Find out when it’s time to begin investing in real estate and how to get started with your first property. Learn what it takes to become successful and what to know before you get started.
Investing in real estate can provide you with a passive stream of income very quickly.
So how does a beginner get started investing?
Real estate may be the best type of investment out there, so find out whether it’s the right path for you in this guide to real estate investing for beginners.
What is Real Estate Investing
When we use the term “real estate investing,” it refers to a specific approach that does not include flipping and reselling for profit, which are considered “real estate trading” rather than investing.
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.
“Most millionaires I know made more money from owning real estate than any other investment. Real estate consistently increases in value over time and outperforms other investments.”
Fourth, real estate investing also gives you a tangible, physical asset that you own – whether or not you’re collecting an income from it.
Finally, real estate investing can make you very, very wealthy.
This doesn’t mean that you’re guaranteed to make a profit or that real estate is not without risk.
However, renting homes or commercial property puts money in your bank account (almost) immediately, and the passive income helps free your time to generate more wealth.
When To Start Investing In Real Estate
Before you purchase your first property (or make any other kind of investment), you should get your personal finances in order.
Before you begin investing, you should complete the following personal finance steps.
- Build a short-term savings fund of $2000 (for small investments).
A $2000 savings fund will help you get through many of life’s small emergencies, such as car maintenance, phone repairs, and medical copays.
However, you’ll need a complete savings fund, equal to six months of living expenses, before purchasing your first property.
You CAN invest in real estate portfolios, though!
Once you’ve built a short-term emergency fund of $2000, you can begin investing on a small scale while continuing to build your full savings fund.
For example, you can buy into a collection of real estate properties through Fundrise for as little as $500.
Fundrise is a great way for beginners to gain experience with real estate investing on a small scale, until you’re ready to purchase your first property.
Before you invest in real estate, make sure to set aside an emergency savings cushion for personal emergencies.
- Build a complete emergency savings fund equal to six months of living expenses.
Before purchasing your first property, you’ll need a full emergency savings fund equal to six months’ living expenses.
An emergency savings helps prevent you from losing your properties and your home, if something unexpected (such as a medical emergency or pandemic lockdown) prevents you from earning an income for a few months.
- Pay off or refinance your high-interest debt.
High-interest debt, such as credit card debt and student loans, is expensive and can drain your earnings for a long time.
Before making any investments, pay off your high-interest debt or consider refinancing your credit cards, student loans, and other debt for lower interest rates.
- Protect your assets.
Before you begin any type of investing, you’ll want to ensure that you have a will in place and a life insurance policy to protect your family in case something happens to you.
Before you purchase your first property, you should also retain an attorney to protect your wealth.
A good attorney will review your business transactions and contracts to ensure that your wealth and future are protected.
- Allocate your earnings.
Once you’ve saved $2000 for emergencies, you’re ready to begin investing on a small scale.
At this point, you’ll allocate your earnings to a portion of each of these categories:
How you allocate earnings depends on your situation.
For example, if you have a family with children, we suggest you follow the 75-15-10 plan = 75% spending, 15% investing, and 10% savings.
Or, if you’re younger and have no children or major financial obligations, you might allocate your earnings into a 50-30-20 plan.
However you allocate your earnings, you can save the investment portion to help purchase your first property, or invest it in real estate portfolios such as those on Fundrise.
What it Takes To Get Started In Real Estate Investing
While real estate investing provides many advantages, such as passive income and tax breaks, it can also pose a challenge for people wanting to break into investing for the first time.
To determine whether real estate investing is right for you, consider some of the skills and abilities you’ll need to make it profitable.
When you buy your first property, you’ll most likely fund it by paying cash, combining a loan with a large cash down payment, or finding investors to fund it for you.
Skills And Knowledge
You’ll need more than money to make everything come together smoothly for your real estate investments.
For example, communication skills, industry knowledge, and organizational skills are three things that will help you succeed.
Communication and leadership skills help you build successful relationships with real estate agents, property managers, construction workers, and tenants.
Your communication skills will also assist you with networking and negotiating to help you find the best properties at the best prices.
In real estate, excellent communication and leadership skills can significantly boost your profits.
Knowledge of the industry, including local markets and industry trends, can help you make better choices when it comes to investment properties, placing tenants, and hiring team members.
Organizational skills are a must in real estate since you’ll manage teams, investments, tenants, and scheduling.
Fortunately, you can hire a property manager to help you with many of the responsibilities, and an attorney to supervise your transactions. But you’ll still need strong organizational skills to keep your teams, tenants, and properties running.
Getting started takes a bit of time, but not too much. In the beginning, you’ll study the industry, meet new people, take more time than usual to choose properties and tenants.
As you become more experienced and knowledgeable with the ins and outs of real estate investing, you’ll spend very little time on your investments (assuming you hire a property manager), leaving most of your time free for other pursuits.
What to Know Before You Begin Investing
Before you purchase your first property, there are a few things you’ll need to know.
How To Spot 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.
“I only buy certain types of properties, generally multifamily ones in upscale locations that provide consistent cash flow and great potential for future appreciation. I stay away from low-income areas and single-family homes. But even those assets are probably a better place to store your money than letting cash depreciate while sitting in the bank!”
How To Spot A Bad Deal
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.
Remember the Dowisetrepla episode of How I Met Your Mother — when Lily and Marshall bought their first home in an “up-and-coming” neighborhood, only to discover “Dowisetrepla” stood for “Down Wind from The Sewage Treatment Plant” !?!
The HIMYM “Dowisetrepla” episode is a great example of why your relationships with agents and your knowledge of local markets are critical to successful investing.
How To Estimate Your Costs
Estimating your property costs helps ensure that you create an extra stream of income from your properties, instead of an extra stream of debt!
For example, before purchasing a property, you’ll want to consider the following costs:
- Maintenance, repairs, and upgrades
- Attorney’s fees
- Operating expenses
- Property taxes
After you pay all the property’s monthly and annual expenses, will you still earn a profit?
There’s no one simple answer to that question. Any investment is a risk, and real estate is no exception.
But, the more you learn about the real estate market and the better you understand the market, the closer you will get to choosing properties that are most likely to earn a profit.
How To Prioritize Your Goals
There’s more to the real estate market than simply buying and selling properties.
For example, 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.
Breaking Into Real Estate Investing
Real estate investing is an excellent way to quickly generate a passive stream of income.
Before you purchase your first rental property, make sure you’ve got your personal finances in order, develop the skills you need to succeed, and gain a solid understanding of how the market works.
If you want to break into the real estate industry, but don’t yet have all the cash, knowledge, and personal finance achievements in order — consider investing in a portfolio of properties through Fundrise!