“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.” -Andrew Carnegie, billionaire industrialist
What’s your idea of financial freedom?
Maybe it’s enjoying a long vacation in the Caribbean, or spending half the year skiing in the mountains. Maybe it’s a scaled-back work week, being able to work part-time, while you spend the rest of your time with your family or pursuing a hobby that you enjoy. Or maybe it’s retiring at the age of 40 and setting out on a great adventure to travel the world.
The definition of financial freedom will look different for everyone, but for most this achievement means reaching a point where you don’t have to worry about finances and knowing you have the wealth to support yourself and your family under any circumstances.
While there are many different routes that you can take to grow your wealth and find financial freedom, one tried and true method is none other than real estate investing.
Real estate is an asset class that’s long been used as a means to grow wealth. It offers a number of benefits –both immediate and long-term. Additionally, with real estate –you get the chance to use leverage (that is, someone else’s money) to grow your wealth. That’s something that other investments just don’t offer.
Long-term, real estate can be a good hedge against inflation –and when structured right, it can even help to protect against any temporary fluctuations in the market. Housing prices are less tied to the stock market; making it a great way to diversify a portfolio that may be too stocks and shares-heavy –like most 401(k)s are.
But when it comes to real estate investing, where do you start? How can you begin your venture into real estate investing in a way that will offer viable returns and help you to reach your goals of financial freedom?
In this article, we’ll take a look at what you can do to begin, and get there faster.
Set Clear Goals
To begin this journey, you must first decide what financial freedom looks like to you. Start by assessing your long-term goals, and asking yourself where you’d like to be in ten, twenty years’ time. For some investors, this means connecting real estate investments with specific life goals; so for example, one property can be used to fund your child’s education, and one can be your “boat fund.” Or, you could set a goal (early retirement) and assess how many properties you will need to achieve that goal, and work backwards from there, putting a plan in place to help you make it happen.
Once you have started answering these questions and have a better idea of what you’ll need to invest in to help you get there. Of course, setting goals without a plan on how to achieve them won’t work in real estate, so that’s where the next step comes in.
Create a Plan
Next up, you’re going to want to create a plan to get there. This means determining which type of property you’re going to invest in, and what your strategy will be (cash flow, appreciation, or both?). Will you be investing in value-add properties, like fixer-uppers? Or purchasing turnkey rentals that are ready to go? You’ll also want to determine what type of returns you’re looking to generate. Are you hoping for an 8% yield? Or 10%? Or higher? Properties vary widely in terms of the type of returns that they offer, so when assessing potential investments, you’ll want to figure out what a property’s cash flow will be, and then run the numbers to see what type of yield you’ll generate as a percentage of the money invested. This approach will allow you to accurately assess the viability of any property in question, which means you’ll be able to ensure that you’re not tying up your money into something that won’t produce the type of returns that you’re looking for.
You’ll also need a plan for financing. Many first-time investors obtain conventional financing through a bank or other lending institution, but once you add a few properties to your portfolio, you may find it better to go for private lending or even hard money loans. There are plenty of different ways that you can get started. See: 30 Tips for Financing Your First Investment Property.
Look Into Your Options
There are a number of different real estate investment strategies out there, and different types of property that you can invest in, from single-family rentals (SFR), to duplexes, and multifamily (apartments). Then there’s commercial real estate, which is a different ball game altogether! There’s also the option of investing in REITs, which allows investors to take a hands-off approach, while still diversifying and investing in real estate.
Here’s a rundown on the different types of real estate investments:
- Vacation Rentals
Airbnb and short-term rentals can be a good investment, but they carry a great deal of risk as well. As we’ve seen in recent months, stay-at-home orders can be devastating on the vacation industry. Short-term rentals have been especially hard hit. Demand for these properties also tends to be seasonal, and you’ll want to ensure you’ve factored in higher vacancy rates. Additionally, there are a number of rules and regulations for these rentals that vary by state, and city, so you’ll want to ensure that you stay up to date on all of them.
- Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is a company that operates income-producing real estate. These are a good option for some investors, since the buy-in is lower than with traditional real estate, and they’re an easy way to add some real estate to your portfolio.
- Commercial Real Estate
Commercial real estate includes properties such as retail buildings, warehouses, and offices. There can be good financial returns with this type of investment, but often, there’s a great deal of risk as well. This type of property tends to be especially hard hit during an economic downturn. There’s also greater liability with these properties, so you’ll want to ensure that you have a good insurance policy in place for these buildings.
- Fix-and-Flip Properties
The fix and flip option has gained popularity over the years and can be a great option for some. Fixing and flipping, as the name suggests, involves buying a property that’s in need of some upgrades or renovations, performing the work, and then selling it. The idea is that you will make a profit on the sale and be able to continue investing in other properties. While this is a great option for those who are able to perform repairs themselves or who have a great contractor on speed dial, for the unprepared, it can end up being a costly endeavor.
Some experts recommend never paying more than 70% of what the house will be worth after the cost of repairs. This is known as the After Repair Value (ARV). This will help to minimize risk, and keep you solvent if the market experiences an unexpected downturn.
- Rental Properties
Owning rental property can be an excellent long-term investment strategy. Rental property offers a number of benefits, including immediate cash flow, and long-term appreciation as the property (ideally) appreciates in value. It also allows you to experience equity growth as you –or, your tenants pay down the mortgage.
Owning a traditional rental in some markets can also offer you a high return on investment as well.
Here are two popular strategies for investing in rental properties:
- The BRRRR Strategy
Buy, Rehab, Rent, Refinance, and Repeat. The BRRRR strategy allows you to purchase a property needing some repair, fix it up, and refinance it in order to buy another property. It is one option to help fast-track your portfolio and get you on track to reach your financial goals faster. With this strategy, you’ll want to make sure you run the numbers carefully to ensure that you find something that’s not only priced well, but will generate a profit.
- The Debt Snowball Plan
Once you start, you’ll be able to get the ball rolling with your investments. The debt snowball plan is another method of acquiring rentals and paying down debt. This method requires diligence, but it can be a great way for many first-time investors to get started. With this plan, you use all of the cash flow from your first property, and your job, and any other sources that you have –and channel most of it into paying off one mortgage at a time.
By taking the profits of your first investment and using them to help purchase a second property, you will be able to grow your portfolio quicker and more efficiently.
First-time investor? Read First-Time Income Property Investors, How to Begin, for more tips.
Improve Your Knowledge of Real Estate
Another thing that you can do now is to start growing your knowledge of real estate. While you don’t need to become a real estate agent or accountant, you do need to become fluent in real estate. Get ahold of a few good books on the topic, and start frequenting websites that share information on real estate and investing. Join a couple of forums like Bigger Pockets and r/Realestate, and read what others are saying –or ask your own questions.
There are plenty of online resources available to help you improve your knowledge of real estate and many of them are free. Learning about these things now will help prepare you down the road for when you start to invest, helping you to make smart decisions.
Assemble a Team
Investing in real estate isn’t a one-person job. It’s important that you work to build a network of people to help you. You may be able to oversee your own property –at least at first, but eventually, you may find that outsourcing is the best solution. For this reason, it’s a good idea to factor in the cost of professionals –like accountants, property management, and an attorney –into your costs when running the numbers on a potential property. That way, if you do decide to outsource down the road, there will be room in the budget to do so.
Learn more about developing a team: How to Build a Successful Real Estate Team
Get Your Finances in Order
If you are unable to invest right away, you shouldn’t just sit by idly and wait. There’s a lot that you can do to help prepare yourself for the investment opportunity that is just around the corner.
The most important thing to consider is your current financial situation. Some areas worth diving deep into are your credit score and current debt. While a lower credit score doesn’t make it impossible to invest, it does mean that you might not qualify for the best loan terms possible, and you could end up with a higher interest rate. Generally, lenders will want to see a credit score that’s good or excellent. See steps that you can take to improve your credit score.
You should also start saving up for a down payment, and ensuring that you have full-time employment, or self-employment –and a steady and documented source of income every month. Taking action to stabilize your financial situation now will help you be better prepared when it comes time to apply for a loan and start the investing process. You don’t need an abundance of wealth to start investing, but you need a solid and secure financial foundation.
Regardless of what your goals may be, it’s important to start working toward them now. Start by assessing your big-picture goals and taking stock of your current situation. Then, create a plan; determine what you need to do to get yourself into a position where you can invest.
Growing your portfolio won’t happen overnight, but the sooner you can start, the better off you’ll be. Start by laying the groundwork necessary to invest so that when you’re ready, you can get off to the best start possible. The first step is always the hardest, but now is the time to leap.
Ready to get started? At Renters Warehouse, we offer resources to help new investors. Download your FREE guide: The Stability of the Buy and Hold Method to explore more benefits and strategies. Begin your real estate investing venture and journey to financial freedom today.
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