Real Estate Investing

If you’ve been looking for a guide on how to invest in real estate, you’ve come to the right place. If you have no idea how to get started, you’re not alone. Buying real estate is a great investment choice, but it can be tricky to navigate the process as a novice. That’s why we are offering tips, advice, beginner-friendly strategies, terminology, and mistakes to avoid. You’ll want to keep this real estate investing guide handy.

How Do You Invest In Real Estate?

Real estate investing is the purchase of real estate. To fully understand this definition, we must first define real estate. Real estate is essentially any piece of land and property attached to that land. Anything natural or man-made that is a part of this land, including trees, buildings, or fences, is considered real estate.

You might hear people use the words land, real estate, and real property interchangeably. However, there are slight differences between each term. The land is any natural surface and airspace — anything you could attribute to being a part of Mother Earth. Real estate is this land plus any permanent man-made additions, such as a home. Finally, real property is the set of incentives and benefits from owning real estate.

Thus, investing in real estate is the act of purchasing a piece of land plus any man-made additions made to that land. There are several categories of real estate investing, and the most popular ones are residential, commercial, and industrial real estate investing.
Investing in real estate can seem expensive at first, but it is one of the most proven ways to build wealth. We discuss how you can make money by investing in real estate next.

[ Ready to take the next step in your real estate education? Learn how to get started in real estate investing by attending our FREE online real estate class. ]

 

 

How Does Real Estate Investing Make Money?

Investing in real estate is a tried and true method of making money, and you can make that money in various ways. The two main methods are value appreciation and rental income:

• Value Appreciation: Throughout history, property values have increased over time. We call this increase in value appreciation. Any expert would agree that location is the number one thing to base your investment upon. Property values go up along with the perceived desirability of a neighborhood. Have you ever heard the phrase, “buy the worst-looking house in the best neighborhood?” There is some truth to this. It’s better to buy a house you can fix up in a great neighborhood than an okay house in a bad neighborhood. You can also look into investing in an up-and-coming area.

• Rental Income: Some real estate investors will rely solely on value appreciation. For example, perhaps they live in the property or invested in a vacation home. However, many real estate investors like to grow their wealth by generating rental income.

  By renting out the property you own, not only is that property appreciating over time, you’re earning a monthly income. Your level of involvement is up to you, but some landlords who work with a property manager can label this income as passive.

  In an ideal situation, your renters would be paying for your mortgage and some profit to boot. (It’ll turn a pure profit once the mortgage is paid off.) However, be sure to factor repairs and maintenance into your budget.

How To Invest In Real Estate: 8 Strategies For Beginners

If you don’t already know how to invest in real estate, breaking into the industry can be intimidating. It can take several years before an investor feels comfortable and confident in real estate. That’s why beginner-friendly investing strategies are a great place to start. While they are suitable for investors with little to no experience, they can still be highly profitable when managed correctly.

Starting in a beginner-friendly investing niche is a great way to learn the ropes before taking on more complex investments. By starting with an accessible strategy, investors can get to know their local market, build a network, and learn how to raise capital without committing to a deal they may not be able to handle. Investors can then use their experience and profits to transition into other strategies down the line.

Here are some real estate investment strategies for beginners to use as a starting point:

1. Wholesaling: This strategy allows investors to act as a middle man between sellers and buyers. Wholesalers will identify and secure a property under market value, and then assign that contract to an end buyer.

2. Prehabbing: Prehabbing is the process of positioning a property for resale by adding minor cosmetic updates. The property is then often sold to an investor who will complete a full rehab.

3. REIT Investing: A real estate investment trust (REIT) is a company that owns and manages income-producing properties. Investors can then purchase shares in REIT and benefit from the profitability of real estate without owning physical properties.

4. Online Real Estate Platforms: Online platforms help to connect investors with real estate developers. The investors help finance real estate projects in exchange for monthly or quarterly repayments, including interest.

5. Purchasing Rental Properties: Buying rental real estate is a great way to secure a monthly income stream, especially if you’re ready to be a landlord. If you don’t want to be a landlord, you can hire a property manager instead.

6. Real Estate Syndication: Real estate syndication is a form of crowdfunding, but with a team oriented approach. Investors pool resources and skills to buy large-scale properties and split the profits.

7. House Flipping: Flipping house is one of the most popular strategies to get started in real estate. In real estate, the term flipping refers to the process of buying, rehabbing, and then selling a property for profit.

8. Real Estate Investment Groups (REIG): A real estate investment group is a business that focuses most of its business on real estate. It pools capital from multiple investors to invest in multi-unit or commercial properties.

1. Real Estate Wholesaling

One of the fastest ways to get started in real estate is by wholesaling. This unique strategy involves securing a property under market value and assigning an end buyer to purchase the contract. Wholesalers never own the property and instead make money by adding a fee to the final contract.

The key to wholesaling lies in creating a strong buyers list. This is essentially a list of investors who may be looking for their next deal. Wholesalers will often run a lead generation campaign to identify potential buyers. This involves marketing their business, often through emails, social media, or direct mail, and then building a list of interested investors. To create a buyers list, you will need investors’ names, contact information, type of funding, and buying criteria. This will ensure you know what kind of deals they are looking for and how to reach them once you’ve found the right property.

What makes wholesaling great for real estate investing for beginners is that it does not require significant capital to get started. While investors may need capital for successful marketing or payments of good faith, they will not be actually purchasing properties. Furthermore, wholesaling allows investors to build a reliable network and form a strong understanding of their market area.

2. Real Estate Prehabbing

Another great option for beginning real estate investing is through “prehabbing.” Unlike a rehab, which involves funds to make significant improvements, a prehab project requires only minimal upgrades. Investors will typically enhance a property just enough to entice other investors visually. Rather than making dramatic changes, prehabbing consists of improving a property through sweat equity. A few prehabbing projects include:

• Cleaning: Taking the time to remove trash and debris from a property, including general cleaning, can have a powerful impact on its appeal.

• Painting: At minimal costs, painting provides an affordable way for beginners to improve the appearance of a property.

• Landscaping: If you can’t get people to like the outside of the property, they most definitely won’t be interested in taking the time to come inside. Believe it or not, curb appeal goes a long way in real estate, at very little cost.

Investors hoping to choose this strategy should know that not every property will be well suited for a prehab. Look for properties with structural integrity in need of an “easy” cleanup, avoid homes that could require pricey repairs straight away. Additionally, always keep location in mind when searching for prehab houses. Research your market and identify popular or up-and-coming neighborhoods.

The allure of prehabbing should be easy to see when learning how to invest in real estate. Not only does it involve minimal risk and minimal work compared to other investment options, but it will also produce a quick return on investment. Remember, the aim of prehabbing is learning how to sell the sizzle, not the steak.

3. REIT Investing

Real estate investment trusts (REITs) are a good jumping off point for those new to real estate. Equity REITs, which are the most common type, are essentially companies that own income-generating real estate. Investors purchase shares in these companies and generate income through regularly paid dividends. REITs are perfect for beginners who cannot pursue real estate full time because they can generate steady, passive revenue streams.

While REITs can be thought of similarly to investing in stocks, according to The Motley Fool REITs often pay above-average dividends. To get started, try researching publicly-traded REITs and evaluate their records yourself. Research the company’s anticipated growth and current dividends, as well as the funds from operations (FFO). It can be a good idea to discuss with a financial advisor when selecting a REIT to invest in.

A variety of investors use REITs as a way to diversify their existing portfolios, they still serve as an excellent gateway to the real estate industry. As a whole, REITs are well suited for beginners because they allow investors who may not be ready or able to purchase properties the chance to benefit from real estate. Although there are variables that can influence the performance of REITs, this investment option is known for offering solid returns with relatively low risk.

4. Online Real Estate Platforms

Online real estate platforms, also called real estate crowdfunding platforms, help connect borrowers with investors. Developers will post deals and projects that they need financing for, and investors can then finance these projects through debt or equity. This creates a mutually beneficial arrangement; investors can enjoy the benefits of real estate investing without having to deal with ownership or labor. The developers can get the financing they need for projects.

Keep in mind that financing real estate deals can be just as risky and speculative as directly investing in real estate yourself. Always do your homework before you strike a deal. Investors benefit from receiving monthly or quarterly distributions, and they can choose to invest in standalone projects or a portfolio of projects. It’s also a great way to diversify your real estate investments geographically. Potential downsides to using a real estate platform are that the funds can be illiquid with lockup periods, and investors have to pay platform membership fees.

5. Purchasing Rental Properties

Ready to become a landlord? Investing in rental properties can be a great way to secure a fixed monthly income. If you think you can handle the responsibilities of being a landlord, you will definitely enjoy earning income consistently.

If you buy a rental property at the right time and in the right market, you might even be able to cover your mortgage, maintenance, and repair expenses with your rental income. (Even better, you might even have some profit leftover!)

As a rental property owner, you can decide how active or passive you want this income stream to be. Landlords who prefer not to “landlord” at all can contract out their duties to a property manager. Some rental property owners choose to outsource just the maintenance and repairs, and others might do everything themselves to cut costs and maximize income.

When investing in rental properties, you might also consider something called house hacking. This means you will occupy one of the rooms in a property and rent the other rooms out. Alternatively, you could buy a multi-unit property and inhabit one of the units. This can help you qualify for a residential loan, even though you plan to earn rental income off of the property.

6. Real Estate Syndication

Real estate syndication is a partnership between real estate investors, with the common goal of identifying and buying properties. Typically, the responsibilities are split between a sponsor and other investors.

The sponsor is in charge of searching for potential investments and securing the contract. They may also be tasked with managing the property. Sponsors typically do not contribute capital to the investment, and instead, add value with skills and time.

Investors in a syndication deal fund the acquisition and cover any additional costs needed to renovate or repair the property. Investors play more of a passive role, and receive payment over time through monthly or quarterly returns.

The syndication aspect of the deal is completed after the exit strategy is accomplished. For example, once the property is renovated and sold. Sponsors will be paid an agreed-upon amount for their work in the deal.

7. House Flipping

If HGTV is one of the influences that inspired you to become a real estate investor, then you’re likely already familiar with the concept of house flipping.

In essence, you identify a home that is being sold under market value. It usually needs some rehabbing and renovation. Once the property has been renovated, the property is then sold for a profit.

Investors who want to flip houses should understand the risks and be very careful in conducting their financial analyses. Several things can go wrong. For starters, if you spend too much on your renovation budget, you may not make any profit. You also run the risk of not being able to sell the house if the price or market conditions aren’t right.

If you’re brand new to the house-flipping game, consider bringing on an experienced partner.

8. Real Estate Investment Groups (REIG)

A Real Estate Investment Group (REIG) is a business that focuses on investing in real estate. It pools together investor money to buy multi-unit housing and commercial properties. They might even choose to buy, renovate, and sell properties for profit.

REIGs are a little different from Real Estate Investment Trusts (REITs) because their businesses are set up to be more flexible. They may change their investing strategy and leverage various strategies to diversify their sources of capital. REIGs often attract investors who want to enjoy the returns of the real estate market without having to deal with property management responsibilities.