Are you looking for a guide for real estate investing for beginners? CONGRATS! You have taken your first steps in your investing career!
Before my wife and I got married, we each owned a house. After we got married, we didn’t think we could sell one of our houses. So, we rented out my house.
Before we continue, I want to say that at this time, I knew nothing about being a landlord and nothing close to real estate investing. If only I knew what I know now, I would have already been a millionaire!
There is a saying, “Don’t reinvent the wheel.” A new investor doesn’t have to repeat the same mistakes. A new investor can quickly catapult themselves to success by learning from the experiences (good and bad) of other investors.
Although you may not be actively acquiring a property, you can be actively participating! Like a pencil, you can continually sharpen your knowledge, network, and skills!
Jump ahead to
About ten years ago, my wife said she wanted to buy a condo downtown and rent it out. I quickly disagreed and told her that I did not want to fix the toilets.
With the first real estate property I described earlier, I would feel disappointed that I would only cashflow only $100. I also frequently worried if the tenants were going to destroy my house.
I did not understand real estate back then. All I focused on were the potential problems. All I cared about was profit from the monthly rent.
I didn’t have an investor mindset.
According to The Millionaire Real Estate Investor By Gary Keller, there are four different investing attitudes: observing, speculating, collecting, and investing.
At that time, I was just an observer. An observer wants to invest, but because of fear, they buy nothing.
On the other hand, an investor looks for opportunities, reduces financial risks, and takes action!
Beginner investors also need to understand that investing is not a get rich scheme. Buy & Hold Investing, in particular, is building wealth over the years!
Imagine having all your properties paid off! The rental real estate income from multiple properties will passively provide your income, your retirement, and cover expenses!
Ways To Invest In Real Estate
There are many real estate strategies. Do you want to be an active investor or a passive real estate investor? Do you want to be hands-on or hands-off?
Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates, and purchase various income-generating properties. These types of properties include, but are not limited to, apartment buildings, office spaces, hotels, medical facilities, and the like.
Publicly traded REITs pool together the money of numerous investors to operate and acquire properties. Investors receive a share of the income produced by properties owned by the REIT.
However, a REIT is not the same thing as real estate syndication. Although syndication pools together money of multiple investors, the investment focuses on only one investment property.
This way of investing is purely passive. It avoids the work of searching for properties, handling construction and repairs, and managing tenants.
The usual minimum for a person to start investing in a REIT ranges from $1,000 to $20,000.
However, this type of real estate investing does not allow investors to benefit from their property’s appreciation because they do not own property.
House flipping is a good option for an investor looking to profit in a relatively short amount of time. This investor needs to be an active investor.
Flipping is when an investor acquires a property, makes improvements, and sell it for a profit.
Notice how flipping is different buy & hold investing. Buy & Hold investing in building long term wealth. In contrast, flipping can supplement or even replace ordinary income.
The key to successful flipping is to purchase a very undervalued property, which is usually a foreclosure. This strategy allows for larger margins of profit when selling the improved property.
The difficulty is the supply for undervalued properties are low.
However, the good thing about low supply in the market is that owner-occupied home buyers are willing to pay top dollar for a property. This low supply allows a flipper to list their property for a dollar amount, ultimately increasing their profits!
Interested investors should note that if a flipper sells their property less than a year, then the profit is considered ordinary income and will be taxed as short-term capital gains. In contrast, a property taxed on long-term gains receives a better taxable bracket.
Buy & Hold
Buy & Investing is when an investor becomes a landlord to tenants. The tenants pay down the debt and additional expenses associated with the property over time.
The cashflow produced by these investment properties depends on the monthly expenses. The monthly expenses consist of mortgage, taxes, insurance, repairs, etc. The higher the monthly expenses, the lower the monthly cash flow from the rent.
This type of investing can be active depending on how much improvements are necessary along with managing tenants.
However, it can be passive if an investor buys a turnkey or a rent-ready investment property. The investor can also hire a property manager to market the property and manage the tenants.
Because the investor owns the property, the investor can also benefit from its real estate appreciation. The appreciation of the properties will add to the net worth of the investor. Owning your property is different from being part of a timeshare, which is why some people are trying to get out of a timeshare.
Furthermore, the monthly expenses of rental property investing are tax deductions lowering the investor’s taxable income.
They have multiple properties that cashflow can replace or supplement an investor’s ordinal income. On the other hand, investors can use this type of investment for retirement.
Compare a retirement account in the stock market versus the income produced by a rental property.
The amount a person can withdraw from their retirement account in stocks or mutual funds depends on how much they could save up. The draw usually will not match their pre-retirement income.
On the other hand, the cash flow from a rental property will remain stable or increase over time.
An investor can buy land and hold onto it until they can sell it for a profit. Another strategy for land investing is an investor can do seller financing with a buyer. This type of investing is also passive.
Seller financing is when the seller acts as a lender. The buyer pays a down payment and makes monthly payments to the landowner until paying down the agreed-upon amount.
The difficulty of land investing is coming up with comparable values to determine market value. Also, unlike Buy & Hold Investing, land investing does not cash flow.
A note is a promissory note that contains the terms of a loan, such as a loan amount, interest rate, length of the loan, payment amount, etc. Usually, investors are buying real estate properties through a lender who creates a note with the borrower.
A note investor acquires the ownership of the note at a fraction of the principal balance. Afterward, the borrower’s payments transfer to the new owner of the note (i.e., the investor).
As a REIT, this type of investing is also passive. There are no maintenance expenses or tenants to manage.
However, because a REIT pools together other investors’ money, there is a lower entry barrier. A note investor may require more upfront money depending on the remaining principal of a loan.
Real estate Crowdfunding
There are real estate crowdfunding platforms, such as Fundrise, that can allow anyone to get involved in real estate. This kind of investing is passive.
However, there is no guarantee on your return because you don’t know all the details of the property you are funding.
Whether you’re looking for your first real estate deal or your fifth deal, you can always stay active by educating yourself through reading. Here are the real estate related books I recommend for getting started in real estate investing.
Rich Dad Poor Dad By Robert T. Kiyosaki
Rich Dad Poor Dad was the book that changed the way I understood money and wealth. The author emphasizes having more assets than liabilities. Assets generate income, whereas liabilities are debt that causes someone to lose money.
Ask any real estate investor if they have read this book. 99% of the time, they have read this book!
The Millionaire Real Estate Investor By Gary Keller
The Millionaire Real Estate Investor is an inspiring book that has identified multiple common models used to create real-life millionaire real estate investor. These are the models:
- Net Worth Model
- Financial Model
- Network Model
- Lead Generation Model
- Acquisition Model
The E-Myth By Michael E. Gerber
The E-Myth is more of a business book than a real estate book. It paints a picture of why many businesses fail. It tries to debunk the myth that hard work and hustling is necessary for success.
Instead, it promotes working smarter rather than working harder as the key to success! A business owner should create systems to manage their workload correctly.
Remember, real estate might be fun. But treat it like a business and not a hobby!
Know Your Finances
Before investing, you should know your financial situation. Do you know where every dollar of your income goes? Do you have a lot of liabilities or debt? You should ask yourself, “Am I able to save up for a down payment and cash reserves?”
If you’re getting started in real estate, then most likely, you will be financing your real estate property with a bank. Banks usually require a 20% down payment for investment properties. This down payment amount allows an investor to avoid private mortgage insurance (PMI).
However, there are “No Money” ways to invest in real estate. Check out my post 4 “No Money” Ways to Invest In Real Estate.
There are ways to save $10,000 to contribute toward a down payment. However, my primary method for a down payment and paying for rehab expenses is through a Business Line of Credit against my assets, including a primary residence.
Investors utilize cash reserves to make repairs to your property or make payments toward the mortgage due to vacancies.
These cash reserves can prepare you mentally and emotionally for any unanticipated mishaps in the future. I recommend a beginner real estate investor hold at least three to six months of rent for each property in cash reserves.
A portion of the rent should go towards repairs, vacancies, and “big-ticket” expenses (i.e., furnace, roof). Check out my post “How To Calculate Cash on Cash Return” to see a list of costs.
Create a Core Real Estate Team
Start networking through friends and attend your local REIA meetings to build a core team. You can leverage the expertise and experience to achieve your goals in a shorter amount of time.
In my post 8 Important People For Your Real Estate Investing Team, I go into more detail. Below are the “team members” you should be looking for:
You will need a supportive spouse to help you overcome those overwhelming moments. They are the first person you need to include in your team!
Real Estate Agent
A real estate agent can help you find a property that matches your search criteria. They also have access to the Multiple Listing Service (MLS), which is a listing of properties that are for sale.
A local in-state banker can provide more flexibility than a banker from one of the “big box” banks. Build a good relationship with a local banker, since a majority of the time, you require financing.
Insurance brokers are like a middle-man that will set up a policy with one of the “big box” companies. If you ever need to switch insurance companies, your broker will do the research and find another provider to meet your needs.
If you had to evict one of your tenants, it would be beneficial to have a real estate attorney.
Also, as your debt service goes down, and you gain more equity in your property, you should consider hiring an attorney to put your properties under an LLC.
Certified Public Accountant
A CPA can help maximize your tax deductions. That is one of the benefits of real estate; Expenses are tax-deductible, which can lower your taxable income.
A mentor is someone who has experience as an investor and someone who can listen. They can help when you need to feel insecure or need some guidance. Also, they can be one of your best real estate team members.
Understand How To Analyze A Deal
While you’re building up your down payment and cash reserves, you can still practice analyzing properties that are for sale in your local real estate market.
Visit an online real estate marketplace to see what properties are currently for sale. Research the current rent in those areas. Determine if there are any of them are good deals by using some of the methods below!
After a couple of practices, you will be able to determine which areas in your local market cash flow better than others!
The cash-on-cash return (CoC) is the ratio of the net rental income for the year to the initial investment. The net income is the difference between gross rental income and expenses. Net rental income is also known as cash flow.
Cash on Cash Return = (Monthly Income – Monthly Expenses) / Initial Investment
Monthly expenses consist of mortgage, taxes, insurance, repairs, property management, etc.
I aim to cash flow at least $100 and have a cash-on-cash return of 10%!
Check out my post on How To Calculate Cash on Cash Return, where I explain the calculations in detail. You can also get a FREE worksheet as well!
The BRRRR method is one of the real estate investing strategies that allow investors to recoup their initial investment (i.e., down payment, rehab expenses) and put it towards another property.
The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat!
- Buy: Purchase a property below market value.
- Rehab: Make improvements to the property to increase the market value
- Rent: Starting renting the property and pay down the loan with the rent
- Refinance: Have a bank reappraise the property and perform a cash-out refinance on the property. The cash from the refinance pays back the investor’s initial investment.
- Repeat: After an investor recoups their down payment, the money can go towards the next property
Check out my post on The BRRRR Method: How to Do Super Simple Calculations, where I walk through an example deal. I also included a calculator you can use to analyze any BRRRR deal.
One Percent Rule
The one percent rule is a quick estimation to see if the purchase price works with the potential rent. This estimation doesn’t consider specific monthly expenses, such as property management company, insurance, taxes, etc.
In the example below, the purchase price is $150,000. The one percent rule calculates that the rent should be about $1,500.
1% Rule = Purchase Price x 1% = $150,000 x .01 = $1,500
If the purchase price is $170,000 and the potential rent is $1,500, then the one percent rule does not qualify this as a good deal.
Online Real Estate Marketplace
Roofstock.com is an online real estate marketplace for buyers of investment properties, such as residential and commercial real estate. Receive alerts on office buildings, retail spaces, and multi-family properties that match your crystal clear criteria and offer online.
It’s another way to find real estate opportunities for your next real estate projects.
Do I Need A Real Estate License
You don’t need to become a real estate agent to start investing in real estate. One of the benefits of having real estate is having access to the Multiple Listing Service (MLS).
The MLS is a database of properties available for sale. Numerous online real estate marketplaces source their data from the MLS.
However, a real estate agent on your team can easily access the MLS for you.
Real estate investing is a great way to make money. There are different types of strategies for new investors, such as house hacking and owning rental properties.
No matter what investment strategy you choose in this beginner’s guide, you’ll always be making money with a great deal.
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