Real estate investing is one of the most effective and dependable ways for investors to generate income. Better yet, it’s possible to invest in real estate while spending far less time than you do at your full-time job.
But if real estate investing is so great, why doesn’t everyone do it? There are many reasons, but much of it comes down to a lack of information.
Thus, this post will look to dispel some of the misconceptions while giving you all the information you need to get started.
Let's go ahead and dive right into the steps that can help with real estate investing for beginners.
What Are Your Goals?
When investing in real estate as a beginner, it helps to have a plan. Saying “I want to make money on real estate” isn’t really a plan!
Before you get started investing, come up with a specific plan. This plan should answer questions like:
- What specific financial goal do I hope to achieve by investing?
- What specific steps will I take to achieve those goals?
- How long will it take to carry out my plans?
Of course, you may not know how to answer these questions, especially if you are new. Luckily, there is plenty of content out there to help you get started writing a real estate investment business plan.
One of the biggest benefits of real estate investing is it generates steady cash flow. That is opposed to stocks, which rely more on growth.
Know Your Market
Knowing your market is always important when it comes to owning real estate. That knowledge will help you understand who your typical buyer is and, thus, the type of home they need.
For instance, is the market predominately made up of single people working in the tech sector who would rather be renters?
Or maybe it is mostly families that need more space and want to buy?
If you are in a large market, you may have all of the above, but knowing what is most in-demand can help you make good purchasing decisions.
The One Percent Rule
If you intend to purchase your own rental properties, the one percent rule is a good rule of thumb. This is a simple calculation that can help determine whether a rental property will actually be profitable.
So, how does it work? All you have to do is calculate one percent of the purchase price of the property. Once you have that number, your monthly rent should be greater than one percent.
If your rent is greater than one percent of the purchase price, you have some solid cash flow. Thus, you have the potential to generate a profit.
But keep in mind that the one percent rule is just a rule of thumb; it will help you to completely avoid markets that aren’t worth your time.
For example, if you are looking at some high cost-of-living area and the homes sell for $1 million but rent for $3,500, you can probably avoid it altogether.
If a home does meet the one percent rule, you should still be sure you account for all expenses. You don’t want to have any surprises later.
Diversify Your Investments
If you currently only invest in the stock market, investing in real estate can be a good way to diversify your investments. But don’t forget that you should also diversify your real estate investments.
Again, if you own your own properties, owning more than one is a good idea. Combined with a buy-and-hold strategy, diversification can help reduce risk.
This way, if something goes wrong with the property, causing it to bring in less revenue than expected, it won’t be as big a blow to your overall investment.
Diversify your investments with real estate.
Want to go beyond stocks? Real estate is the perfect way to invest, and Fundrise makes it easy to start with REITs.
Things happen. Sometimes, tenants find themselves unable to pay their rent for one reason or anything. Other times, things go wrong with the property itself.
What happens, these issues will sting a little bit less if you lose 10% of your rental income than if you had lost 50% of your rental income.
This is not to say you should immediately buy dozens of properties. You don’t want to bite off more than you can chew, but slowly expanding your portfolio will make it less risky.
You Don’t Have to Be a Landlord
If you’re a real estate investing beginner, you may not realize it, but there are many different real estate investing strategies. Just a few of them include:
- Investment property marketplaces: real estate investment marketplaces such as Roofstock are made for investors and will help you find a property management company, finance, and insurance all in one closing process. And there's no need to work with a real estate agent since properties can be bought and sold on the marketplace.
- Real estate investment trust (REIT): a REIT is a company that owns and may operate properties, including commercial real estate. They allow investors to purchase shares to invest directly in real estate projects.
- Real estate crowdfunding: real estate crowdfunding allows you to invest in specific properties, such as an apartment building. This is unlike a REIT, which only allows you to invest in real estate companies.
- House hacking. Technically, you are still a landlord of sorts here, but house hacking involves renting out extra rooms or extra units within your home.
These are just a few of the alternative ways to invest in real estate. Keep in mind that some of them may have lower monthly returns than owning your own rental properties.
However, they may also have less risk and require less work on your part. The best real estate investment is one that doesn't require a ton of upkeep.
Real estate appreciation is another way to make money via real estate investing. In fact, this is the way many middle-class families have built wealth.
But investors can reap this benefit as well. If your properties increase in value, you can put them on the real estate market for a higher price than you paid.
Get Your Finances in Order
Have you ever heard the expression “it takes money to make money?” While that isn’t true in every situation, it is true with real estate investing.
Not all forms of real estate require a significant up-front investment. For instance, investing in a REIT only requires money to buy shares in the trust.
However, things are different if you intend to own your own properties. You must cover the entire value of the properties with cash, or - as most investors do - finance them.
When you purchase a home for yourself with financing, a 20% down-payment is typical. That is no different for rental properties, as it makes no difference to the lender that this is an income-generating property.
While you may be able to find ways to put little to no money down, it’s a better idea to put money aside until you can afford 20% on a rental property.
Thankfully, there are ways to help lower the bar on that 20% down-payment. The most obvious way is to buy a cheap house. Of course, “cheap” is relative, and if you live in an HCOL area, a house that is actually cheap may just be a complete tear-down.
But if you use a service like Roofstock, you can buy a home in a less expensive market. That way, you can buy a house at a lower price that’s still a good investment.
Ready to Start Investing in Real Estate?
Real estate investing can seem intimidating to start, but it doesn’t have to be. With the right approach, almost anyone can become a real estate investor.
Plus, if you aren’t comfortable handling all the responsibility on your own, there are plenty of ways to invest without doing everything yourself.
You can use an investment marketplace, invest in a REIT, participate in real estate crowdfunding, and more.
And the investment marketplace I mentioned, Roofstock, helps you find a remote property manager so you don’t have to worry about the day-to-day responsibilities.
Overall, real estate is an excellent investment that everyone should consider. It adds diversity and strength to your portfolio that you won’t find anywhere else.
Plus, it can help you grow you earn passive income and grow your net worth.
If you're looking for a way to build wealth, real estate will continue to be a great investment for years to come.