The Essential Beginner's Guide To Real Estate Investing
People often ask what’s the best way to get started in real estate. There’s plenty of people that have been hanging out on the sidelines, waiting to jump in, but aren’t really sure how to get good enough at the game to win, so they just stay on the bench.
That question, unfortunately, is not an easy one to answer because there are literally dozens of ways to invest in real estate and hundreds, if not thousands of ways to structure deals.
Another major factor is credit, time, and money. Many people find themselves in unfortunate situations where their credit isn’t the best and they don’t have the money to invest and they see real estate as the way out. Real estate is not a get rich quick scheme,it’s a build wealth slowly game. You need decent credit and it takes money to make money. Now that doesn’t have to be your credit or money, but the reality is that most haven’t done the research or taken steps to learn techniques that could allow them to do low or no money down deals. You typically have to partner with someone who is going to rely on your skills, labor, knowledge and/or expertise. So if you have a skill that you can leverage, that’s a great place to start.
A good way to get into real estate with little to money is wholesaling. Wholesaling is when you get a property under contract, but don’t close on it, and you sell the contract to someone else for a profit. Those that have been successful have been able to scale by marketing for properties for sale and investors looking for deals.
I always suggest that if someone doesn’t currently own a home,that they purchase a duplex, triplex, or quadplex with FHA, which would only require 3.5% down. it’s the only way you can get into a multifamily with less than 20% so it truly is an incredible opportunity. You get a taste of being a landlord and you get to live for cheap or even free if the numbers make sense. Not having a hefty rent or mortgage payment allows you to begin to supercharge your saving ability to be able to invest in the next property.
It’s very easy to get intimidated and never start learning or to get overwhelmed once you start learning and to wind up with paralysis of analysis, never doing anything. There are even people that dive head first into investing rather than dipping their toe in the pond first and they have a traumatizing experience that turns them off to the idea altogether.
If you’re one of those spectators hanging out on the sideline, rest assured that there are many ways to get involved. In this article, I will walk you through how to diagnose where you are, what you want out of investing in real estate, and the best way(s) for you to get started.
Here’s a summary of what we’ll cover:
Get a Birds Eye View of Where You Are
Get a Birds Eye View of Where You Are
Identify Your Why
Decide whether or not you want to be “hands-on”
Evaluate Your Risk Tolerance
Decide How Much You Want to Invest
Figure out which Types of Investments you want to Pursue
Takeaways and Recap
Use the New Real Estate Investor Road Map
Download this One-Pager to help guide you through the steps below. There is space to organize your thoughts and write them down. Step 1: Get a Bird’s Eye View of Where You Are
First and foremost, before making a decision to do anything in real estate, it’s important to take a step back and look at where you are in life, your financial journey, and what you are hoping to achieve.
Did you just finish college, are well into your career, retired or somewhere in between? Are you married with children or is it just you?
Are you at a stage where you don’t mind being mildly inconvenienced in your living situation or are you ready to live out your days in your “forever house”? How much money do you have to invest?
What are you hoping to get out of investing? Do you want a one-time returns or are you hoping for smaller on-going returns? Do you need the money to live off now or are you looking to supplement your retirement income? How much would it take for you to become financially free?
Getting a good birds eye view of where you are will help you decide what type of investing you want to do, how much risk you’re willing to take on, how aggressive you should be, how much money you can comfortably invest, what you’re looking for by way of returns, and the time frame you’re hoping for
It’s a lot to think about, but if you narrow down these basics, it will make it much easier deciding how to move forward.
Step 2: Identify Your Why
Because there are so many different ways to invest in real estate, from investing in REITS (shares of a real estate portfolio) to short term rentals (ie Airbnb), from investing in syndication’s (group investments) to house hacking (Sharing a living space), and everything in between, it’s very easy to fall prey to “shiny object syndrome”. One day you want to buy a fancy downtown condo for Airbnb, the next day you look into storage units. Trust me, I’ve been there.
You can make money in almost any real estate investment opportunity, that’s why it’s easy to get swayed by the jaw-dropping story of how someone made loads of money investing in one thing or another. But I would encourage you to filter out the noise for a minute and look within and decide what’s best for you and stick to it for awhile. It’s hard to excel at everything, so work on mastering just one thing before you move on to
the next.
It sounds cliché, but it’s so important to understand your why. Why do you want to invest in real estate? Are you hoping to create passive income so that you can quit your job? Or are you looking to beef up your retirement nest egg? Do you want money now or later?
Are you looking for freedom of time or location? Are you hoping to take advantage of the tax benefits? Perhaps you’ve heard about house hacking and want to give it a try?
Whatever your reasoning, make sure to take some time to gain clarity around what you hope to get out of real estate investing that you’re not getting out of your current investing options (stocks, bonds, CD’s, savings accounts, etc.). This will better prepare you to resist the temptation when shiny object syndrome strikes.
Step 3: Decide How Hands-on You Want to Be
I’m sure you’ve seen all those house flipping shows on HGTV, where they go from a dilapidated dud to a showstopping beauty, complete with a champagne-laden open house. They make it seem so glamorous. They go in with masks, protective eyewear, sledgehammers and you can imagine getting all your frustration out demolishing one of those places. They crawl through moldy spaces with cobwebs and critters. They uncover unexpected repairs. Lots of drama for sure, but in the end, they git her done. And they get the personal satisfaction of being able to say that they turned an eyesore into a work of art.
If the previous paragraph excites you, fantastic. Then perhaps you want to be more of an active, hands-on real estate investor. It can be incredibly gratifying, but it’s often very hard work. And even if you aren’t the one doing all the work, it can be challenging to manage these crews. It’s important to understand that getting into flipping is high risk, high reward and hard work. But if you’re up for the challenge then get to it!
If, on the other hand, that description made you cringe and want to step reading, don’t fret! The world of real estate investing has plenty of options for you too. Perhaps you want to be a more hands-off investor, and are looking for passive investing opportunities.
The decision of LINK whether to be an active or passive investor is an important one, so take some time to think about where you are on the spectrum, given your current life situation and goals.
As I mentioned wholesaling is a good way to get into real estate with little to no money down and without getting your hands dirty in the physical sense, but you could still spend a significant amount of time on the hunt for deals and end buyers. Purchasing a duplex, or house hacking can be a good intro to investing because you are renting out either the other apartment in your duplex or rooms in your house. There will inevitably be repairs and things that come up, but it’s far less daunting than a property that you don’t live in and can’t be around to keep an eye on things. For this strategy you have to be comfortable sharing your living space. This may not be the best option if you have children or you really like your space.
Investing in a syndication (group investment) is a truly passive investing opportunity where you put in the money, you leverage other people’s sweat equity and expertise, and you reap the rewards. Of course, they will get a piece of the returns, but it’s a small price to pay for not having to deal with cockroaches and dirty toilets, don’t you think?
Step 4: Evaluate Your Risk Tolerance
Every real estate investment, along with driving in a car, riding in an airplane, or investing in stocks comes with some level of risk. Heck, even something as simple as walking down the stairs is not entirely risk free.
As with any investment, in real estate there tends to be a correlation between risk and reward. The higher the risk, the higher the potential reward. The lower the risk, typically the lower the reward.
For example, a ground-up new construction project in a seedy neighborhood might come with a higher risk profile than an existing apartment community, whose rents would cover the mortgage and expenses and still provide cash flow.
In real estate, because there are physical assets and paying tenants, there are often ways to mitigate risk.
However, there’s always that teeny tiny chance that you could lose it all. If the thought of losing money makes you nervous and your palms start sweating, take that as a sign that you need to start off slow and with smaller amounts of money. This will help you learn the ropes on a smaller scale and get more comfortable. Your cash returns might not be as big, but you will thank yourself in the long run.
If you are in a position where your world would be completely turned upside down if you lost any amount of money, then you might need to evaluate if investing in real estate is right for you at this time. It might make better sense to focus on building up your cash reserves, and evaluating your overall financial picture before jumping in. Step 5: Decide How Much You Want to Invest
Now that you have a better understanding of where you are, why you want to invest, how hands-on you want to be, and where you stand on the risk/reward profile, it’s time to think about how much you want to invest.
You obviously wouldn’t want to put your entire life savings into real estate, especially not into any one investment. Diversification, even within real estate is important. If you’re just getting started, choose a modest amount that you could afford to lose if things went terribly wrong, or that you could at least afford to live without for a few years.
Unless you’re doing a short-term deal, you should be prepared to have your money invested for several years, so make sure that you’re not investing so much money that you won’t have enough to pay for your groceries next month. You may laugh and think you would never be you, but for many, poverty is just a few paychecks away. Have you built up adequate savings for an emergency?
When looking at investment opportunities, make sure understand the exit strategies, and have a backup exit strategy just in case you ever needed to get your money out sooner than you expected.
Step 6: Decide Which Types of Investments to Pursue
Now onto the fun part. You’ve taken time to reflect on where you are, what you want, and how real estate investing can help you get it. With that settled, you can begin to narrow down the investment vehicles that best fit your situation and goals.
More than likely, you fall into one of these categories:
The Lots of Money / Little Time / Hands-off Investor
The Little Money / Little Time /Hands-off Investor
The Little Money / Lots of Time / Hands-on Investor
The Lots of money / Lots of time / Hands-on Investor
Using these loose categorizations, let’s explore some of the investment types that would fit your scenarios.
The Lots of Money / Little Time / Hands-off Investor
We will start with those who have some money saved. Maybe you invested in stocks or perhaps you have a nice chunk of change in your savings account. You’ve heard about the incredible benefits of investing in real estate - the passive income, the tax breaks, the ability to grow your nest egg rapidly.
We know that you’re a busy person, you don’t have time to do a bunch of the research it takes to be confident investing in real estate, and you certainly don’t have the time to rehab a property or manage rentals.
It seems that there’s a bazillion real estate listings, not to mention deciding on a market. And never mind touring tons of properties with an agent. And it’s not enough to just pick a city in many cases. With changing communities, there is increasing variation in the demographics of a town, they are “block by block”. So one street may be kosher and then just a few streets down is a borderline war zone. Just thinking about it all makes you exhausted.
Recommendation: Become a Passive Investor
If you’re in this group, one of the best ways for you to get started in real estate is through passive investments, either through turn key rental properties or through commercial real estate syndication.
Turnkey Rental Properties
On a smaller scale, turnkey rental properties may be manageable enough for a busy person to handle if they put a property manager in place. Turnkey is exactly what it sounds like; you buy it, and it’s newly renovated or in good condition and is ready to go, with minimal involvement or work needed. It’s important to understand that nothing stays new forever. So will you do some upgrades in 10 or 15 yrs or will you sell it once you’ve “got your money’s worth”.
As a rule of thumb, rentals provide the biggest payoff when kept long term.
Commercial Real Estate Syndications
You may be thinking I want to go big or go home. In that case, it may be better to invest in commercial real estate syndication’s. I may be a little biased, but they are my favorite type of investment. What is a syndication, you ask? Well simply put, it’s when a sponsor who will manage the project pools together money from multiple investors.So if I were the syndicator. I would have spent tons of time researching markets, analyzing properties, meeting with brokers, property managers, contractors, etc. When I find something that looks like a home run investment, I would reach out to my investors and get the ball rolling.
If the building costs $4M, it would require a $1M down payment. I have $100,000 to put in, which leaves $900,000 that I would still need to come up with. So I look for investors to fill the deficit. As an investor in my syndication, you would rely on my time and expertise. I would take care of all the day-to-day operations, repairs, management, renovations, accounting, etc. You would simply put your money in, and monthly or quarterly, depending on the deal, I would send you a check with your share of the returns. You would also get a percentage of the profits when the building is sold.
Your money goes toward increasing the value of the property through repair and renovation. And in doing that, you are revitalizing and improving the community it lives in. So you get these great returns and you get to take part in improving the lives of others. Win-win.
Overview of These Types of Real Estate Investments
What you give
Your money
What you leverage
the people’s time and expertise
What you get
Ongoing passive income, the confidence of knowing that your money is being put to work by an experienced team and earning an excellent return.
The Little Money / Little Time / Hands-off Investor
Now, on the flip side, let’s say that you don’t have very much time or very much money or interest in real estate. You just know that it’s a good investment, but you have different goals and passions in life and you don’t want to put in a whole lot of work.
That’s okay. There’s even a place for you in the world of real estate investing.The easiest and best way for you to get involved in real estate investing is probably through real estate crowdfunding sites.
Recommendation: Invest through a real estate crowdfunding site
Just as Kick starter crowdfunds new products, real estate crowdfunding sites crowdfund commercial real estate deals. But unlike
Kick starter, you would get cash returns, instead of rewards in the form of products, t-shirts or sneak peeks of beta releases.
Real estate crowdfunding sites are open to the public, and often have much lower minimum investments (as low as $500 minimums) than syndication’s. There are sites that serve both accredited and non-accredited investors.
These sites help reduce the exclusivity of investing in commercial real estate. Historically you had to no someone to get involved.
While this still remains true in some cases, The SEC has loosened regulations and allows some investments to be advertised publicly, which is why these crowdfunding sites are able to even exist. They are not completely exempt from SEC regulation, rather they file legal paperwork with their attorney that gives them permission to do so. So, if you are tight on time and cash, but you still want to get started investing, crowdfunding is a great place to start.
Hey, everyone has to start somewhere!
Overview of These Types of Real Estate Investments
What you put in
Your money (in small amounts)
What you leverage
Crowdfunding platforms, experienced sponsors, multiple people
What you get
The ability to invest with very little money, multiple types of deals and project lengths to suit your real estate investing goals.
The Little Money / Lots of Time / Hands-on Investor
Perhaps you’ve been bitten by the real estate bug and want to start investing actively but you don’t have a lot of money to get started. You aren’t afraid to pull up your sleeves and get dirty.
You might not have saved as much as you would have liked, but you are willing to put in the time and effort to learn more about investing and to put in a little “sweat equity”.
There are many ways to invest in real estate with little to no money. You just have to be willing to hustle, learn, and get creative. I recommend the Bigger Pockets Book - The Book on Investing in Real Estate with No and Low Money Down by Brandon Turner. Your Strengths, Interests, and Goals
Try to get to the bottom of what you love about real estate. Is it the thrill of finding a great deal? Is it planning renovations and/or doing the work? Do numbers excite you? Do you enjoy analyzing market trends and neighborhoods? Are you a people person and think that you will have a unique approach to managing tenants or relating to brokers and contractors. Figuring out what you’re most passionate about, as well as what you’re good at, will help you hone in on where to start your investing journey. I think it’s important for anyone getting started in the business to be very frank with themselves when deciding on what tasks to keep and which ones to outsource. What are you good at? What do you like to do? What don’t you like or aren’t good at? Outsource those things. Do you really have time for a given task or are you going to ruin any semblance of a normal well-balanced life? Is it worth your time or is your time better spent else where growing your business? Moreover, what are looking to get out of it? Are you hoping for a large quick payout or more long-term wealth building? Quick buck or Passive income?
Recommended Real Estate Investment Strategies Here is a quick rundown of some of the most common ways people with little money and lots of time and interest or skill can get started investing.
1. Fix & Flips
As Seen On TV, this is when you buy a fixer upper, renovate it and sell it. If you don’t have the money to get started, you can look into finding short-term private loans, which will give you up to a year to finish the renovations. Once you sell, you can pay off your loans and take your share o the profits.
2. The BRRRR Strategy
The BRRRR strategy is similar to fix & flips, except that you hold onto the asset long term, rather than selling. BRRRR stands for buy, renovate, rent out, refinance, and repeat. Just like the little/no money down option mentioned above, youwould take out a private loan to cover the down payment. But then instead of selling it, you would do a cash out refinance to payoff your loans.
If you purchase correctly and all the numbers are right, the after-repair value (ARV) will be significantly higher than the purchase price. This will allow you to do a cash-out refinance and pay off your loans and possibly event take a profit. You would keep the property to rent it out. Any cash flow would be yours.
3. Wholesaling
Those of you who love networking and searching for off-market deals, this one might be for you. Wholesaling is when you find a deal, get it under contract for less than it’s worth and then while it’s under contract, you sell the contract to another buyer for a higher price. So you never have to actually purchase the property, the other person does but you get to pocket the difference for finding such a great deal.
4. House Hacking
Depending on where you live, house hacking might be something you want to consider. This is exactly how I got started investing years ago.
In essence, you buy a property (typically a duplex, triplex, or fourplex) where you can rent out some of the rooms or units. The rent from your tenants helps pay down your mortgage. For those with limited funds, this can be done with a single family or without even owning the house. You would obviously need to get approval from the owner, but if the numbers work to allow you to live for free/cheap or to even pull a profit, then it’s an option. House hacking in it’s simplest form is probably best reserved for someone who is young and doesn’t have children. Or it may be a strategy used temporarily to build up savings to buy the next property. The saying goes live like few will, so that in the future you can live like few can.
Pro tip: If you’re able to get an FHA loan, you can put down as little as 3.5% of the purchase price, making this a even sweeter deal. FHA is the ONLY way you can purchase a multifamily with less than 20% so it truly is an incredible opportunity. You can only have 1 FHA mortgage at a time, so that’s something to remember if you are considering purchasing a single family house. There are plenty of programs that will allow 0-5% down on single family owner occupant homes, not the case with multifamily properties.
5. Real Estate Crowdfunding Sites
If you’re interested in commercial real estate, real estate crowdfunding sites might be a great place to start. This allows you to learn about commercial real estate without having to do it all by yourself.
You would learn from finding and analyzing deals. You would learn what to look for in a sponsor teams, and what type of communication and returns investors can expect. All of this will come in handy if and when you decide to take the leap.
Overview of These Types of Real Estate Investments
What you put in
Your time
What you leverage
Other people’s money
What you get
First hand experience, potential for great returns on very littleof your own money
The Lots of Money / Lots of Time / Hands-on Investor
Hey best friend! If you’re in this category, you are perfectly positioned to put your money to work for you. Perhaps you have a lot of money in the stock market and are tired of the volatility so you want to shift some of that over to real estate. Maybe you’ve already built up a nice portfolio of rentals and want to go bigger, or transition into a more passive role.
Recommendation: Lead Commercial Real Estate Syndications
If you’re looking to be an active investor, you may want to pursue leading your own syndication. This puts you in the driver’s seat. You can find the deals, put together the team, raise the capital, and deal with day-to-day operations after acquisition.
Recommendation: Become a Passive Investor in Commercial Real Estate Syndications
If you’re looking to become a passive investor, you can still be involved with finding and vetting deals, either through real estate crowdfunding sites or direct connections to real estate syndicators or private equity firms.
To be a savvy passive investor, you might want to learn the lingom cap rates, equity multiples, and IRRs, etc.), as well as have a basic understanding of how deals are structured and analyzed. Any team can put together a fancy marketing package, but you want to begin to learn how to determine if the deal and team are solid.
Overview of These Types of Real Estate Investments
What you put in
Your money and your time
What you leverage
The power of others’ expertise, time, and money to help you go bigger, faster
What you get
The freedom to create your own path and maximize your returns by putting your money to work Get the Real Estate Investing Roadmap
If you haven’t already, download this one pager to help guide you through the steps we just went through. There are spaces top organize and record your thoughts for each step.
Recap
By now, your head may be spinning a little. It’s okay, that’s natural. 🙂 Here’s a quick recap. We started out by getting a bird’s eye view of where you are in life, what your goals are, how involved you want to be, your risk tolerance, and how much you want to invest. Given that information, we then explored a few different scenarios, with some real estate investment recommendations for each.
The Lots of Money / Little Time / Hands-off Investor Consider investing passively in commercial real estate syndication’s
The Little Money / Little Time / Hands-off Investor Consider investing small amounts through real estate crowdfunding sites
The Little Money / Lots of Time / Hands-on Investor Lots of options: Fix and flip, BRRRR method, wholesaling, house hacking, crowdfunding, and more
The Lots of money / Lots of time / Hands-on Investor
Active: Consider purchasing your own commercial real estate
Passive: Invest through real estate crowdfunding sites or directly through syndicators and private equity firms Takeaways
As you can see, there are many, many ways to invest in real estate. And, the options included above barely skim the surface. If you walk away with nothing else, remember this. No matter where you are in life, how much money you want to invest, how much time or interest you have, there are ways for you to get started in real estate investing.
If you are still anxious or overwhelmed, there are ways for you to start small, with a few hundred or few thousand dollars. If you lose it all, consider it tuition for the University of Real Estate. Each lesson you learn makes you a savvier investor, so don’t be afraid to fail. It’s inevitable that not everything will be perfect 100% of the time. Even the most successful real estate tycoons have lost money, but they kept going.
Above all, remember that real estate gives you a unique investment opportunity, different than any other type of investment. Real estate allows you to invest in places where people live, work, and make memories. Investing in real estate allows you to make your money work for you, and also to make an impact on families and communities. And that’s something that a stock certificate could never give you.