Real estate offers some tremendous opportunities for long-term wealth creation, and many people are catching on. Some 85% of millennials now believe that real estate is a good investment, and for good reason. Millennials have seen this asset class bounce back following the recession and are drawn to the benefits that come from owning a tangible asset. Owning real estate, and in particular, rental property, not only gives you access to an asset that offers long-term benefits like asset appreciation and equity growth, it also offers immediate returns in the form of cash flow as well.
If you’re one of those who’s ready to leave the sidelines and start investing, what should you do? How do you get started? How do you pick a strategy and prepare yourself for uncharted territory?
In this article, we’ll answer all of your questions on real estate investing, and show you how you can go about starting your investment journey. We’ll explore different investment strategies, separate fact from fiction, and highlight what steps you can take to set yourself up for success as a new real estate investor.
Real Estate Investment Myths
You never know what tales you might encounter when you’re beginning to research real estate investing. It’s good to learn, unlearn, and relearn some of this information now. In particular, it’s important to combat some big myths that are out there. Let’s take a look at a few of the most common real estate myths now.
- Myth #1: You need access to significant capital to get started in real estate investing.
One of the popular myths about real estate investing is that you need a good chunk of money to get started. While you should be financially solvent, you don’t need to be wealthy to invest in real estate.
If you want to buy a rental property but you don’t have the capital to buy with cash, don’t worry. The great thing about buying a house is that, in most cases, you can finance it. In fact, financing a property is one of those benefits that’s often talked about but is easily misunderstood. Financing allows you to use the concept of leverage to buy the property, and start generating returns. All you need to do is pay a small percentage of the property’s price as a down payment. Even though you’re only putting down a small percentage of the property’s value though, you’ll still be able to generate returns (both cash flow and appreciation) on the value of the entire asset–leverage allows you to grow your investment faster than you’d be able to on your own.
Want to start investing but find yourself with little access to excessive funds? Check out our article on investing with limited funds to see how you can get started.
- Myth #2: It’s best to invest in cities.
Want to invest in real estate? You’ll want to pay close attention to the housing market. Housing markets vary considerably, and you can gauge the health of a market by looking at factors like economic growth, housing price growth, and population growth. See the Renters Warehouse Research Center to access this data, and more.
The decision to invest in cities or suburbs depends on your strategy and investment preference.
Although investing in cities may seem lucrative, a closer look at the numbers can reveal a lot of things you won’t see from the sidelines. Most urban areas are hot, but this means that competition for housing is high and housing prices are too. Due to increased expenses, profit margins are often lower as well, even through gross incomes might be higher.
Alternatively, investing in suburbs might prove to be even more profitable. These days, many urban dwellers are migrating from congested cities to spacious suburbs. These secondary markets are often great places to invest in rentals as cash flow tends to be higher.
- Myth #3: Real estate is risky.
Sure, some types of real estate investing can be risky. For instance, if you invest in property sight unseen or fail to research the local market conditions before you buy. But if you put in the time and effort to educate yourself and do your research, the risks can be greatly reduced or eliminated altogether. And when you compare real estate with investing in stocks, real estate is much less volatile.
Moreover, when you consider some of the so-called risks that are attached to real estate investing, you’ll realize that most of them are able to be mitigated by taking action ahead of time. For example, you can take steps to reduce vacancy rates and lower the number of emergency repairs that you have. You can also sidestep many common problems often associated with renting if you’re proactive with management and tenant screening.
- Myth #4: Owning rental properties is tremendously stressful.
Forget what you’ve heard about owning rental property being stressful. The truth is, it doesn’t have to be.
Sure, when it comes to successful investing, there’s a lot that you’ll need to do up front in order to set yourself up for success. But with the right approach, investing in rental property can be a great way to generate passive income.
Real estate investing requires you to be more proactive about your personal learning. You need to ensure that you have a solid plan for investing in rentals that will help you to grow your portfolio and reach your big-picture goals. Likewise, you’ll also need to ensure that you do careful market research on a local level, to see how an area checks out as a viable market to invest in. In most cases, you’ll want to look for an emerging market; one that’s showing signs of future growth. Then you’ll need a plan for management and will want to outsource the work to a professional property manager. Real estate investing isn’t always easy, but with the right approach it can be stress-free. But you’ll need to lay the groundwork ahead of time in order for this to happen.
Real Estate Investment Strategies Investors Need to Know
Now that you’ve had a chance to unlearn some of the common myths about real estate investing, it’s time to choose your path to wealth. In this section, we’ll discuss different investment strategies in real estate investing. Let’s dive in!
1. Fix and Flip Investing
Fix-and-flip investing is a real estate strategy that requires you to buy a property in disrepair and below market value, repair it, renovate it, and sell it at the current market value. Although the fix-and-flip strategy can be highly profitable in the right location and during the right economic conditions, it comes with its own set of risks. It can also be stressful and time-consuming if you don’t know what you’re doing. You need to buy, repair and sell the property within a short period (between 3-6 months) to maximize your profit margin.
To be a successful home flipper, you need to look for ways to find an off-market property. You need a financier ready to finance the purchase. You also need a team of contractors who can handle the renovation project within a short period. After the repairs, you’ll need to get the property to market and sold as quickly as possible.
This means that as a fix-and-flip investor, your level of profitability depends on your experience in the industry, management, and marketing skills, as well as your connection with good (skilled and affordable) contractors. It’s also contingent on you timing the market perfectly.
2. REITs or RELPs
If the fix-and-flip investment strategy seems too complex for you, check out a RELP.
An RELP is a private investment group where investors pool money together to invest in the purchase, development, and lease of investment property. When you invest in RELP, you can choose between being a general partner (GP) and a limited partner (LP).
The general partners (GP) handle the management of the business activities. They’re usually property managers, real estate development firms, and so on. GPs take full liability if something bad happens. The limited partners (LP) are usually financial partners. They provide funds for investment returns. The LPs only take responsibility for the amount they invested in the partnership.
While RELP looks similar to real estate investment trusts (REITs), there are significant differences. Many REITs are publically traded on the U.S. stock exchange, but RELP is just a private partnership between investors.
REIT income is perpetual (until investors sell their stock), whereas RELP income is for a short period (usually determined by the GP). And finally, REITs shares can be sold anytime, but RELPs are not redeemable until the predetermined liquidity event.
3. Real Estate Investment Groups (REIGs)
REIGs can be thought of as small mutual funds for rental property. Here, you don’t pool money to buy and develop a property like in RELP, but you buy units of an already completed project, and the company manages it on your behalf. The property lease will be in your name instead of the general partner’s name.
Just like build-to-own investors, a company builds several real estate properties with its fund. And after the completion of the project, they allow investors like you, to buy one or more units of the property. They’ll manage the properties on your behalf and pay your rental income after deducting their management fee.
Like the rental property strategy, you own your rental property and earn rental income, but the company manages the units on your behalf. Keep in mind though, that the success of an REIG is largely dependant on the decision-makers. If there are inexperienced people in charge, then the risks could outweigh any potential rewards.
4. Wholesaling
Wholesaling is negotiating the contract of sales/purchase between the seller and the buyer. When you work as a wholesaler, you don’t buy properties; you just serve as the facilitator of the home buying process. Your job is to sell a property to a buyer on behalf of the seller.
As a wholesaler, you have to enter into a contract with the owner for the right to sell on their behalf for a certain period and at a certain price, and find a buyer willing to buy the property at a higher price. Your profit will be the difference between the contracted price and the price you sell.
For example, assuming a property is to be sold at $300,000, you can enter into a contract with the seller to sell on their behalf in three months. Once you sign the contract with the seller, you can look for an interested buyer and sell the property for $320,000. Your profit will be $20,000 (the difference between the price you sell and the seller’s price).
The benefit of working as a wholesaler is that you can start with zero funds. So, if you’re a beginner investor with an enormous network of investors, wholesaling can help you get your foot in the door. But with this strategy, your income will be unpredictable. Nonetheless, this strategy allows you to learn on the job without great risk.
5. Rental Property Investments
Rental property investing, also referred to as buy-and-hold or Rent Estate®, requires you to buy a property (single-family, multi-family, condo, etc.) and hold it for several years to rent it out. When you follow this real estate investment path, you become a landlord. This strategy is one of the most lucrative and stable investment strategies in real estate.
Long-term vs. Short-term Rentals: Which is Better for Investors?
The rental strategy is divided into two opportunities: long-term and short-term rentals.
- Long-term rentals are conventional rental property investments. With rentals, you have a range of options that you can choose from, multi-family, duplexes, or single-family units. With long-term rentals, you can choose your market to invest in, or invest in multiple properties in different markets to diversify your investments. With rental property, you can also set your investments up so that you can earn a passive income by outsourcing to a property manager. The great thing about long-term rentals is that they offer cash flow, equity growth, and tax breaks. In most markets, they offer solid appreciation as well.
- Short-term rentals, usually referred to as vacation rentals, are a relatively new rental strategy that started to take off more than a decade ago with the advent of Airbnb. Even though it’s still new, this short-term rental strategy can be profitable in the right market, but it does have its caveats. You’ll need to ensure that you’re investing in a property that’s in a popular vacation market, and plan for vacancies during the off-season times. You’ll also have higher maintenance costs and will need to pay for a cleaner as well.
6. Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are investment companies that buy, build, and manage commercial properties like malls, condos, data centers, self-storage facilities, and so on. They’re highly liquid but volatile and managed by professionals for maximum ROI. Moreover, they offer you access to invest in properties you may not have the financial capacity to invest in on your own.
Investing in REITs is similar to buying a company’s stock, which is managed by the U.S. security and exchange commission (SEC). Unlike other alternative strategies previously mentioned that require investors to pool their funds together, you only need to buy a share of a REITs company on the stock market to invest, and you’d receive dividends regularly.
Looking for more investment tips? Check out our article on comparing every property investment opportunity!
7 Tips to Get Started With Investing
Before we leave you to explore this fresh path of real estate investing, we have some important advice for you; here are seven tips to prepare you for the journey toward your financial freedom.
1. Familiarize Yourself With the Local Market
As a real estate investor, one thing you need to know is that real estate differs from one state to another. Therefore, while you need to have a general understanding of the nation’s real estate market, you also need to understand what’s happening in your local market as well.
You need to familiarize yourself with the trends in your locality. Know the workable analysis, learn about your state rules and regulations, and understand the local industry standards. Crunch the numbers and find the relationship between the value of properties and location. With this knowledge, you’ll be able to find a good property, for a good price.
Check out our article on choosing the right market to invest in, for more strategies related to local trends.
2. Brush Up On Your Knowledge
“Knowledge is power” is especially true in real estate investing. As you’re getting started as a property investor, invest in your personal education and knowledge. Learn as much as you can. The industry never stops changing, so you also should never stop learning.
Read books, ask experts questions, and listen to podcasts. Learn about negotiation, marketing, and communication because you’ll need them when you’re making an offer. Study and understand how tax, insurance, and the local and federal laws work. Study the different investment strategies in real estate, property management, and home improvement.
3. Avoid Starting With Fix-and-Flip Investing
Since you’re just starting out, consider avoiding the fix-and-flip investment strategy. You need to have a deep understanding of property analysis to calculate the below market value and the after-repair value of properties. You also need to understand the intricacies of this strategy and be well-versed in your local market trends.
Apart from learning the intricacies of the fix-and-flip strategy, you need an extensive network of investors, real estate agents, contractors, and financiers. Your connection with these industry experts will determine your profitability. Even if you prefer the idea fix-and-flip strategy, tread carefully. Learn the ropes, acquire knowledge, and build your team first before you go all in.
4. Develop a Thorough Strategy
Right from the start, you need to develop a plan for your investments. Think long-term and build a road map for achieving your goal. Remember that you can only track what you can measure.
What do you want to achieve? How do you want to go about it? What are your investment strategies? What’s your exit strategy? What’s your investing budget?
These questions will provide you with a structure of what you want to achieve. And, by this, you can build a roadmap and set an actionable and achievable goal. Knowing the end from the beginning will help you track your workflow.
5. Don’t Be Emotionally Attached to a Deal
As you’re dipping your feet into the real estate waters, remember that you’re investing for a reason—you want to be profitable. Try not to be emotionally attached to deals.
Focus on the numbers. Do your math and never forget to verify the profitability of the numbers, even when the deal looks good. Always do your research. Ask questions from property owners, agents, and neighbors first before you make an offer.
6. Plan Your Finances Carefully
Financial wealth plays an essential part in your real estate investing. So, when starting, plan your finances. Save for a down payment, read and understand tax and insurance law, prepare the documents for a mortgage application, and look for ways to increase your chances of getting a mortgage approved.
Even if you’re an all-cash investor, pay down all your loans and build your credit score. Know what you can afford. It could be embarrassing to discover that you can’t afford to buy a property after making an offer.
7. Know the Numbers and How to Crunch Them
As a real estate investor, you need to understand property analysis and evaluation. When you know how to calculate your cash flow, cap rate, and cash-on-cash returns you’ll be able to run the numbers to ensure whether a property is a good deal.
Moreover, apart from knowing how to perform a property analysis, you should also know the standards that work in your local market. When you have a deep understanding of your local economy, you can work out a workable analysis and evaluate a property correctly.
For more tips on running the numbers for a rental analysis, check out this article.
What’s Next?
Real estate investing is an interesting endeavor. Apart from helping you generate passive income, it’s a potential path to financial freedom as well. While it could look overwhelming when you’re just starting, as long as you take the time to learn, relearn, and, yes, even unlearn certain things, you can find a strategy that will work in your favor and start building your path to wealth.
Want to get started in real estate investing? Be sure to check out your FREE guide: Spotting a good investment property. See how you can spot potential rental properties that represent a great investment.
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