.
Live in flip
When you purchase a property to live in, you’ll usually have an easier time securing attractive financing. With a live-in flip, you can update the property while living there and then sell it for a nice profit.
Depending on the flip, this is a very labor-intensive way to invest in real estate.
Live in rent later
In a similar fashion, a live-in and rent later strategy would allow you to secure owner financing. If you take this option, then you’ll likely be required to stay in the house for at least two years for the sake of loan requirements. At that point, you can move on to a new property and rent the old one out.
This is a good way to take advantage of tax breaks for homeowners while easing into real estate investing.
You don’t have to live in the property to flip it. In fact, it might be easier to flip a house if you aren’t living in a construction zone. The goal of flipping a property is to buy it at a low cost and make some improvements. Depending on the property, you may have to make major improvements to the property. Once you update the property, you should be able to sell it for a profit.
The key to a successful flip is to do your research ahead of time. When you find a house in need of repairs, get estimates on those repairs before proceeding. Also, check out what comparable houses are selling for in the neighborhood. If you stick to a predetermined flipping budget, then you should be able to make a profit.
A REIT, real estate investment trust, will allow you to invest in real estate without owning a physical property. Many experts will often liken REITs to mutual funds of the real estate investing world.
With a REIT, you are essentially buying a piece of a company that owns many properties. These properties may be commercial or residential, it just depends on the specific REIT. If you are interested in buying REITs, then you can do so through most brokerage accounts.
In some cases, buying real estate can be a very expensive endeavor. Plus, it can require time-consuming management. But with crowdfunding options, you can avoid major upfront expenses and ongoing maintenance issues.
Crowdfunding opportunities to buy a share of a large real estate investment project are becoming more popular. You won’t have to invest as much of your time. But you will also miss out on some potential rewards. There is still the opportunity to profit through this option, but it will likely not be quite as lucrative.
If you are interested in trying crowdfunded real estate, then check out RealtyMogul or Fundrise.
A real estate syndication is a transaction that involves an investor (or group of investors) and a sponsor. The sponsor is responsible for committing the sweat equity to the deal. That means seeking out the right property, raising funds from multiple investors, and managing the repairs and operation of the purchased property.
In most cases, the sponsor will be asked to contribute monetarily in some way to the deal. But the investors will take over the majority of the capital contributions. Usually, these deals are conducted through various legal entities such as an LLC or Limited Partnership.
With this structure, the properties are bought and managed. At the point of purchase, the sponsor is usually rewarded with a commission for finding the property. After the property is purchased, the sponsor will take care of the property and only receive in the profits once the investors have received their shares.
Real estate wholesaling is another more complex real estate opportunity. In this case, a wholesaler of real estate will get a home under contract with the seller. Once the property is under contract, they will find a buyer and get them under contract for a higher price. When the sale goes through, the wholesaler will keep the difference as a profit.
Generally, wholesalers will work with sellers that are in distress. If a seller is under financial stress, the wholesaler is typically able to secure a better deal.
As a wholesaler, you would not have to make any updates to the property. Plus, you will not be putting any of your money into the property. That can make it a less risky situation with less upfront capital.
How real estate deals make you money
After understanding the types of real estate deals available, you might have a better idea of which direction you’d like to take. The other piece of the puzzle is determining how real estate deals can make you money.
Luckily, there are several different ways that investing in real estate could produce a profit for you. Here are the most common ways:
Appreciation happens when your property’s value rises over time.
For example, let’s say you buy a home for $100,000 and it is worth $120,000 one year later. At that point, the property will have appreciated by $20,000!
A few factors that can cause this to happen include the desirability of the location, the physical structure, and the broader economy.
Cash flow income
If you have a property that is producing more income than expenses, then you have a positive cash flowing property.
Here’s an example of a cash flow positive property. Let’s say your mortgage on a property including principal, interest, taxes, and insurance was $1,000. If you are able to charge your tenants $1,200 per month, then the property would be producing a positive cash flow.
Onsite services income
Depending on the property you own, you might have the opportunity to provide onsite services for additional income. For example, you might provide a coin laundry machine for your tenants’ use or a vending machine to supplement your income.
Equity pay down
As you pay down the mortgage of a property, you are building your net worth. If you have tenants that are covering the mortgage for a property, then you are building your net worth in a physical asset through equity pay down.
Depreciation in real estate is an opportunity to lower your overall tax liability. With the help of depreciation, you can potentially save hundreds or thousands in taxes each year.
Essentially, the IRS will allow for an income tax deduction to offset the cost of a property being used to produce an income. The idea is that the property will be subject to wear and tear that will lower the overall property value while the property is used to produce an income. Although you may still enjoy a positive cash flow through the property, using this tax strategy can help to lower your overall out of pocket costs.
How to start as a real estate investor
Now that you know the basics of real estate investing 101, it is time to consider your options. It is completely possible for you to become a real estate investor. But you’ll need to tailor your entrance to the market to fit your goals and current financial situation.
Get your personal finances in order
Without a solid foundation in your personal finances, venturing into real estate can be fraught with risk. After all, you want to be able to comfortably afford your mortgage without fear of missing a paycheck.
With that, I highly recommend that you take the time to set up a strong financial foundation before moving forward with real estate investing. Although that might cause a slight delay in building your real estate portfolio, a strong foundation is worth the wait.
Consider your financing options
After you have a handle on your personal finances, you’ll know what kind of upfront investment you might be willing to make. For example, you’ll know whether you want to buy in cash or commit the lowest possible down payment.
If you are looking for affordable entry points, there are many ways to secure affordable financing as the resident of a property. A few of the most affordable loans include the FHA, USDA, and VA home loan options. You might only need to put down 3.5% to get into a house. With that, house hacking is a great entry point into real estate investing for anyone.
Save for a down payment
Once you have a better idea of your financing options, then it is time to save for the appropriate down payment. You might need just a few thousand dollars to get started. But saving up that first down payment if critical to making your foray into real estate.
How to start real estate with no money
If you are wondering how to make your vision of a real estate empire a reality without a big bank account to back you up, then read on. Many real estate investors get their start by thinking creatively and taking action.
For example, you might want to consider partnering with someone who has the capital to invest. You could offer your services to do all of the legwork required in exchange for a fee or share of the profits. If you are interested in this strategy, then join local investor groups to learn more about the market in your area and network.
Another option is to get creative about saving up cash. You could ask for a raise at your day job or start a side hustle that will propel your income to the next level.
Don’t be discouraged if your bank account is currently holding you back. Everyone has to start somewhere. Take some time to think creatively on how you can leverage your current situation and create a pathway for your real estate dreams.
The benefits of investing in real estate
Let’s take a closer look at some of the benefits of real estate investing.
The positive cash flow opportunities that can be found through real estate investing are very exciting. As a real estate investor, you have the opportunity to build a real estate portfolio that will produce an income for you.
Over time, you might be able to produce enough income from your real estate investments to fund your lifestyle. At that point, you will have truly reached FI by REI!
Anyone can get started
The process of buying a property is open to anyone and everyone. If you have the drive to build capital and seek out great deals, then you have the ability to build a strong real estate portfolio.
The best place to get started is by giving house hacking a try. You’ll be able to secure the best owner financing options, build equity, and cut your housing costs. What could be better than that?
Beyond owning a physical property, you can try crowdfunding and REITs to get your feet wet without committing a large amount of capital.
As you delve further into real estate investing, you’ll uncover a variety of tax strategies that you can use to your advantage. Although the best combination of strategies will vary for each investor, you have the opportunity to significantly reduce your tax burden.
The drawbacks of real estate investing
As with all forms of investing, there are some drawbacks that you should be aware of.
Upfront costs to get started
Although you can try crowdfunding and REITs to avoid large upfront costs, most real estate investment options will require some form of upfront capital. Even if you only have to put down 3.5% on a property, that could still be several thousand dollars that you don’t have on hand right now.
The good news is that there are countless ways to creatively raise capital. Don’t let the upfront costs prevent you from pursuing real estate.
If you own rental properties, then you’ll have to manage tenants. In some cases, a good tenant might not require too much work to manage. But a bad tenant can cause headaches along the way. In either case, you’ll need to perform tasks like collecting rent, screening new tenants, and more. This is definitely something that you need to be aware of as you purchase rental real estate.
A solution to the tenant headaches is to hire a property manager that can handle tenant issues for you. Before you hire a property manager, find out what to ask!
Is it hard to get into real estate and is it right for you?
The great thing about real estate investing is that there are many different strategies to suit your needs. Hopefully, after reading our “Real Estate Investing 101” article, you can find a real estate investment strategy that works for you. You can – and should – customize your real estate portfolio to your needs and preferences.
If you are interested in moving forward with real estate investing, then take action today! My advice is to take a closer look at house hacking as an entry point into real estate and make plans to optimize your housing situation today!
In 2018 FI by REI was created with the purpose of helping individuals that want a better life. We share articles on personal finance, house hacking & real estate investing, and more.