Are you wondering how to invest in real estate as a complete beginner? It can be a very profitable investment when done properly. However, there are also several pitfalls that can turn the investment upside down. This article covers how to invest in real estate with 10 expert strategies.
But first, what is an investor in real estate and why invest in real estate?
Investing in real estate involves the purchase, management, ownership, rental, and sale of real estate to earn a profit.
To help you get started on the right track, we have interviewed several experts with experience in the field. They know the in’s and out’s of real estate investing, so we have combined their knowledge to provide the ultimate guide for you.
By the end, you will understand how to get started, what you need to know to get a positive return on investment, and the different approaches you can take.
Let’s get started!
How to Invest in Real Estate: Research!
The first real estate investing basics you need to understand is that requires real estate investing requires research.
“Taking Shortcuts on due diligence is the most common mistake,” says Terry Painter, author of The Encylopedia of Commercial Real Estate Advice.
“Due diligence is the research a buyer needs to do to determine the financial and physical condition of the property. Failure to do market research to get an accurate representation of the property’s value and market rents is number one, followed by believing what the listing broker shows for income and expenses on the marketing flyer. ”
“Often these marketing pieces show a mixture of actual and potential income and expenses. Sometimes expenses are left out or underreported. You would not buy a business based on potential or inaccurate income, so why would you do this when buying investment real estate? You need to evaluate at least 2 – 3 years of profit and loss statements or tax returns on the property to verify the property’s income. You need to look at the month by month rent collections to make sure all tenants are paying the rent. You will need to have an in-depth property condition report done to truly know the physical condition of the property.”
Every deal is a learning experience. You can minimize mistakes by getting involved with a mentor or real estate investing group.”
Nancy Brook, realtor and investor, explains that you are going to make mistakes. She says, “Every deal is a learning experience. You can minimize mistakes by getting involved with a mentor or real estate investing group.”
What is a real estate investment group? It is an organization that owns a stock of properties and sells them to investors as rental properties. The group often offers property management services in exchange for a cut of the monthly rental income.
If you are more of the do-it-yourself type, you can perform the research on your own.
There is an unbelievable amount of advice from seasoned investors, as well as first-timers that share their experiences.
Michael Kelczewski of Brandywine Fine Properties SIR adds, “Read forums and conduct research online. Each sub-market is governed by specific dynamics. Understanding a local market is imperative for success.”
There are also several real estate investing for beginners books you can check out, such as:
- The Encylopedia of Commercial Real Estate Advice
- The Book on Rental Property Investing by Brandon Turner
- The Unofficial Guide to Real Estate Investing by Spencer Strauss
- Rich Dad, Poor Dad by Robert Kiyosaki
- Rich Dad’s ABC’s of Real Estate Investing by Ken McElroy
- The Book on Investing in Real Estate with No and Low Money Down by Brandon Turner
So, step one is to spend some time gaining an understanding of the real estate investing basics.
How to Invest in Real Estate: Identify Your Goals
Once you have a general understanding of real estate investing, you’ll need to identify what exactly you want to do.
There are many ways to make money by investing in real estate, but without a vision for what your goals are, you can end up spending lots of time and money to not get very far at all.”
“When starting to invest in real estate, the first thing you have to know is your goals,” explains Brian Lauchner, full-time real estate investor.
He adds, “Some people are looking to make money this month or this year. Some have the long-term goals of building a rental portfolio and either self-managing them or hiring a top-notch manager to deal with everything. Furthermore, some want to invest passively and not deal with tenants and toilets.”
He also says, “There are many ways to make money by investing in real estate, but without a vision for what your goals are, you can end up spending lots of time and money to not get very far at all.”
Buy and hold or buy and flip?
On a basic level, you have two choices: you can buy a property and hold it, or you can flip it
If you want to buy and hold, that means you are going to buy a property and rent it out to earn the income. On the other hand, if you want to flip, you are going to buy a home, renovate it, and resell it for a profit.
Chris Taylor, a broker with Advantage Real Estate, says, “It’s imperative to be aware of what your own capabilities. If you’re handy and could fix up a bathroom, kitchen, etc. Great! If you’re not, don’t go into it thinking, ‘yeah I could probably figure that out.’ Too often, you’ll find that you’ve gotten yourself in over your head.”
Identify your strengths and weaknesses as well as your preferences for involvement, and identify which route will be best for you.
How to Invest in Real Estate: Calculate Costs
Once you have identified your goals, it’s important to understand the costs. What numbers do you need to know to ensure you get a profitable return on investment?
In my area, I use the 1% rule—if a home is purchased for $100,000, then it needs to make at least $1,000/month in rent.”
Here’s what the experts had to say.
How to Invest in Real Estate: Buying to Hold
“If you are buying to hold, you need to make sure your cash is flowing well. In my area, I use the 1% rule—if a home is purchased for $100,000, then it needs to make at least $1,000/month in rent.
If it meets this rule, then it is worth investigating further. If not, then I look for another property,” says real estate broker and investor Jamie Crouch.
She adds, “The other quick assessment used is the 50% rule. This rule assumes that the expenses associated with the property will average about 50% of the monthly rent (maintenance, management, vacancy, etc.).
If your cash flow is still positive, then it’s worth looking into further. If not, move on to the next property.”
“Also, make sure to account for property management,” explains John Horner, Founder of John Buys Houses.
He says, “Even if you want to manage the property yourself, at some point in the future you may want to pass this off to someone else, and you’ll want to make sure the numbers still work that way as well. Property management can cost anywhere from 6%-11% of gross rents.”
How to Invest in Real Estate: Buying to Flip
On the other hand, here’s what you should know if you are buying a home to renovate and flip it.
“Most people understand that there may be real estate agent commissions and closing costs to some extent, but they discount in their mind the holding and transactional expenses associated with selling a home. There are expenses when you buy and sell,” says Brian Davis, Director of Education at SparkRental.
He explains, “Some examples would be on the sale, seller concessions, prorated taxes, who is paying the title insurance, interest paid, the closing costs at the sale, and, if selling on the retail market, you may need to account for a home warranty that the seller buys for the new buyer.”
Why is it so important to calculate costs?
“Most new investors underestimate (or ignore entirely) expenses like vacancy rates, repairs, maintenance, capital expenditures, property management expenses, accounting, and administrative expenses.
That gets them into trouble when they overpay for properties and wind up losing money when all those unexpected expenses come home to roost,”
He adds, “As the old saying goes, you make your money on the buy, so you need to know those numbers well when making your offers because they can end up costing you or changing your return on the investment.
Typically a fellow investor, a real estate agent, or a title company can help you with understanding the costs associated with selling.”
How to Invest in Real Estate: Where to Begin
Now that we have covered all of the prep steps, what is the best way to get started in real estate investing?
You may also be wondering how to start investing in real estate with little money and if no cash down real estate investing is a possibility.
Here are ten investment strategies for beginners you can consider.
Strategy 1: Wholesale properties to investors
“If you are interested in making quicker money (rather than long term investments), you can get started wholesaling properties to other investors with no money (under $1,000) and no credit….yes, it’s a thing,” says Davis.
How does wholesaling properties work?
Transactional funding allows you to purchase a home at the wholesale price without any of your money as long as you have an end buyer who will purchase the home from you within a short time period; typically two to five days.
You create a winning solution for them and allow yourself to purchase the property and resell it to another investor in the same month, using either transactional funding or the assignment method.”
So what you do is find distressed properties and market them for the sellers who are trying to get rid of them.
Davis says, “You create a winning solution for them and allow yourself to purchase the property and resell it to another investor in the same month, using either transactional funding or the assignment method.”
He adds, “It is best to consult a real estate attorney before entering into a contract with a seller or selling that property to another investor to protect your interest and maximize your profits.”
Strategy 2: Turn-key rental investments
“For those who are looking for more of a hands-off approach,” Davis says, “you can purchase turn-key rental investments, but you pay a premium for those services.”
These are fully renovated apartments or homes that are ready to rent out immediately after purchasing them. Often, the seller has bought an older property and restored it. They may also offer property management services.
While the convenience factor is high going this route, the price of entry will be higher as well.
Strategy 3: Buy as an owner-occupant
Another option is to buy as an owner-occupant property.
Live in the home one year and then rent out the property. If you are looking to flip a house, you can live in the property for two years and usually pay no taxes on the profits. This is a great strategy for those with little money”
“Live in the home one year and then rent out the property. If you are looking to flip a house, you can live in the property for two years and usually pay no taxes on the profits. This is a great strategy for those with little money,” says Mark Ferguson, real estate agent, real estate investor, and creator of Investfourmore.com.
Jeff Miller, a real estate agent at AE Home Group, adds, “Starting out in real estate investing can be expensive. If you’re looking for a way to get in with little money, consider buying a primary residence and renting out rooms.
These owner-occupant loans require very little cash down, and your tenants will pay the mortgage.”
He adds, “You can use the money you save living mortgage-free as the down payment for your next investment. If you decide that being a landlord is not for you, then you can sell the property after two years tax-free.
This is thanks to the federal government’s home-sale tax exemption for principal residences.”
Strategy 4: Start small
Next up is easing into the real estate investment venture. Taylor says, “Don’t buy beyond your limits. Some first-time investors are quick to put their entire savings on a down payment without saving some for unexpected repairs and maintenance. Don’t be afraid to start small.”
Don’t buy beyond your limits. Some first-time investors are quick to put their entire savings on a down payment without saving some for unexpected repairs and maintenance. Don’t be afraid to start small.”
He says, “I know investors that have started with a small studio condo that needed work, fixed it up, refinanced (or flipped) the property, and then purchased a 1-bed fixer upper.
It can take some time and effort, but if in a few years you can turn a small down payment on a studio condo into a multi-unit investment, it pays off.”
House hacking is a great way to start your real estate portfolio. House hacking is where you buy a single-family or multi-family property as a primary residence, live in one of the units and rent out the others. The goal of this investment strategy is to live for free, using the rental income generated from your tenant(s) to cover the entire mortgage.
Strategy 5: Seller-financing
Seller-financing is another little-known option. It means that, instead of getting a loan through a bank, the seller finances you and monthly payments are made directly to them.
“I wish I would have known that there are owner-financing deals out there. My partner picked up a condo with only 10% down and seller financing in place. I recently was approached on a deal where the seller would carry financing for only $5,000 down,” says Brook.
This could be a great option if you are having trouble getting approved by a bank. Further, sellers may offer you a good deal to sell their property quickly.
Strategy 6: Credit cards
Credit cards? Really? Yes, read on.
I bought my first three houses using credit cards. It goes against the grain, but many people receive those 0% deals in the mail. I actually signed up for as many 0% cards as I could, and used them as the down payment.”
Christopher Rither, real estate investor, says, “I bought my first three houses using credit cards. It goes against the grain, but many people receive those 0% deals in the mail. I actually signed up for as many 0% cards as I could, and used them as the down payment.”
He adds, “When the 0% deal ended, I just rolled them over to another 0% card. Then, over time, I took all the excess rental money and started to pay off the cards. I sold a house at a nice profit and used that money to buy my next dozen properties.”
Strategy 7: Rent out your primary home and take out a HELOC
Here’s another strategy for those working with little capital.
“It’s hard to get started without much money, but it can be done. One of the easiest ways to start is by leasing your current home instead of selling it when you’re ready to move. You will have to qualify for both mortgages, but that’s how many investors get started,” says Crouch.
She adds, “Most investor loans require at least 20% down, which is hard to come up with for a lot of people. As a result, many investors open a home equity line of credit (HELOC) on their personal home.
You can use this for the down payment, but make sure you have a plan to pay it off or refi the investment home to get your money back out.”
Strategy 8: Hard money lenders
A hard money lender is typically a private company or investor that issues a specific type of asset-based loan financing. The borrower receives the money, and the loan is secured by real property.
The terms are usually a bit steeper than conventional loans, being for shorter periods of time with higher interest. However, they can be easier to get because lenders will be more concerned with the value of the property at hand than the borrower’s credit.
Jen Nash of the Chief Money Instigator says, “If you want to invest quickly, go find hard money lenders. The right kind of hard money partners will review your deals. They won’t do them if they don’t think it will work, so it’s almost like having a helping hand.”
Strategy 9: Find a partner
If you need financial assistance, consider finding a business partner.
Partners are a great way to start with no money or little money. They can bring a TON of value and hard work to a relationship if you lack the funds.”
Mike Higgins, a real estate investor, says, “Partners are a great way to start with no money or little money. They can bring a TON of value and hard work to a relationship if you lack the funds.”
Sbeih agrees with Higgins saying, “If your funds are limited, try teaming up with family and friends to raise money. Initially, starting small means that you will give away most of your profits. But you will learn everything you need to know to realize larger profits down the line.”
Help goes beyond just the financials, as Taylor points out.
He says “Reach out to your friends and family. Does anyone know a good plumber? A contractor? You’ll be surprised how many people have close ties with someone who is an expert in an area that you may have no experience.
I had a client who had the money to buy a 3-family house that needed a lot of work, and they had no experience doing any renovations. They found a family friend who was an experienced contractor who was willing to hold off on getting paid for the work because they owed the mutual friend a favor.
My client paid for supplies, fixed up the property to increase equity, refinanced the property and pulled some equity out, inevitably paying the contractor in full. They have since worked together on several other fixer-uppers.”
Ideally, you will find partners who can help supplement your areas of weakness whether that be financial or regarding a skillset.
The takeaway here is, if you want to get into real estate investing with no money and bad credit, consider finding a business partner.
Strategy 10: Join a marketing investment platform
Lastly, if you are an accredited investor (as per the guidelines set in place by the U.S. Securities and Exchange Commission), one of the easiest ways to get started in real estate investing is by joining a real estate marketing investment platform.
PeerStreet is one such platform. The company sources loans from trusted private lenders which it deems to be of high-quality (most are secured by first liens on real estate). Then, investors like you can go in, browse the loans, and select the ones in which you would like to invest. Investments can be as small as $1,000 per loan, providing a low price-of-entry and making it easy to diversify.
How to Invest in Real Estate: Find the Right Property
When you understand the real estate investing basics, your goals, the costs involved, and the strategy you want to use, it’s time to start the search for the right property.
Here are four things you should know.
1.) Shop wholesale
“Most new investors are paying retail for their first rental home, or they are renting their old home out when they move. However, if you take a look at the true return on investment of that investment five years later, it will most likely be a lower single digit number.
Instead, new investors can build relationships with reliable wholesalers in their market who can be emailing them a list of what properties are available on a monthly basis,” explains Davis.
Wholesalers are real estate investors that buy houses at well below market value and sell them to other investors.
Buying from a wholesaler is different from MLS because wholesalers are not typically real estate agents, the time frame for the sale is usually shorter, there is usually no home inspection, and the home is as-is without any repairs.
Benefits of buying wholesale
“These wholesalers can be sending you properties at deep discounts and structured to protect you from losing money simply by purchasing it at the right price,” says Davis.
He adds, “Also, a good wholesaler will send you the information on what the value of the property is, what rehab needs to be done, and a budget for that work.”
While these can have more risk and may be harder to get financing for, there’s also the chance of getting a steal of a deal.
It’s worth looking for wholesalers in your market to see what they can offer.
2.) Set emotions aside
Another factor is to have the right mindset when shopping for investment properties.
Don’t buy what you love. Buy what will make you money.”
“Don’t buy what you love. Buy what will make you money. Many first-time buyers fall in love with certain properties, and then let their emotions rule their decisions. If you want to buy a home, love-at-first-site is great.
But if you want to buy an investment, it’s all about cash flow and turn-around time. In the end, remember that emotions and investing make poor bed fellows,” says Rither.
3.) Hone in on one area
A key piece of advice from the experts was to focus in on one area and get to know it very well.
My recommendation for real estate beginners is to get to know one area or neighborhood inside and out before you begin to invest. You’re looking at putting hundreds of thousands of dollars on the line.”
“My recommendation for real estate beginners is to get to know one area or neighborhood inside and out before you begin to invest. You’re looking at putting hundreds of thousands of dollars on the line.
That kind of sum makes it worthwhile to spend a lot of time walking the pavement, digging through records, and doing a great deal of due diligence,” says Adham Sbeih, CEO of Socotra Capital.
Taylor agrees saying, “Know where you want to buy, know what is a good deal, and know what kind of income you can generate. If you don’t have the time to do this, find a real estate agent who does.”
Crouch also says, “Get to know the market! If you can’t drive by a property and know what it’s worth and what it will rent for off the top of your head, you have more homework to do. You need to really know your market.
That means you need to start doing your research well in advance to know the market trends, prices, rents, and details of the area. When you know the market, you will be able to spot the deal as soon as it pops up and not miss it. This also means you watch the new listing daily, so you don’t miss the deal.”
4.) Do your due diligence
Lastly, when you think you have found a property, be sure to vet it thoroughly.
“Before you open escrow: Check tax, building, and legal records, spend time doing your own home inspection, talk to neighbors who may have ‘inside’ information (trust but verify), and do your own market analysis by looking at similar properties in the area, talk to property managers about costs and locations that are easier to rent, and running a worst-case cost analysis (like how much money will it really take to make it a nice rental unit).],” says Rither.
He explains, “After you open escrow: Choose a well established and trusted escrow company, hire a good home inspector (usually not the cheapest), dig deeper into property history at local police stations/county records/legal records, check on the ability to subdivide or if there are any easement problems.
Don’t rest until you make sure there’s nothing that will come back and bite you.”
How to Invest in Real Estate: Start Your Real Estate Venture
“Successful house flipping really comes down to analyzing properties quickly and correctly, obtaining sufficient financing, finding the right deal, and then keeping the project on-time and well-designed,” says Lucas Machado, President of House Heroes LLC.
Now you know ten strategies successful real estate investors have used to break into the business. You have also learned other tips on getting started that can increase your chances of making a profitable investment, including performing research, goal setting, calculating costs, property vetting.
If you’re ready to start weighing the different financing options, finding out if you can pull equity out of your current home is a good place to start.
FAQ on Real Estate investment
Does real estate investing work?
The rental real estate investing strategy offers a number of profit opportunities. Cash flow is created when the monthly rental income exceeds the mortgage and other expenses. Long term wealth is created through appreciation of the property, the tenants paying down the mortgage, and tax advantages.
How much money should you have before investing in real estate?
Most banks will require an investor to put 10 to 20 percent down on a rental property. That is a lot of money to most people, especially when you consider a property may need repairs, you have to pay closing costs and you want to have money in reserve in case something goes wrong.
What can you do to get started if you don’t have much capital to invest?
“This is not easy to pull off, but if you are willing to do the work I assure you it can be done,” says Terry Painter, author of The Encylopedia of Commercial Real Estate Advice. Here is a condensed version of Terry Painter’s recipe.
- Find an outstanding property with 2 or more of these upsides. This will get the attention of investors and lenders.
- 1. It is in a good safe neighborhood.
- 2. It is priced below the market price for its condition.
- 3. It already has enough Net Operating Income (NOI) to cash flow the mortgage payments.
- 4. The property has a strong repositioning upside. This can include rents that are already under market, lower than market occupancy, or the need for inexpensive operational and cosmetic changes that will enable rents to be raised.
- Raise at least 10% of the down payment in your own name. The one thing you can count on is that every potential investor will ask you how much you are putting into the deal. Do you really want to tell them “zero”? Putting in at least this amount will give you “CLOUT”. Whatever you have to do to raise this amount whether its from a home equity line of credit, a cash-out refinance, or a loan from your parents – you really do need to accomplish this.
- Bring in a high net worth investor as your first partner. It’s going to take financial strength and maybe experience to qualify for financing and get your foot in the door with listing agents and sellers. Both will want to verify the down payment. If you don’t qualify, bring in someone who will. This experienced partner can really make a difference when raising investors and can make the presentation with you.
- Create an Outstanding Executive Summary. This is going to be 4 pages or less and sell your deal for you to investors and lenders. You are going to start out by creating a pro forma projecting the property’s annual cash on cash, and internal rate of return over the years you plan to own the property. Then give a good description of the property with its location and access to major shopping and freeways. State what you are paying for the property, and the value adds you will be doing, and how much those will cost. Most importantly, estimate what the property will be worth in so many years. Be sure to mention risks and how you will lower them by taking precautions.
How do beginners invest in real estate?
Here are five options, ranging from low maintenance to high.
- Buy REITs. REITs, or real estate investment trusts, allow you to invest in real estate without the physical real estate.
- Use an online real estate platform.
- Invest in rental properties.
- Fix up and resell properties.
- Rent out a room.
What do I need to know before investing in real estate?
You need to know a lot of things before buying your first investment property.
- Don’t let your emotions play with you.
- Do your research.
- Secure a down payment.
- Calculate expenses and profits beforehand.
- Select a low-cost home as your first investment property.
- Pay your debts.
- Consider investment loan options.
Do I need a license to flip houses?
Getting a contractor’s license to flip houses is usually not necessary, although many investors may find it useful. Different states enforce various regulations relating to what permits and licenses are required to flip homes, so investors should make sure to research what type of permits are required in their area.
To find the best lender for your situation, head over to our mortgage lender review page complete with reviews and real user ratings.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.