Investing in real estate is a way to build wealth efficiently over time. As a beginner, you might be wondering where to get started. Luckily for you, we will cover the ins and outs of real estate investing for beginners.
Let’s dive into everything you need to know about investing in real estate as a new investor.
Real estate investing for beginners
Before we get started, it is important to understand one truth. It is completely possible for beginners to take charge of their financial future by investing in real estate. Although you will need to take action to build the real estate portfolio of your dreams, it is completely possible!
Don’t let the fear of getting started stop you from making your dreams a reality.
Real estate investments for beginners
As a brand new real estate investor, it is critical to learn the basics. Before you start your real estate investment journey, it’s important to learn about the different options. Here are the most common ways for new real estate investors to jump into real estate.
House hacking is a real estate concept that has the power to completely transform your financial future. The idea is that you buy a property with extra space, which could mean extra bedrooms or completely separate units. Then you rent out the extra spaces to help cover your mortgage costs.
The power of house hacking is that you can lower your housing costs while building equity in a home and potentially generating a cash flow. Beyond that, you will be able to take advantage of the best owner financing opportunities.
Overall, house hacking can be the best and most accessible way to start building your real estate portfolio. To find out more, check out our ultimate guide.
Live in flip
In this strategy, you would buy a property that is in need of some updates. While you live in the property, you would make the updates. At some point, you would sell the house for a profit and move on to your next deal.
With a live in flip, you can take advantage of attractive owner financing options without any tenants. But you might have to live in a construction zone while making changes to the house.
Live in rent later
A live in now and rent later strategy is very similar to a live in flip. Instead of selling the house after you’ve used it for your purposes, you turn it into a rental. You could make updates to the property while you are living there or you just rent it as you found it. Either way, you would move on to a new place and a tenant would move in. The goal would be to create positive cash flow with a new tenant.
If the idea of physically owning a property is too daunting, there are still options. You could choose to invest in a REIT, real estate investment trust. With that, you would not own a property. Instead, you would own a share of a REIT which may own several properties.
You’ll be able to buy REITs through most investment platforms. Many investors compare REITs to mutual funds because they are relatively hands-off investments. But they often offer worthwhile returns with minimal effort on your part.
Another way to invest in real estate without owning a property is through crowdfunding platforms. Through real estate crowdfunding sites, you can buy a share of large real estate investment projects.
With a real estate crowdfunding option, you will not need to invest as much of your time or money. Instead, you will have the opportunity to profit from real estate deals on a smaller scale because you won’t be the only investor involved.
A few good platforms to consider real estate crowdfunding options include RealtyMogul or Fundrise. Both offer opportunities to get started with real estate investing without a large upfront capital investment.
Buying a rental property is one of the most common ways to invest in real estate. The goal of buying a property is for it to create a profit for you over time. With a rental property, you will face some complications with the need to maintain the property and manage the tenants that live there. However, it can be well worth the effort if you invest in a lucrative opportunity.
If you’d like to make your rental property portfolio less labor-intensive, then consider hiring a property manager. They can take care of all the tenant headaches for you so that you can simply enjoy the profits.
How to start investing in real estate for beginners
Let’s tackle the best strategies of real estate investing for dummies. Although it is not difficult to get started, you can save yourself time and energy by following the steps below.
Take stock of your personal finances
Before you can move forward with building your real estate portfolio. It is important to build a financial foundation that can comfortably support your real estate endeavors. Real estate investing, and life in general, can be more complicated when you don’t have a solid financial foundation.
Take some time to learn about your finances. Make sure that your finances are rock solid before venturing into real estate investing. Yes, it is a great opportunity to build wealth. But your finances need to be ready to make that leap. You’ll need to set aside some money to invest in a growing real estate portfolio.
If you want to learn the basics of personal finance, then please read our ultimate guide. You’ll learn how to set up a financial foundation and beyond.
Understand the numbers of a real estate deal
If you are considering investing in real estate as a beginner, then it is important to do some research on the numbers of a deal. There are several numbers that you should consider when evaluating whether or not a real estate property is a good deal. Let’s take a closer look at the top rules
The 1% rule can help you determine what kind of rent you should be able to charge for the property. As a quick rule of thumb, the gross monthly rent should be equal to 1% of the purchase price plus any renovation costs.
For example, if you buy a property for an all-in cost of $100,000, then you should be able to rent it for at least $1,000 per month. Of course, this is just a rule of thumb. Check the market rental rates in your area to see if the 1% is realistic in your area. In some cases, you might be able to stretch your rental income to obtain a 2% rule. In high cost of living areas, you might not be able to come close to the 1% rule.
When you are determining where to invest, you might need to look beyond your zip code or even state lines to find an affordable property with exciting returns. However, the decision to invest in a particular area is entirely up to you.
What is a cap rate?
A cap rate, also known as the capitalization rate, is the ratio of net operating income to the property asset value. Essentially, the ratio can let you know how much of a percentage of investment you’ll receive each year on the property if you bought the house in all cash.
With a higher cap rate, you should expect a riskier investment. A lower cap rate might provide a slower but stable return.
The amount of risk you take on in your real estate property will boil down to your individual risk tolerance. If you have a high risk tolerance, then you might find yourself gravitating towards properties with a higher cap rate. If you have a lower risk tolerance, then you might stay towards the lower end of the spectrum. There is no right or wrong way to approach this issue, it just depends on your preferences as an individual investor.
Cash flow (positive vs negative)
The cash flow of a property is the difference between the property’s expenses and the income it brings in. For example, let’s say you have $2,000 worth of monthly expenses on a property but are able to charge $2,500 in rent. With that situation, you would have a $500 positive cash flow. If you were only able to charge $1,500 in rent for the same property, then you would have $500 in negative cash flow.
As a real estate investor, the goal is to have a positive cash flow whenever possible. In fact, if a real estate deal would produce negative cash flow on a regular basis, then it is probably not a good fit. The only exception is if you are house hacking the property. In that case, negative cash flow might be reasonable if you are still able to reduce your housing costs to some degree.
The 50% rule is there to make sure that you don’t overextend yourself. It states that half of all your gross rent will go towards expenses to maintain the property. With that factored into your budget, you will likely be able to manage the costs of your property with fewer surprises.
For example, let’s say that you are able to charge $1,000 for rent every month. Multiply that by 12 to get your annual net income of $12,000. With the 50% rule in place, you could expect $6,000 of your net operating income to go towards property expenses.
Of course, the exact expenses will vary based on the property. But this is a good place to start your calculations.
Many new real estate investors want to start looking for deals in their local area. That can be a good strategy if you live in a low cost of living area. However, if you live in a high cost of living area, then you might want to expand your geographic search. Try to seek out deals in LCOL areas because they will have a lower entry point for you to get started.
As you look in different areas, consider the numbers we talked about above. Plus, consider the logistics of managing a property from afar. If you want to hire a property manager, then you’ll need to include the cost of hiring a property manager in your calculations.
Diving headfirst into the waters of real estate might sound exciting, but it might be better to start off small. Instead of jumping straight into a very expensive real estate deal, start small. Don’t take on more than your finances can handle. There is absolutely nothing wrong with starting with a small property and building up to a larger investment. After all, just because a lender will give you the money doesn’t mean that it is a good idea.
As you get your feet wet, exercise caution along the way. You’ll get more comfortable as you work through more deals. If you want to start with something extremely manageable, then try renting out a room in your current home. You can gain experience as a landlord and create extra income without taking on the responsibility of an entirely new property.
Learn more about real estate
Moving forward with your real estate investing plans may seem like a big step. And it is! You are embarking on a journey that could carry you all the way to financial independence. However, it can be a struggle to get comfortable with taking risks as a real estate investor.
Instead of flying blind into your real estate journey, take some time to learn about real estate investing for beginners. You will likely feel more comfortable with your real estate choices if you know more about your options. Once you have more information, you’ll be able to move forward more easily.
Luckily, we have many free resources available on FI by REI. Please take advantage of them!
Of course, learning is great. But eventually, you will need to take action. Don’t let great deals pass you by because you are nervous to get started. Take the time to learn about real estate investing but then move on to actually invest when you can.
Keep an emergency fund on hand
An emergency fund is critical if you want to avoid unnecessary stress while building your real estate portfolio. You should expect that emergency repairs and vacancies will take a bite out of your profits at some point in your journey.
You have an emergency fund for your personal finances, so why not your real estate portfolio? It could be the perfect way to protect your personal finances from a major impact due to a rental property issue.
Real estate investing strategies for beginners
If you are considering investing in real estate, then take some time to do your research. Once you have a better understanding of the type of real estate that you want to pursue, get started. Don’t let fear stop you from taking action. The best time to get started is today!
Of course, you might not be able to start today without the proper funding on hand. That’s okay! If you don’t have the funds on hand now, then set a goal for yourself. Consider how much money you would need to buy your first property. It might not be as much as you think! With owner financing opportunities readily available, you can likely secure financing with as little as 3.5% through an FHA loan. That is one of the many reasons why house hacking is such a great opportunity.
Take time to get creative on how you will finance your real estate deals. You might need to consider an unconventional living situation through a house hack to enter the market. Or if you need money for a down payment, then you might need to get serious about building a side hustle.
Is real estate investing right for you?
Real estate investing is not for everyone. If you don’t have your personal finances under control, then you might need to wait before taking the leap into real estate investing. However, if you have already build a solid financial foundation, then you are likely more than ready to start investing in real estate.
Take some time to familiarize yourself with real estate concepts and decide what you want your real estate portfolio to look like. Then take action and start building your real estate portfolio.
If you aren’t sure which strategy is best for you, then seriously consider house hacking. It is the perfect opportunity to get your feet wet in real estate investing as a beginner. You’ll learn more about the home buying process and gain some experience managing tenants. Once you have that experience under your belt, you’ll be ready to tackle even bigger investments.
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.