No matter where you live, getting into real estate can be a great strategy for your financial future. Real estate can be a reliable way to build a strong investment foundation to save for retirement and future spending.
Similar to other forms of investing—like the stock market or mutual funds—there are huge advantages of investing in real estate earlier in your adult life.
By investing in real estate early, you can set yourself up for success in later adulthood and retirement without having to worry about short term fluctuations in the real estate market.
Investing in real estate is certainly a long term game, and the longer you can allow your investments to grow in value, the better.
However, investing in real estate is not without risk. In fact, real estate is one of the easiest investments to mismanage and create long term financial damage.
We’ve all heard of quick fix real estate investment strategies, but in reality, investing in real estate is a strategic long term game that should be well researched, using resources for property investors.
Wondering how to buy rental property? This article will give a helpful overview of strategies essential to the success of any real estate investment.
Why You Should Buy Real Estate
As far as investing principles go, real estate investing may seem relatively simple and accessible to the average person. After all, there's no need for a finance degree or specialized knowledge of the stock market.
However, real estate investing may be more complicated than it seems. As a real estate investor, there are two primary ways that you could make money from real estate. The strategies behind these two distinct approaches can vary greatly.
If you are a specialist in the real estate industry or have business associated with your property assets, there may additional sources of investment growth. But for the purpose of this article, we will focus on these two approaches for beginner real estate investing.
An Increase in Property Value
This approach to real estate investing is centered around investing in properties that will grow in value over time. Increasing your property value does require some work on your part to maintain your property and ensure your investment is well taken care of in the long term.
This can be a risky strategy as real estate value does not always increase over time at a steady pace. There are lots of factors that can be outside of your control when focusing on appreciation as an investing strategy.
These factors include inflation, rise taxes, the growth or stagnation of the neighborhood, and the overall economic climate.
Rental Income
Buying apartments, condos, or other sorts of rental properties is another way to increase your cash flow and create long-term real estate investment opportunities. This cash flow comes from tenants paying you monthly rent to live in your property.
Managing a property can be a ton of work, so many real estate investors consider this type of investment to be their full-time job. Rental income properties can become more of a passive income stream if a property management company is hired to manage your property.
Real Estate Investing Basics
Investing in real estate is a long game that often requires investors to weather the storm of turbulent economic times and to quickly capitalize on favorable markets.
Knowing when and how to navigate these changes in the market is crucial for your long-term success in the real estate investing game.
Here are some of the pros and cons associated with real estate investing.
Pros of a Rental Property Investment
Relatively Predictable Level of Risk
In comparison to the stock market or other forms of investing, real estate investing is often a more predictable and less risky way to invest.
While a real estate may not offer the kind of dramatic earnings that are possible when you invest in volatile stocks or cryptocurrency , the steady, predictable increase in capital in real estate is often enticing for many first time investors.
Steady Cash Flow
When you are properly managing rental properties, you'll often be able to count on reliable and stable income. Rental properties can be an extremely viable way to create a steady income stream.
A Break Come Tax Time
There are all sorts of deductions and tax breaks that real estate investors can take advantage of come tax season, including mortgage interest and property taxes.
Positive Long Term Outlook
Because real estate investing is a long-term game and there will always be demand for housing, over time many properties will increase in value, resulting in a positive return on your initial investment.
Potential Cons When You Buy Property
Gains May Not Be as Dramatic as Other Investments
As is the case for many things in life, the riskier the investment the more dramatic the potential gains.
For real estate investors, the risk of investing is significantly less than playing your hand at the stock market, therefore the potential return on investment is lower and less immediate.
Can Require Continued Investment
If you are investing in rental properties such as apartment complexes or rental homes, it is often necessary to continue to put money into your real estate investment.
These costs could include maintenance, repairs, floating the payments if tenants are evicted or don’t pay their rent, and even the use of a property management company.
Your Assets Aren't Liquid
One of the disadvantages of real estate investing instead of the stock market is that properties are often more difficult to sell off in times of financial hardship, making these assets illiquid.
If you come into financial trouble, you won't have the option of immediately selling for cash as you could with stock options.
Managing a Property Can Be a Full-time Job
Running a property can often be a lot of work, especially if you are handling a multifamily complex.
Tenant issues, ongoing maintenance, emergency repairs, and other unexpected tasks can become overwhelming if you are choosing to manage your property yourself.
Because of this workload, many real estate investors consider property management companies to be a worthwhile investment.
How to Get Started in Real Estate
As a first-time real estate investor, it can be difficult to know where to start. Here are five different strategies that you can use to build capital and become a successful real estate successful.
Consider Starting Small With Rental Properties
While many property investors would like to immediately jump to high cash flow properties, investing in apartment complexes or rental homes is often a significant investment of upfront capital and ongoing costs to manage maintenance and vacant months.
To start small, we recommend trying your hand at being a landlord to see if this path is right for you and your lifestyle.
When you're starting out, sometimes the best real estate investments are small properties where you rent out rooms to tenants rather than whole suites.
For many first time investors, this is an excellent way to begin their real estate investment journey.
Many people choose to live in a home and rent out the other rooms to help cover the mortgage and other bills.
This particular strategy is very popular for college students and young professionals who live for free while others pay their existing mortgage, allowing them to save for additional real estate investments.
Invest in Real Estate Investment Groups (REIGs)
Real estate investment groups are ideal investment opportunities for individuals who want to invest in real estate but do not want the hassle of running the physical property. Investing in REIGs requires an investment of capital and access to financing.
REIGs are similar to small mutual funds that invest in real estate properties throughout the country.
In a typical REIG, a company will buy or build a set of apartment blocks or condos then open the opportunity to investors to purchase units through the company. Once you own one of these units, you are part of the investment group.
As a single investor, you can own one or multiple units in these multifamily complexes. The company operating the investment group collectively manages the units, taking the property management tasks off your plate as the owner.
For their services, the company that manages the units take a percentage of the rent. The remainder of the rent is for the owner to use to pay off their nvestment, or as additional cash flow.
Real Estate Flipping
Real estate flipping is often considered to be the wild side of property investment, due in part to the rise of HGTV home flipping television shows and in part due to increased risk in this investment strategy.
Real estate flipping is the process of purchasing an undervalued property, renovating and improving this property, and then quickly reselling the property for an increased property value.
Experienced real estate flippers do not truly invest in improving, but often take on properties that already have intrinsic value.
We highly recommend house flipping for real estate investors who have experience and a strong understanding of real estate valuation, marketing, and renovations or home improvement.
Real Estate Investment Trusts (REITs)
Real estate investment trusts are created when a corporation (or a trust) uses investor capital to purchase a property. These properties are then run by the real estate investment companies.
REITs are bought, traded, and sold on the stock market, just like any other stock. These types of opportunities are best for investors who want to invest in real estate without traditional property holdings.
Contrary to more traditional real estate investments, real estate funds are highly liquid because they are bought and sold just like any other stock.
When you invest in REITs, you'll have the security in known that highly-qualified real estate experts are on your side, as some of the best paying jobs in real estate investment trusts can be highly lucrative.
Online Real Estate Platforms
Online real estate investing, sometimes called real estate crowdfunding, is a way to connect investors with developers. These platforms allow investors to diversify their real estate investments without having to purchase physical properties.
These investments are very accessible to first-time investors as they often require a more minimal investment.
Tips for Buying Your First Investment Property
As a first time buyer, here are some of our top tips for buying your first investment property.
Research What Being a Landlord Entails
Wondering how to start real estate investing?
Prior to buying a rental property, it is important to understand exactly what roles and responsibilities you will be taking on as a landlord.
For many real estate investors, hiring a property management company is a way to minimize these tasks, but it does not completely diminish your responsibility to your tenants.
Managing a property is often a full-time job and involves tenant relationship management, ongoing maintenance, and emergency repairs.
Pay Down Personal Debt
Before taking on any investment, it is important to understand your own personal financial situation.
While it might not be necessary to pay down all personal debt, there are a number of important calculations to consider in order to protect yourself from long term financial damage.
As a general rule: don’t put yourself in a difficult financial situation where you do not have the liquid capital to have a margin of safety for your investments.
Be Wary of High Interest
We recommend doing thorough research on the interest rates available to you as a real estate investor and how these interest rates will affect your profit margins.
It is important to note that interest rates are different for investment properties than they are for traditional mortgages.
Calculate Your Margins
As a real estate investor, we recommend doing extensive research on your profit margins and what certain properties can give you in terms of return.
Many real estate investors set a goal of a 10% return on their investment. You should have access to cash totaling 1-3% of your investment on an annual basis to manage maintenance and ongoing repairs.
Other costs you should consider when buying an investment property include insurance, homeowners or condo association fees, property taxes, and other monthly expenses related to ongoing maintenance.
Resources to Learn More about Real Estate Investing
Is real estate a good investment? Certainly, if you prepare yourself using the best available resources.
Here are some excellent resources to learn more about real estate investment, the best places to invest in real estate, and the strategies you should implement to protect and grow your investment.
Some of our favorite resources include:
Bigger Pockets
Investopedia
Realty411
InvestFourMore
Any number of podcasts available for free!
With our comprehensive guide, we hope you feel prepared to take your first steps as a real estate investor. We advise all new property investors to speak with financial and real estate professionals in their local area to chat about helpful tips and guidance.
Good luck on your investment journey!