If you’re wondering “how do I start investing in real estate?” you’ve come to the right place. For many investors, real estate can be a superior choice to diversify their portfolio. Real estate appreciates in value over time, and rental properties lead to regular monthly cash flow, while selling a property is a large cash return on the investment. Once you own one piece of real estate, that property can be leveraged to expand your holdings even if you don’t have cash on-hand to buy the next property.
How to invest in real estate is a simple transactional process, but that doesn’t mean it’s necessarily easy to make a long-term profit. The return you make on your real estate must be greater than taxes and other costs like insurance and regular maintenance for the investment to generate revenue. Additionally, many investors forget to consider opportunity cost, which is what the funds could have made in alternative investments. For this reason, merely “rent to pay off the mortgage” is insufficient.
Plus, there are risks like changes in the market. Did people who bought residential properties expect that the pandemic would disrupt both the short- and long-term rental market, as well as the housing market? No, but that is now a liability they must manage.
Like any investment, real estate comes with risks and rewards. That’s why understanding the real estate basics for beginners is so essential. We will review how to start investing in real estate, even with no experience, and what specifically to think about if investing in rental residential properties.
Want this guide in a shareable, printable package? Click here to download our real estate investing for beginners PDF: Real Estate Investing 101.
How Do Beginners Invest in Real Estate?
Starting to invest in properties right away might not be the best approach for every investor. Learning real estate for beginners can require owning several properties before building confidence. There are other real estate investment strategies for beginners that can let you begin exploring and understanding this industry before making a six-figure purchase. Here are ways to invest in real estate along a spectrum of complexity—and responsibility.
- REIT Investing: A real estate investment trust (REIT) is a company that owns and manages many different types of income-producing properties. You can buy shares in these trusts just like shares of stock. This allows you to benefit from the consistent stability of a real estate investment without having to own or manage the property yourself. REITs invest in a wide range of income-producing real estate like industrial and commercial properties, as well as residential. Unfortunately, because REIT’s are traded in the stock market, their valuations are subject to sharp decreases, as noted in 2020’s COVID Crisis. For this reason, Delta Wealth typically advises clients to gain real estate exposure outside of REITs.
- Online Development Funding Platforms: There are online platforms to connect investors with real estate developers in need of funding. In exchange for the initial investment, you receive monthly or quarterly repayments with interest. The most common problem Delta finds with Online Development platforms are the subpar deal structures, terms and properties. Some developers will offer one set of terms to friends and family before turning to online platforms with less advantageous terms.
- Wholesaling Real Estate: Working as a real estate wholesaler, you find homes that are being sold for under market value. After securing a contract with the seller to buy the property, you then find another buyer like a rehabber or investment company to take over the purchase agreement. Many times the end buyers do not want to spend time identifying quality properties being sold below market value, so working with a wholesaler is a benefit to both sides. Generally, a wholesaler’s fee is a percentage of the purchase price. This is one way to learn the negotiation skills and legal elements of the real estate industry as a form of real estate investing for beginners with no money.
- Rehabbing or “Flipping” Real Estate: The idea of becoming a “flipper” is attractive to many beginner real estate investors, but this type of investment can become a money sink very quickly. Unless you have experience yourself as a contractor or home inspector, or know one you can deeply trust, these projects can be difficult to make a profit on. You could consider breaking into this corner of the real estate industry with “prehab” projects. That is when you purchase the property and make some cosmetic upgrades before selling it to a more experienced rehabber to make other improvements.
- Buying Rental Properties: Last is the option to buy rental properties as a source of monthly revenue. If you are ready to take on the duty of being a landlord, you can increase the return on this investment by handling the property management yourself. Or, if you are not in the geographic area where the property is located, or simply don’t want to act as the landlord, you can also work with a property manager. Check out our blog about how real estate tax works for more insights about how to minimize taxation as a rental property owner.
- Partnership/Syndicate Properties: In a partnership, the investor has an hands-off approach by investing money in exchange for a preferred return and a percentage of profits above that preferred return. For example, the investor may be one of 50 investors who each invest $100,000 with the expectation of earning 7% a year plus 50% on any profits over that 7% “hurdle rate.” The investor typically joins as a limited partner, meaning there is limited legal responsibility for the property and loan. The general partner is a developer/operator who is legally liable for making the bank loan and any legal liabilities. Because the general partner is responsible for the day-to-day management and strategic decisions, it is critical to identify high performing general partners.
How Can I Invest in Real Estate With No Experience?
As with any field where an investor has little experience, the best practice is to start small and get comfortable with the industry and the risks. If you don’t currently own your own residence, that is the best place to start. (After all, who is better to rent to then yourself?) Here are some strategies to start investing in real estate with your first home purchase:
- Buy a Duplex (Or Bigger): The Federal Housing Authority (FHA) works with borrowers to finance loans with only a 3.5% down payment requirement. These can be used to purchase duplexes, triplexes, or any bigger property you can find. This allows you to live in the home while also leasing other areas out to other residents. This is a great way to get experience as a landlord and property owner while also reaping the benefits of primary home ownership. And once you have more experience, you can rent out all the units in the property.
- Use Home Equity: If you have already owned your home for some time, you can use the equity to finance investment in additional real estate. This equity can be accessed through either a one-time loan or a revolving line of credit that you pay every month. Both these options can cause changes in your existing monthly mortgage payment and interest rate, so it’s best to consult with an expert and understand what is at stake in either type of home equity financing.
- Learn About Seller Financing: Did you know the seller of the property can also take out a loan to fund the purchase? This can be a loan for the full purchase price, or just part of the amount. Instead of making payments to the bank each month, you as the buyer make payments to the seller each month. This offers the benefit of you and the seller being able to agree to terms of payment that might differ from what is offered by a mortgage company. This type of transaction usually works best for a property where the seller does not owe any debt.
What is the Best Real Estate Investment for Beginners?
The best type of real estate investment for beginners is one that matches the level of risk and time you want to assume. Many times, we find that the time component is a bigger concern for Delta clients. This is because we don’t encourage clients to buy properties that they couldn’t pay the entire mortgage if they had to. If part of the reason you want to get into real estate investing is that you love looking at and working on houses, you will find benefit in a different type of investment than someone who just wants to diversify their portfolio with a stable asset that appreciates in value over time.
Lower-Risk Real Estate Investments for Beginners would include options like buying rentals or partnership investments. Even these investments still come with some risk. The rental homes owned and managed by you might face issues with finding reliable, quality tenants. Or, in the case of a partnership investment, a property might get fully-developed but not generate the expected revenue. These are risks that are present with any type of investment. One major benefit of these two examples is that you put your investment to work without having to find the property or manage anything yourself.
Higher-Risk Real Estate Investments for Beginners start with wholesaling real estate and extend to investing in your own properties as an owner. The risks in these scenarios are the risks of the free market. Will you be able to find an end-buyer to assume the purchase agreement as a wholesaler? If not, you might suddenly find yourself entering the industry of prehabbing or full-on flipping the house. Owning a rental property adds several more layers of complexity relevant to insurance, property management, taxes, and more.
Considering these risks as compared to the potential returns will help each beginner real estate investor decide on what type of investment might be best for them.
Rental Property Investment Strategy 101
Many people interested in real estate investment know they want to get into owning rental properties as a source of revenue. Here are some basic points of strategy to consider:
1. Set a Specific Goal: Many times our first real estate conversation with clients starts with “I know you can make a lot of money in real estate.” True, but how are you trying to accomplish that goal? Are you looking for rental properties well into the future, short-term flips, or “mailbox money?” Being specific with your end goal is critical for knowing which path to pursue in the real estate arena.
2. Determine Your Niche: Rental properties don’t have to be residential. You can also purchase commercial properties like storage units, office buildings, or retail. Each comes with its own nuances of effective property management, maintenance, innovation, taxation, and insurance. Learn about all the different kinds of properties in general, as well as what is performing best in your area. For instance, in a college town, investing in apartments and other residential property could be a good fit, or might set you up for fierce competition. Make sure you do research and don’t base your strategy on assumptions.
3. Know Your Financials: A second element of planning is understanding your financials. This doesn’t just include the mortgage payments but also property taxes, insurance, utilities, maintenance, advertising to get renters, and the cost of a property manager if you are going to work with one. With a multi-tenant property, you must also calculate the cost of vacancies. Ultimately you must figure out, how much profit should you make on a rental property? This math will not only help you determine the minimum amount to charge in rent, but also might shed light on a good investment versus just a mediocre one.
4. Location, Location, Location: Once you know your niche and your numbers, it’s time to go back to the idea of location. Some cities have huge differences in property value from one block to the next based on a wide variety of factors. Additional research into the resale potential of the property, or its attractiveness to renters, should be conducted. What zip codes in your area have seen the most appreciation in value for the property type you are interested in? Where do those values intersect with your budget? This will help you narrow your search and buy the right investment property, not simply the most convenient.
5. Invest for Cash Flow, Not Emotion: There are all kinds of emotions that can influence a real estate investment purchase, from impatience and anxiety to falling in love with a property. Remember, you are an investor! Acting from emotion will cloud your ability to make a decision that is right for you in the long-term. If the right type of property isn’t available in the location you want, that doesn’t mean you should settle for the next best thing. Just because you love a home’s architecture or yard doesn’t mean it will make a lucrative rental property. As you break into the world of real estate as a business it is important to remove emotion from the transaction entirely. It’s no longer personal—now it’s business.
6. Keep Savings for Repairs: If you choose to be the property owner, it will be your responsibility to fund any and all necessary repairs, even working with a property manager to oversee the day-to-day. This means you need to keep at least 10% of your monthly income in savings to fund these necessities. This isn’t just for the sake of good business and taking care of your tenants, but also an issue of legal liability. If you fail to provide a safe working or residential environment that is up to code and meets other regulations, that can get you in a lot of trouble. For partnership investors, be certain that the general partner’s financials account for repairs and maintenance. Failure to do so could result in unrealistic financial projections and future difficulties.
7. Work with a Financial Professional: Like with any business, ownership of rental properties comes with many bookkeeping and accounting needs. It’s important to keep track of cash flow coming in, as well as the expenses for maintenance and insurance, and documenting it all for itemizing taxes at the end of the year. Working with a financial professional is worth the investment to keep your records, file your taxes, and consult with you on the next best investment strategy to keep your money growing.
Get Into Real Estate Investing in Indianapolis With Delta Wealth Advisors’ Support
Delta Wealth Advisors is proud to support our clients in all aspects of sound, unbiased financial planning and wealth management that includes sourcing, vetting and monitoring of real estate investments. We encourage goals-based decision making that will grow your net worth and have the experience to help you achieve it.
Through our work with top-tier real estate professionals, we work to tie our clients’ goals with attractive properties and projects. Our investment classes include residential rental properties, industrial buildings, medical office buildings, Qualified Opportunity Funds and residential property developments exclusive to Delta Wealth clients.
Our in-house certified accountants offer a suite of services like accounting and bookkeeping, tax consultation, and IRS audit support. These professionals work alongside our investment managers, who not only help you construct your investment portfolio, but monitor it for risks and share advice about when to make changes. This allows both sides to work together to minimize your tax liability as a real estate investor and help you grow your income in alignment with your vision and goals.
If you are trying to get into real estate investing, we’d love to talk with you and share our decades of experience and insight. Let’s get you started on the right foot. Contact Delta Wealth Advisors today to start a conversation.