Learn How to Confidently Invest in Real Estate

1. Pick a lane

The most important steps in real estate investing happen before you actually buy anything, Mehta says.

"It's all in the pre-planning phase and then striking a deal when the pieces fit," he says.

To start, figure out what you are actually interested in buying. There are many different types of real estate investments: Single-family homes, multi-family homes, commercial real estate and REITs (real estate investment trusts), to name a few. And within each category there are different ways to make money, including flipping, house hacking and more.

Each strategy comes with different costs and risks. Investing in a REIT is similar to buying a mutual fund, for example, and requires much less time and energy than renting out a house. Buying properties "gives you more control and responsibility," which is riskier but can also come with a higher return, Mehta says.

"Choose a suitable option based on your current financial position, risk appetite, experience and how much you want to be involved," Mehta says.

When choosing, it helps to understand your "why," he says. Once you do, pick the strategy that aligns with it. "Everyone has a different motivation and purpose. Clearly defining what that is for you will help you navigate through the noise."

Flipping Houses

Like the day traders who are leagues away from buy-and-hold investors, real estate flippers are an entirely different breed from buy-and-rent landlords. Flippers buy properties with the intention of holding them for a short period—often no more than three to four months—and quickly selling them for a profit.

The are two primary approaches to flipping a property:

  1. Repair and update. With this approach, you buy a property that you think will increase in value with certain repairs and updates. Ideally, you complete the work as quickly as possible and then sell at a price that exceeds your total investment (including the renovations).
  2. Hold and resell. This type of flipping works differently. Instead of buying a property and fixing it up, you buy in a rapidly rising market, hold for a few months, and then sell at a profit.

With either type of flipping, you run the risk that you won’t be able to unload the property at a price that will turn a profit. This can present a challenge because flippers don’t generally keep enough ready cash to pay mortgages on properties for the long term. Still, flipping can be a lucrative way to invest in real estate if it’s done the right way.

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6. How do you set the rental rate to cover bills and generate revenue?

“Both rents and home prices are changing quickly as spring seasonality meets optimism around vaccination rollout and reopening [during the coronavirus pandemic],” Popov said. “Do your due diligence with sources that track real estate trends, and keep up with new inventory to make sure [your property is] priced competitively and your investment doesn’t sit vacant.”

If you’re going the rental property route, Pinnegar said to make sure you look at your “potential expenses versus potential revenue on paper to help inform your investment” first.

“If the deal doesn’t look good on paper and you will not have positive cash flow from the very beginning, think about your risk tolerance and proceed with extreme caution,” Pinnegar flagged.

“The market plays a large role in rental rates [so] investors should first look at comparables in the specific real estate market and asset class. It’s important to look at other rents in the area and ask how your unit compares to others in the market, while also considering the age and condition of your property,” Pinnegar said. “Certain amenities – natural light, outdoor space, gyms and parking – are highly desired and could also bring greater value to your rental property, therefore increasing potential rent and revenue.”

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Getty Images

How Can I Add Real Estate to My Portfolio?

Aside from buying properties directly, ordinary investors can purchase REITs or funds that invest in REITs. REITs are pooled investments that own and/or manage properties or which own their mortgages.

Which type of real estate investing is right for you?

Most people find owning their own home a great way to begin investing in real estate. And some enjoy taking in a renter or two to bring in a little income on the side. This basic strategy involves some work and costs. But those are baked in for any homeowner.

Unless you opt for a REIT, other forms of real estate investing involve scaling up the burdens, risks, and rewards of homeownership. The more work you do yourself, the more profit you stand to make.

Being a landlord isn’t as easy as it sounds, certainly in the early years. Tenants can be difficult to manage. But you want to keep the good ones for as long as possible so you minimize your vacancy rate. And, depending on the buildings you buy, it can be expensive to keep units up to scratch, even if you do provide most of the labor.

Renting out a vacation home can involve even more work. And, unless you buy somewhere near your main residence, you might have to outsource an endless list of chores. Obviously, that will eat into your profits.

But there’s a lot of money to be made in real estate. Do you have the determination and staying power to take a chunk of it for yourself?

If not, REITs may provide good returns with little effort. If that’s what you mean when you think of investing in real estate, go for those. But take great care when selecting yours.

3. Be unconventional

Everyone has access to Zillow, Redfin and other online listings sites. If you're bidding on a property that many other people are, chances are you are not going to get the best deal, Mehta says. "You need to think and work outside the box to have an edge on competition," he says.

Mehta suggests trying to reach out to sellers directly. "I personally bought my first two properties off-market, just driving through the streets in my favorite neighborhood and seeing for sale signs getting installed before the homes actually hit market."

Mehta also suggests connecting with local real estate agents. They often know what is going to be listed before it actually is.

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5 Books On Real Estate Investing For Beginners

If you are interested in adding a few books to your current reading list, there are numerous titles on real estate investing. These books can provide information on the basics of investing, industry terminology, key strategies, and more. Here are a few books to help you get started:

  1. The Book on Investing in Real Estate with No (and Low) Money Down by Brandon Turner: The goal of this book is to start thinking like an investor. Turner’s insights help readers learn how to use other people’s money to make deals and how to make the most out of your finances.

  2. Building Wealth One House at a Time by John Schaub: This book is all about methodology. If you are interested in learning how to buy properties, earn money, and replicate the results, this is a great read. With over 30 years of experience in real estate investing, Schaub’s book is a great starting point for beginners.

  3. The E-Myth Real Estate Investor by Michael Gerber This is the backbone of real estate investing. The E-Myth teaches beginners to look at investing from a new perspective. The book provides an overview of strong business practices and investing frameworks to help you get started.

  4. The Real Estate Rehab Investing Bible: A Proven-Profit System for Finding, Funding, Fixing, and Flipping Houses Without Lifting a Paintbrush by Paul Esajian: If flipping houses is the strategy that interests you the most, consider starting here. Esajian outlines the best systems for slipping houses for profits and provides advice on how to fund each deal. The book contains important formulas for analyzing deals that investors of all experience levels will find valuable.

  5. The Real Estate Wholesaling Bible: The Fastest, Easiest Way to Get Started in Real Estate Investing by Than Merrill: Wholesaling is often thought of as the best strategy for beginner real estate investors. This book outlines how you can turn this beginner-friendly side hustle into a full-blown real estate business. Merrill’s advice includes advice on how to find funding for beginners and how to break into tough markets.

To learn more about the best books for beginner real estate investors, read our full run-down here.

Step #7 Raise Cash For Your Down Payment Reserves

Real estate investing is a business that allows you to use other people’s money to help you move forward. But you shouldn’t count on building your entire business with no money down.  Even if you use the highest leverage scenarios, like 0% down VA (Veterans Administration) loans, you will still want to save cash for reserves.

So, how much cash will you need? And how do you raise it?

The amount of cash needed will depend upon your strategy (Step #2), the prices in your target market (Step #3), and your property criteria (Step #4).  You can also ask your lending team member (Step #5) how much down payment you’ll need for certain loan programs (Step #6).

For example, let’s say your financial priority is increasing your savings rate (wealth stage #3). You decide to use the house hacking strategy to purchase a duplex for $150,000. You may be able to find an FHA loan with a 3.5% down payment. So, you’ll need $5,250 (3% of $150,000) for your down payment and perhaps another $3,000 for your closing costs.  But you may also need more cash for property improvements and reserves for a rainy day. So, let’s say you need another $10,000 for that.

Your total cash in this VERY low down payment scenario would still be $18,250 ($5,250 + $3,000 + $10,000).  How do you find that money? Here are a few ideas:

  • Save – I know this is obvious. But sometimes you just need to make investing important, work for extra income, cut other expenses out of your life, and be patient until you have saved the money. No short cut here, but it works.
  • Sell – Can you sell your car and buy a less expensive one? Do you have expensive toys that you can sell until later in life when you’re financially better off? What about selling a big home with a lot of equity if you’re willing to downsize? Do you have collections of junk in your attic/basement/garage that needs to go away? Selling is one of the safest and most logical ways to raise funds.
  • Borrow – This one you need to be careful with. I am personally comfortable borrowing safely against long-term assets like rental properties. But personal loans, credit cards, or lines of credit used for down payments can be dangerous if things go badly. The problem is the discipline of cash flow. If you borrow $10,000 to invest, will the investment produce enough to pay the interest? If not, you’ll need to come out of pocket. Just make sure you can handle that extra loan payment in a worst case scenario.
  • Partner – Partnering is like sharing a delicious cake. What if someone offered me a rich, chocolate cake (my favorite!) for 50% off? But what if I I didn’t have the money to buy it? Wouldn’t it make sense to find a friend who DOES have that money and split the cake with them? Now we both win.  That is partnering in a nutshell. It has worked very well for me over the last 15 years. Just make sure to communicate clearly up front (in writing), and only work with people you like and trust.

Now that you have your cash and financing lined up, let’s move to Step #8 where we find good deals!

Top 10 Traits of Successful Real Estate Investors

As a first-time real estate investor, it can be easy to begin to doubt yourself and wonder if you have what it takes to succeed. However, no success story begins with perfection. As the real estate mogul Warren Buffett says, “the most important quality for an investor is temperament, not intellect.” It is entirely possible to learn from experience and reinvent yourself time and again. The following describes some common traits of successful real estate investors that you can start to channel today:

  1. Passionate

  2. Self-disciplined

  3. Driven

  4. Imaginative

  5. Bold

  6. Principled

  7. Flexible

  8. Economical

  9. Team-oriented

  10. Personable

Tips for Your First Property Investment

There are a few ways you can buy your first real estate investment. If you are purchasing a property, you can use debt by taking a mortgage out against a property. The use of leverage is what attracts many real estate investors: it lets them acquire properties they otherwise could not afford.

Warning Using leverage to purchase real estate can be dangerous. In a falling market, the interest expense and regular mortgage payments could drive you into bankruptcy if you aren’t careful.

To manage risk and protect yourself, consider holding real estate investments through special types of legal entities rather than in your own name. These include limited liability companies or limited partnerships. You should consult with a lawyer to decide which method is best for you. If the investment goes bust, or someone slips and falls, resulting in a lawsuit, these legal entities can protect your personal assets. That means the worst that could happen is that you would lose the money you’ve invested. You will have peace of mind knowing that your retirement accounts and other assets should be out of reach.

Checkbook IRA

A recent case has shed light on one of the riskiest retirement plan strategies put forth by promoters. In McNulty v. Commissioner (157 T.C. 10) a U.S. Tax Court brought clarity to the scheme of using self-directed IRAs for personal investments.

Why invest in real estate?

People invest in real estate for several reasons, including generating rental income, profiting from the potential appreciation in property value over the long term, and reducing taxable net income. 

One of the unique things about real estate as an investment asset class is that it may be possible to achieve all three of these things – income, long-term profit, and tax savings – at the same time while using other people’s money.

Use leverage to invest in real estate

People who invest in real estate directly by owning property such as a single-family rental (SFR) home often use leverage – also known as other people’s money – to finance the property purchase. 

To illustrate how leverage works, assume an investor purchases a SFR for $120,000. One option is to pay cash for the property, while another option is to leverage the property purchase by making a 25% down payment of $30,000 and financing the rest. 

Now assume that after 5 years, the home is worth $176,000. If an investor had paid all cash, the profit would be $56,000 and the cash on cash return would be 47% ($56,000 profit/$120,000 purchase price cash invested). 

However, if an investor had used leverage to purchase the home, the profit would still be $56,000 but the cash on cash return would be 187% ($56,000 profit/$30,000 down payment cash invested). In other words, by wisely using leverage by making a conservative down payment, an investor nearly doubled the cash on cash return in this example.

Generate income

Another reason people invest in real estate is to generate monthly cash flow. 

Depending on the type of real estate owned, an investor may earn income from dividend distributions from a REIT or crowdfund, or an annual cash return by directly owning a property. 

Profit from long-term appreciation

Housing prices historically increase in value when held for the long term, although there may also be times when home prices decline. 

According to the Federal Reserve, the median sales price of houses sold in the U.S. has increased by more than 25% since the 2nd quarter of 2020, and by over 94% since the end of the Global Financial Crisis (GFC) of 2007-2009. 

However, the median sales price of houses sold during the GFC declined by about 20%. During this 2-year period, millions of people lost their homes through foreclosure, allowing some buyers to purchase inexpensive homes and wait for the real estate market to rebound.

Save money on taxes

The IRS offers real estate investors numerous tax deductions to reduce taxable net income. For example, rental property owners can deduct ordinary expenses from rental income collected, including:

  • Property management fees
  • Leasing commissions
  • Repairs and maintenance
  • Mortgage interest
  • Property taxes
  • Insurance
  • HOA fees

Depreciation is another way that real estate investors lower pre-tax income. 

Residential real estate can be depreciated over a period of 27.5 years, excluding the land value. If an investor owns a home worth $120,000 net of the land value, the annual depreciation expense used to reduce a taxpayer’s taxable income would be $4,367. 

Cons of Real Estate Investing

  • Potential returns aren't as high as the stock market: From 1991 to 2019, the S&P 500 gained over 600%; housing prices increased by only about 160%.
  • Real estate investment can be cash heavy: If you really want to get a steady income stream going, then you need enough cash on hand. Whether it's your own money or it's loaned to you, you'll need to be able to pay for building improvements, maintenance, and more.
  • Properties are not liquid investments: You can't turn a property into cash quickly like you can when you sell a stock.
  • Managing tenants and building maintenance can be a challenge: Whether you hire a property manager or manage it yourself, running a property can be full of unexpected problems. These can include overdue rent, roof leaks, power outages, and more.

Your next steps to investing in real estate

You need to see real estate investing as a business venture. And that means being businesslike.

So begin by investing your time in research. Use the links we provided above and then keep reading. You need to know all about your chosen way of making money from property — most importantly, the potential pitfalls.

Once you understand the business model you’ll be pursuing, see whether it fits within the property market in your chosen area.

  • How quickly, if at all, are home prices rising?
  • What about rents?
  • How easy is it to find new tenants?

You can find much of that data online and good sources include Realtor.com and Apartments.com. But don’t stop there.

Cultivate contacts with real estate agents and contractors in your area. Most are willing to share their expertise with newbies, especially if they sense you might bring them future business. And other landlords can also tell you about how they’re finding local market conditions.

Evaluating real estate education sources

With all the aforementioned ways to learn real estate investing, where do you start? Before purchasing any properties, start simple with a few free sources: read a few real estate investing blogs, listen to a podcast or two, and/or take a webinar.

Good real estate investing education sources will point you to other valuable free resources and not just try to pitch their own premium products. They reference their sources when citing statistics and facts and will also point you to excellent real estate investing communities online (such as Facebook groups) because they value the power of networking and peer feedback.

I’ve found that the more specific the niche, typically the better the education. So if you want to learn how to flip houses for a living, find a source specifically focused on house fix and flipping. If you want to learn rental investing, look into a source specific to long-term rentals and income investing.

Strong resources also focus heavily on how to accurately forecast your return on investment and will point out some of the most common mistakes and pitfalls that can derail your returns, and how to avoid them. Finally, good sources of real estate investing education present the risks and downsides, not just the benefits of real estate investing.

4. What loan options are available to rental property owners and how should they be evaluated?

According to Pinnegar, there are a range of loan options available for rental properties. He mentioned three: loans backed by banks, loans from the government or even private money.

“For potential real estate investors, and even those already involved in the industry, it’s important to speak with a loan broker to find the best loan fit,” said Pinnegar. “Often, loan brokers can give potential investors the broadest range of options and evaluate the pros and cons specific to financial situations, market conditions and a host of other variables.”

Pinnegar also recommends speaking with an established real estate broker who is experienced with the type of rental properties you’re interested in. “This is because transactions differ widely based on property size and agents have different specialties – as an example, a transaction for a 1-4 unit property is more akin to a single-family home purchase and would require a different kind of agent than 5+ unit properties, which lean more towards a commercial loan,” Pinnegar explained.

“A knowledgeable agent can also connect you with a trusted loan broker, particularly for multi-family properties, as these transactions tend to be complicated and brokers rely on proven relationships with colleagues who can close deals and bring in commission.”

Getty Images/Westend61
Getty Images/Westend61

Conclusion

We’ve made it to the end of my 9 steps for real estate investing 101! As I shared in the beginning, my goal was to save you frustration and time as someone getting started (or restarted) with real estate investing.

As you may know, too much information can sometimes work against you as a newbie. So, I hope the action steps in this article will give you a framework to get started quickly.  And if you get started and keep moving, you can avoid overwhelm and move past those other pesky beginner challenges like analysis paralysis.

But as you know, these steps are only the beginning. Real life is fluid, and the best plans you make will be tested and challenged in the forge of reality.  So, stay flexible, keep learning, and let me know if I can help by making comments below.

I’d love to hear from you in the comments below

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