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Getting started in real estate will take you one significant step closer to building wealth. But how does real estate investing for beginners really work? Where do you start? How much money do you need?
As someone who wasn’t raised with old money by parents who own several real estate investment properties, I had these questions myself. I’ve built enough savings to feel comfortable, started investing in the stock market, but real estate had always felt too far from my reach until I decided to learn the ins and outs of it.
- What Is Real Estate
- How To Get Started
- Understand The Market
- Finding The Right Property
- Tips For New Investors
And now I’m going to share with you everything you need to know about how to get started in real estate and succeed in the long run.
Real estate investing refers to a specific approach that does not include flipping and reselling for profit. This is considered real estate trading rather than investing. In fact, real estate investing creates a stream of passive income with one simple idea: you buy properties and rent them out to other people.
The rent you earn from those properties becomes a passive source of income, leaving your time free to do other things such as work, run a business, search for more investments, or enjoy some free time.
Real estate investors purchase residential and/or commercial properties such as single-family homes, office buildings, and retail spaces, for the sole purpose of renting them out to tenants to generate passive income.
Why Invest In Real Estate?
Investing in real estate is one of the best ways to build wealth for several reasons.
First, the passive income stream you get from rental properties leaves your time free to generate even more money.
Second, real estate investing provides tax benefits that help you build wealth more quickly.
Third, no matter what the economic situation, people will always need a place to live. This makes real estate a solid investment for the long term.
Fourth, real estate investing also gives you a tangible, physical asset that you own – whether or not you’re collecting an income from it.
To get started in real estate investing you need to cover a few bases first. Let’s go.
When To Start Investing In Real Estate?
- Have a $2,000 emergency fund
- Have enough savings to cover 6 months of living expenses
- Get rid of any high-interest debt and/or refinance student debt
- Learn to allocate your money
- Get legal help to protect your assets
Once you’ve covered all these bases, you’re good to go and dip your toes in real estate investing. Even if you don’t feel financially confident to buy an entire building, you can start small scale and buy into a collection of real estate properties through Fundrise for as little as $500. In fact, Fundrise is great for getting started in real estate without exposing yourself to much risk.
Develop Some Soft Skills
Unlike other types of investments, real estate requires several non-technical, people-related skills — often referred to as “soft skills.” Because as an investor, you’ll work with realtors, contractors, and tenants to purchase, prepare, manage, and rent out your properties.
Every person you work with has the potential to improve your profits if you understand how to communicate with them.
Some of the best skills you can develop to become a successful real estate investor include:
- Team leadership
It’s important to remember that most communication skills aren’t developed by reading articles or watching videos, while they can be helpful. You need to be in the presence of many different types of people frequently and constantly network with people who are better communicators than yourself.
As for negotiation, hostage negotiator Chris Voss offers an excellent class on negotiating. Published on the MasterClass platform, Voss’s course teaches solid negotiating skills that can be applied to real estate investing.
Additionally, Skillshare – an online learning community – offers nearly one thousand classes to help improve your leadership skills and more than a thousand communications-related courses.
There’s more to the real estate market than simply buying and selling properties.
Namely, real estate values run in cycles. Sometimes the market is booming while other times property values drop back down.
As an investor, you’re not in it to resell properties a few months after purchasing them. You’re in it for the long run, so you need the ability to understand how real estate cycles affect long-term value.
Real estate investors stay focused on their main source of profit, which is not reselling but rental payments. If you have good tenants that pay on time and care for their homes, your profits are healthy regardless of what the market does.
Spotting A Good Deal
Learning how to spot a good investment property can lower your risks and significantly increase your profits.
Here are a few tips for finding good real estate deals:
- Real estate is a long-term game, so look beyond where today’s businesses are located. Properties in areas where businesses (and young people) are moving may prove to be the most profitable real estate investments.
- Look for beat-up properties. Most homeowners want a cute home, but “cute” homes come with “cute” profits. If you buy a home that needs work, you can purchase it at a great price, then remodel it for higher profits.
- Location is king. If you’re just getting started, invest in properties located in areas you’re familiar with so you know they’re good places to buy real estate.
- As you gain experience in real estate investing, you’ll develop better judgment for finding good deals. New investors should use caution and learn as much as possible about their markets.
Also, understanding how to spot bad investment properties is as important as knowing how to find the good ones. For example, where you buy property can be more important than what you buy.
Invest in properties that are in high demand, and you’re more likely to fill them quickly. But, if you purchase cheaper properties in other parts of town, beware of deal-breakers that could turn your property into a real estate nightmare. For example, noise from airplanes or trains can make even the most beautiful homes hard to rent.
Figuring Out The Funding
This depends largely on two factors: where you want to purchase, and your funds for a down payment.
Let’s take a look at a heat map of property values. The coasts are always going to be on the expensive end, and the further inland you travel, the lower values become. Next, we need to think about what areas people like to rent in – mainly areas that are close to cities, close to transportation, and close to businesses.
Once you figure out an area (for a first-timer I’d suggest something close to your primary residence) you’ll have a general idea of how much a property will cost.
Now it’s time to go out and get pre-qualified on a loan! You can do this pretty quickly and easily by contacting your favorite bank or lender. This can happen over the phone or even by filling out an application, online. Be careful thou, each time you do this the bank will run a credit check on you, which can bring your score down temporarily. However, if you have multiple checks within one month, they’ll all just count as a single credit check.
You also want to make sure you’re telling the bank or lender that you’re looking for an investment property, not a primary residence. While this might give you rates that are a bit higher, you’ll avoid running into issues later. You don’t want to say you’re looking for a primary residence and then rent it out as an investment without it being documented. To give you some more options, look into different types of loans such as the low down payment FHA loan to save costs.
A couple of main points to remember when looking for a loan:
- Is the lender charging you any lender points? (A fee at closing to lower your interest rate)
- What’s the interest rate they offered?
- What is the APY on the interest rate? (The accumulated interest charged in a year)
- What does my prospective amortization schedule look like? (A breakdown of your monthly payment detailing how much goes towards interest and how much towards the principle)
Most importantly, don’t be afraid to negotiate with the bank, no matter if its JP Morgan Chase or if it’s a Mom & Pop local credit union. Make sure you’re getting a great rate, your loan officer is willing to explain each line item to you, and your lender gives you multiple options in terms of the length of your loan and the percentage you’re willing to put down.
Now, once you’ve found a lender offering a great deal, you can start making offers on properties. You can do this through a Realtor or just search through a variety of online resources like Zillow, Trulia, RedFin, and others. Just Google around and find what works for you.
If you are using a Realtor, make sure they’re investor-friendly by asking if they’ve previously worked with investors, what their experience was, and if they’d be willing to put you in contact with a former investment property buyer. Be sure to ask your Realtor to set up reoccurring MLS emails (A list of properties matching your criteria sent to your inbox) on types of properties you’re interested in.
While hunting I’d suggest searching for properties that are ‘for sale by owner’. Here you’re cutting out the realtor middleman (or woman) and getting straight to the owner. This is one of the best situations to find great deals. Regardless, there are plenty of ways you’ll want to search for properties:
- REO bank-owned – Properties banks have possessed due to foreclosure by a bank)
- Auction – A quick way to buy and sell real estate often sight-unseen
- Driving around and sending letters to distressed properties, or even checking a town’s tax records and finding a name that appears often – a possible investor – and contacting them directly to see if there’s a property they’d like to sell.
Use all of these tools in your property-catching arsenal, and you’ll be well equipped.
Building A Solid Team
Usually, people first look into this once they’ve found a property and had their offer accepted, however since we don’t wait and settle like the majority and since you’ve read this article, that’s not you.
- Locate and get prices on a trustworthy and reliable home inspector, these guys will help make sure you didn’t miss anything. They’ll give you good advice on what needs to be fixed before your purchase, and what will need fixing in the future.
- Get in touch with a Real Estate Lawyer. Stay away from lawyers who don’t specialize in real estate, and check with various Lawyers about their costs and what they cover, such as holding the escrow, checking for liens on the property, and validating the home insurance you’ll purchase.
- This brings me to my next point, find a home insurance company and speak with a rep about insurance costs for an investment property. Since they’ll need specific information about your property, it’s fine to wait until you’ve signed the purchase agreement.
- Finally, talk to people in your prospective area about handymen or contractors they can recommend. If you find a great property but it needs some work, referred handymen can be lifesavers, and thus wallet savers.
Once you have a general idea of what these costs will be, you’ll be in much better standing for what’s to come once your offer is accepted. Better yet, you’ll grow a stronger understanding of everything involved in a real estate deal, and build a rapport with people you’ll soon need.
This will also be a great time to get some paperwork in order, once you reach out to a bank with an accepted offer. A traditional lender will typically want:
- Your W2’s for two years
- Two or more months of bank statements (with enough for a down-payment, closing costs, and reserves)
- Verification that your bank statements don’t show any large deposits (or an explanation for each if they do)
- Two months of statements for any retirement accounts you have
- An explanation for any credit checks you’ve had
- An explanation of your living situation if you’re living with your parents
Running The Numbers
Nice, you found a great property and you want to make a competitive offer. Make sure that this property makes sense as an investment. You’ll want to look at a couple things.
- Does it cash flow? (The difference between the rent and your expenses)
- Am I taking into account the money I’ll need for maintenance or any large repairs?
- Am I accounting for the time it might be unoccupied?
Search for Real Estate Calculators and find a premade spreadsheet or calculator that will run the numbers and help you verify that you’ve got a good deal!
Now, once you’re sure your property is golden, check the area for comps – comparison properties that match or are similar to yours and have recently sold. Make an offer under this number depending on if it checks out with your cash flow test. Or if the property has been on the market for a couple of months, and the owner seems eager to move out, dip your offer even lower.
Sometimes you might feel nervous or even foolish for what you want to offer, however you never know what they’ll accept unless you ask. Take that first step; a property is only worth what people are willing to pay for it!
Oiling Up The Machine After The Offer Is Accepted
Awesome! Your offer got accepted and you’re ready to take ownership.
Here are the next steps:
- Inform your lender and prepare to send them your paperwork
- Contact your lawyer so they can get things rolling on their end
- Confirm an inspection date with your home inspector
From there, create a timeline based on important dates given to you by the bank and your Lawyer, and make sure the ball is effectively passed along from person to person with nothing held up. If something is, get it to the requesting party as soon as you can, and verify that everyone’s on the same page.
Get Ready For Closing
Once the bank gives you the go-ahead and you’re cleared for closing, there are still a couple more things you’ll need to pay attention to.
- Pay attention during your final walk-through, make sure to note and bring up anything you have questions about or are just now noticing.
- Make sure you have enough in your accounts for the amount needed at closing.
- You’ll also want to make sure you have, or will have, funds to change the locks on your new purchase, and make any immediate repairs to the property in case you find something you’d like to change.
- Register as a landlord in the town of your purchase (not all towns require this and those that do might have a fee).
You can never know too much about real estate investing. The following tips will help you enter the world of real estate investing on the right foot.
Get Familiar With Real Estate Tax Laws
As a real estate investor, tax laws are your friend.
U.S. Tax codes include several big breaks for real estate investors.
For starters, U.S. tax laws allow you to reinvest your profits without having to pay taxes on the initial earnings (1031 Exchange). Or, when you earn passive income from larger properties, you get tax breaks on that income.
If you familiarize yourself with the real estate investing tax laws, you can legitimately use them to your advantage to create more wealth than you can with other types of investments or careers.
Familiarize Yourself With Real Estate Concepts
One of the most important real estate investing tips for beginners is getting familiar with all or at least some of the most crucial real estate concepts. Here we explain a couple of the most important ones for your quick reference.
Like other types of investment sectors, the overall real estate market also never remains constant. It fluctuates and with it, the value of properties changes too. So tracking the real estate market when purchasing or selling property is essential so you can maximize your gains and minimize losses.
However, remember that over the long-term typically a property appreciates in value. So one of the best real estate investing tips you’ll ever get is to invest for the long term!
Another factor that drives a property’s appreciation is its locality. For instance, has a certain area become busier, or has it attracted more types of businesses? In the case of residential property, the attractiveness of the neighborhood, safety, availability of schools and malls nearby are some attributes that can drive up its valuation.
That said, there is no hard and fast rule when it comes to the real estate market as it can be quite unpredictable. Remember it’s also dependent on the state of the overall economy.
Incoming cash flow
Naturally, your goal when buying real estate is to derive maximum returns from it. Just like you would earn dividends on a piece of stock, ideally speaking your real estate investment should generate positive cash flows in the form of rent.
Many commercial, as well as residential properties such as houses, apartments, offices, commercial complexes, storage units, retail spaces, and many others, provide monthly passive income for you.
Your expected cash flow income should naturally be greater than the outflows or expenses you incur in the form of maintenance, property taxes, repair and renovation, mortgage costs, and others. When calculating expected cash inflows, be sure to take into consideration not only the rent it generates but also its appreciation in value over time and tax benefits.
Networking With Realtors
Real estate investors rely on realtors to help them find the best investment properties.
Networking with realtors in-person and online can help you build these kinds of relationships over time. Relationships take time to build, but if you start networking with realtors when you’re young, you can build a solid circle of support over time.
You can network with realtors at industry events, workshops, seminars, and even in social media groups.
Developing relationships with realtors can help you get some of the best deals before they’re even advertised publicly. These deals can sometimes save you tens of thousands of dollars and help you earn much higher profits.
Don't Get Too Deep Into Debt
Many “get rich quick” real estate investing programs encourage you to take huge risks by borrowing all the money for your first property.
The problem with going deeply into debt is that there’s a big learning curve when it comes to real estate, and like anything else, some of your best learning will come from the mistakes you make along the way.
And making a mistake with your own money is bad enough, but experiencing a failure that leaves you hundreds of thousands of dollars in debt can be life-altering.
Instead, work toward paying for your first property in cash, and consider investing in real estate portfolio funds as you save for your first building. Portfolio funds are a low-cost way to invest in real estate that allows you to learn the market and even collect dividends along the way.
Real Estate Investing For Beginners – Get Started
Real estate investing for beginners can be daunting so hopefully, this guide prepared you for the first steps which are always the scariest. The most important thing is to remember that real estate investing isn’t gambling and with the right preparation and insights you can minimize the risk. So always keep all things in check.