Real Estate Investing for Beginners
Real estate investing has long been a popular avenue for individuals seeking to diversify their investment portfolios and build long-term wealth. If the words ‘portfolio’ and ‘long-term wealth’ made the voice in your head say, ‘not for me,’ don’t listen. Anyone able to come up with a down payment and closing costs can get into real estate investing, provided they have a general knowledge of what they’re doing.
In this guide, we’re going to explore the fundamentals of real estate investing, so you can decide whether it’s the right investment strategy for you.
What is Real Estate Investing?
Just in case, let’s clarify what we mean by real estate investing.
Real estate investing is the acquisition, management, rental, and sale of properties to generate income.
We all like money. If you’re like most people, you’ve probably only ever spent money on real estate. The key here is to turn the tables and finally start making money from it.
As an investor, all types of real estate are at your disposal, meaning you can purchase any of the following:
Each type of real estate offers its own set of pros and cons, but the purchase of any to generate further income is what we call real estate investing.
What are the Benefits of Real Estate Investing?
Do some digging on sites like Bigger Pockets, or listen to a few self-made millionaires, and one thing you’ll notice is that many wealthy entrepreneurs acquired their wealth through the sale and acquisition of real estate. That’s right, if often has nothing to do with their 9-5.
Why is purchasing real estate a good idea? Here are but a few reasons:
Real estate appreciates: Take care of the property and it will appreciate if the right conditions are met, which means the property will be worth more than when you bought it. While real estate is what we call an illiquid asset (meaning it takes a little work to turn it back to money), having it in your investment portfolio can help you in more ways than one.
Generates rental income: Rental payments from real estate investments can generate passive income and ensure steady, consistent cash flow. This means you can use it to boost your monthly income at any stage in life. (Many people think the key to retirement is having a large savings you can pull from. While that’s certainly important, of equal or greater importance is also having monthly cash flow so you don’t have to dip into your savings.)
You can flip the property for a profit: There are buy and hold properties and there are flip properties. Flipping properties can enable you to make a quick profit with minimal effort. Of course, it helps if you’re a contractor or already know one.
You can use the property as collateral: Use equity in the investment property to help secure another loan, which can be used as a down payment for an additional property. Popular options among investors for this very purpose include HELOCs and home equity loans. Play your cards right, and it’s possible to quickly purchase multiple homes using this method.
You can take advantage of tax benefits: Real estate investments often come with tax benefits, such as deductions for mortgage interest and property expenses. It won’t turn your world upside down, but it’s a perk that should be taken advantage of, nonetheless.
You can create long term wealth to fund retirement and pass on to heirs: Many investors consider real estate to be the best investment. Once you understand how to utilize it properly, not only can you potentially fund your retirement with real estate, but you can build a portfolio that would guarantee income for immediate heirs and future generations. Heard the phrase old money? It could start with you.
Things to Consider Before Becoming a Real Estate Investor:
Before diving into real estate investing, it is crucial to consider several factors. These include understanding personal financial goals, assessing risk tolerance, establishing a budget, and conducting thorough market research.
Personal Financial Goals: Success means something different for everyone. How much more money would you need to make each month to be content? I suggest actually calculating a number based on your lifestyle goals and keeping that number in mind as you look at investment properties. ‘A lot’ is not an answer. Actually sit down and do the math so you know what you’re aiming towards.
Risk Tolerance: If you were to lose money on an investment property, how much would that affect your financial stability and overall well being? Would it cripple you, or would it only be a matter of time until you tried again? Never invest so much that pull from your retirement or emergency savings!
Budget: For investment properties, you will likely need to put down between 10-30%, but it depends on your credit profile. Unfortunately, FHA, USDA, and VA loans can only be used for primary residences, so you will most likely need to use a conventional loan, which require a higher down payment for investments.
Market Research: If the plan is to flip the home, you will want to research nearby comps (comparables). What do similarly sized homes recently renovated typically sell for? How long are they on the market? How much can you expect to make in profits? If you want to stay in the game for an extended period of time, the key is to never spend more than needed.
Evaluating Potential Investments
Due diligence is crucial when evaluating real estate investments. Factors such as location, market conditions, property condition, rental demand, and potential returns should all be considered. As mentioned above, you’ll also want to analyze comparable sales, rental rates, vacancy rates, and economic indicators to help assess the property's value and potential profitability. If a property suddenly dropped in price, why? Just because you can afford it, doesn’t mean you should buy it.
Financing Options and Strategies
Real estate investments often require financing, but you have more options than you may be aware. While financing through conventional loans is common, alternative financing methods, such as partnerships, seller financing, and ‘subject-to’ deals should be explored.
Managing and Growing Your Real Estate Portfolio
Once investments are made, effective management is essential. This includes property maintenance, tenant screening, rent collection, and addressing legal and regulatory requirements. Because it’s a bit of work, some investors work with third parties to manage their entire portfolio.
Next, you’ll want to further grow your portfolio. Reinvesting, leveraging, diversifying, and staying up-to-date on market trends are critical.
Conclusion
By grasping the fundamentals, beginners can approach real estate investing with the confidence needed to make informed decisions once they are financially ready. Remember, thorough market research and due diligence are essential— meaning real estate investing can require, above all else, patience. The right opportunity might take time to appear.
Of course, there are risks associated with real estate investing, but even so it remains a proven strategy for building wealth. With the right amount of dedication and perseverance, you can embark on a rewarding path towards financial freedom through real estate.