Invest in knowledge before investing in real estate

So, you’ve done some research and decided to embark on the journey to learn real estate investing.

Now what?

Like any type of investing, there’s a learning curve. Here’s what you need to know about real estate education before going out and investing your time and savings in properties.

How to Invest in Real Estate in Six Steps

All right, let’s talk strategy! Remember, your first investment property should be your primary home. After that’s 100% paid off, then you’ll be ready to start investing in additional properties. Here are six steps on how to invest in real estate—beyond your primary home:

Step 1: Pay in cash

Yep, you read that right! You should alwayspay in cash—in full—any time you buy or renovate investment properties. Don’t even think about going into debt for this!

Now, our advice might be the opposite of what you’ll hear from some real estate investing “gurus.” But the truth is, there’s no such thing as “good debt.” Debt always equals risk—and the riskier your investment, the more likely you are to lose everything. That’s no good!

A 100% down payment takes debt out of the equation and lowers your risk. Can’t find a tenant for your rental property? Who cares—without a mortgage, you don’t need renters right away. Housing market took a nosedive right when you wanted to sell the house you flipped? That’s okay. You can afford to wait for the market to pick back up.

Paying in full also sets you up to make money sooner. Instead of repaying a lender, you get to keep all the profits. That’s how to invest in real estate wisely!

Now, this means you won’t be able to invest in real estate with just a little money. And that’s okay! If all you’ve got is a little money, put it toward your retirement. Which brings us to . . .

Step 2: Diversify

Have you ever heard the phrase, “Don’t put all your eggs in one basket”? That wisdom applies to your investments.

When you reach a specific step in your finances (more on that later), we teach that you should invest 15% of your household income into retirement accounts. And inside those accounts, you should use good ol’ mutual funds as the foundation of your wealth-building strategy. After that’s locked and loaded, you can start investing in real estate.

Oh, and don’t cash out your retirement savings to buy property—or anything else. Your real estate investing funds should be separate from your retirement savings.

Step 3: Stay local

Don’t buy an investment property in Arizona if you live in Illinois! When you live far away from your properties, you’re forced to blindly trust a management company to handle your business—and that makes it much harder to hold them accountable.

Now, it might still be a good idea to hire a management group, even if you’re local, to help things run smoothly. But you—and only you—are the property owner. So stay close and keep tabs on your investments.

Step 4: Be prepared for risks

Usually, renting out property isn’t as simple as getting renters and checking in once a year. Sometimes rentals sit empty for months, which can be tough if you’re not financially prepared. And even in the best situations, appliances still break and roofs still leak.

The best way to prepare for risks and cover unexpected expenses is with a fully funded emergency fund.

Step 5: Start small

Not sure real estate investing is for you? Test it.

Maybe you can rent out a space above your garage or an extra bedroom—even for a few nights at a time. That’ll give you a taste of what owning a rental is like.

It’s also wise to talk to other real estate investors. Get lunch with them and ask them what they wish they’d known before getting started.

Step 6: Hire a real estate agent

We can’t stress this enough: You need a local real estate agent. They’ll know what areas you should look into and what hurdles you might face as a real estate investor. And when it’s time to buy a property, they can help you get a better deal than you’d get on your own.

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Real Estate Mutual Funds

Real estate mutual funds invest primarily in REITs and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved through buying individual REITs.  

Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund. This can include details on acquired assets and management’s perspective on the viability and performance of specific real estate investments and as an asset class. More speculative investors can invest in a family of real estate mutual funds, tactically overweighting certain property types or regions to maximize return.

3. Be unconventional

Everyone has access to Zillow, Redfin and other online listings sites. If you're bidding on a property that many other people are, chances are you are not going to get the best deal, Mehta says. "You need to think and work outside the box to have an edge on competition," he says.

Mehta suggests trying to reach out to sellers directly. "I personally bought my first two properties off-market, just driving through the streets in my favorite neighborhood and seeing for sale signs getting installed before the homes actually hit market."

Mehta also suggests connecting with local real estate agents. They often know what is going to be listed before it actually is.

Tips On How To Invest In Real Estate

For many aspiring investors, the closest they have come to a real estate deal is by watching reality TV. While television shows can be a good source of general information, they are often an unrealistic portrait of how to start a real estate business. Rather than watching HGTV in the hopes of picking up a new term or strategy, it is a good idea to form a concrete plan for learning the industry. The following list will outline some of the best real estate investing tips for beginners:

Networking Is Key

Aspiring investors should attend as many networking events and investment clubs as possible. This may sound uncomfortable at first, but anyone interested in breaking into the industry will need to form some connections. Try reading some networking tips online and attempt to identify a mentor after your first few meetings. By interacting with real estate professionals you can hear specific stories on how to land deals and overcome certain challenges. Networking events in your area can even expose you to information specific to your market.

Not only will networking events be a great place to learn, but they are also where you can start building a contacts list. In terms of real estate investing for beginners, your connections will ultimately impact how you approach investments and uncover your real estate niche. Having the right team to count on will be crucial once you start closing deals.

One final note about networking: always keep your best judgment in mind when talking to other investors. Take in as much information as you can, but remember to do your homework on everything you hear. Just because a certain niche or neighborhood did not work for someone does not necessarily mean it will not work for you.

Draft A Real Estate Business Plan

A great place to start investing as a beginner is to draft a business plan. This will allow you to identify your “why”. For example, maybe you want to save for retirement or help your family’s financial situation. The owner of Independent Property Group, Matthew Peden, gives this valuable advice: “If you are new to real estate investing, the best advice I can give you is to make sure you’re honest about your goals. As a new investor, you need to be honest about whether or not owning a home is just for living in or if it’s something that you see yourself being able to flip for profit. Make sure that even though you have better resources now than when you first started, the complexities of this type of investment are still manageable for you”. No matter what your reason is, visualizing your “why” before getting started will be a crucial source of motivation. The next step to creating a business plan is to write out your specific business goals. It may seem foreign at first, but the purpose of a real estate business plan is to produce a roadmap for investors. It will help you identify and outline your goals, while also strategizing actionable steps to accomplish them. With proper planning, a real estate business plan can serve as a critical learning tool for real estate investing beginners.

Read About Real Estate For Beginners

If you truly want to start a real estate business, it is crucial to learn as much about the industry as you can. There are countless investing books, blogs, and magazines that are a great place to start. While there are a ton of options out there, try not to overwhelm yourself at first. Instead, try grabbing a few investing books or subscribing to a real estate newsletter and designate just 15 minutes a day to reading something new. One thing all successful real estate investors have in common is that they never stop learning. This continual education mindset will serve you well throughout your career as an investor. Check out this list of real estate investing books for a few recommendations to get you started.

Get Started

Finally, the single best way to learn the real estate business is by doing it. If you aren’t quite ready to go at it alone, try shadowing a real estate professional in your area on your next deal. You may need to assist on a few errands to make their time worthwhile, but after networking with other professionals you should have no problem finding a connection to shadow while you learn the ropes. Knowing how to make offers and negotiate with a real seller will be invaluable as you set up your own real estate business. Additionally, walking through properties with other professionals will give you an idea of what to look for when you are ready to start buying. First-hand experience, especially when it comes to real estate investing for beginners, will pay dividends in the long run.

How To Invest In Real Estate: Mistakes To Avoid

Many famous quotes indicate that real success is built upon learning from past mistakes or failures. For example, the author J.K. Rowling once said, “Rock bottom became the solid foundation on which I rebuilt my life.” However, this does not mean that you should not learn from others’ past mistakes. The following provides insight into common first-time investor mistakes to avoid at all costs:

  • Following the herd: When first starting out, it may be tempting to follow the herd. However, relying on speculation and crossing your fingers that a property will appreciate in value is one of the worst real estate investing strategies for beginners to follow.

  • Buying at market value: Purchasing a property at market value leaves very little room for profit potential. Real estate investors specialize in finding great deals or purchasing distressed properties that are well below market value.

  • Getting emotional: It is easy to become emotionally attached to one of the first potential deals that you come across. However, it is of utmost importance to keep a level head and maintain a business-like approach. No matter how good a deal might seem at first, one should always mind their due diligence.

  • Forgetting to mind due diligence: Elaborating on the point above, minding due diligence is a determining factor for selecting a great investment deal. Investors must remain vigilant about crunching the numbers in detail, no matter how great a deal might seem at first. This might include forecasting cash flow, estimating the cost of repairs, and buyer demand in the market.

  • Investing too much of your personal funds: Using too much of your own money for your investing endeavors can put you and your business at risk. Investors are wise to separate their personal finances from their business finances and maintain a reserve fund as much as possible.

  • Not having multiple exit strategies: Investors should always stay prepared for when projects do not go as planned, which is bound to happen from time to time. Because of this, experienced investors have multiple contingency plans in place. For example, if a house flip goes awry, have a backup plan, such as a wholesaling or a buy-and-hold strategy.

  • Going solo: Although some may consider real estate investing an autonomous operation, nothing could be farther from the truth. Some may even argue that real estate investing boils down to being a “people person” business. To be successful, investors need a strong network of professionals to rely on, whether it be for finding their next deal, creating a partnership, or asking for expert advice.

Step #6 Line Up Financing

Unlike other forms of investing, it’s fairly normal to use financing to help you with a real estate purchase. And there are many options to choose from.

I describe seven common financing sources in my Bigger Pockets article The Comprehensive Guide For Financing Your Very First Real Estate Deal. If you are a non-US investor, some of these specific sources will vary. But I think you’ll find at least some of them will be applicable. The seven financing sources include:

  1. FHA (Federal Housing Administration) Loans – Insured by the Federal government and easier to qualify for than most programs. Terms include a small down payment, a fixed interest rate, and a long-term (length) loan
  2. VA (Veterans Administration) Loans – You must be a veteran to qualify. Terms include a 0% down payment, a fixed interest rate, and a long-term loan.
  3. Conforming Loans – Loans conform to guidelines of mortgage giants Fannie Mae and Freddie Mac. Terms may include a 5% – 20% down payment, a fixed interest rate, and a long-term loan.
  4. Portfolio Loans – These are kept by banks or lending institutions instead of being sold off on the mortgage market. Terms vary, but they usually have a shorter term (5-10 years) and interest rates are competitive.
  5. Hard Money Loans – These lenders are most interested in the collateral (i.e. a hard asset) instead of the detailed lending regulations of other sources. The loan costs are much higher, so these are often used for short-term remodeling projects.
  6. Private Lenders – The type of private lender varies widely, from self-directed IRAs & 401ks to wealthy individuals. The flexibility and the long-term relationship you get from these lenders make them extremely valuable. I also include money partners in this category.
  7. Seller Financing  – This is my favorite type of financing. A seller with equity can allow you to pay the purchase price over time with installments or by using more creative contracts like leases and options. It’s not as easy to find seller financing as walking into a bank, but the flexibility of terms make seller financing worth the effort.

The type of financing you choose will depend upon your financial situations (Step #1), your strategy (Step #2), and your personal preference. You will want to rely heavily on your mentors and your lending team members (Step #5) to help you line up the best fit for you.

Once you have a solid plan for financing, you can proceed to Step #7 to raise cash for your down payment & reserves.

Step #9 Schedule Your Time Prioritize Next Actions

I’ve given you a LOT of information so far (over 4,000 words to be exact!).  But the point of this real estate investing 101 article is to help you get started as quickly as possible.

So, the point of Step #9 is to help you transfer all of this information into organized, effective action right away. First, I’ll make recommendations for scheduling your time. Second, I’ll talk about prioritizing next actions.

Schedule Your Time

You know your life and your schedule better than I do. But I assume like most people you’re busy. So, here is an important question for you:

How much time can you and/or your spouse or business partner carve out each week to work on your real estate investing business?

Be realistic. But if getting started with real estate investing is important to you, also be ruthless with your priorities. This isn’t a forever project. You’ll spend more time for the next few months to a year, but later as you gain momentum, buy properties, and build systems it will consume much less time.

So, how much time can you carve out? Based on my prior experience helping other investors one-on-one, you need at least 10 hours per week in order to give yourself a minimal chance of success. But the more time you can commit, like 20-30 hours, the more you will increase your chances.

Now look at your calendar and block out specific times to work on real estate each week. For example, if you plan to do real estate before your job each day and on Saturday mornings, schedule it so that nothing else gets in the way. This is like a work or doctor appointment. It must be scheduled in order to be a priority.

Once you have the time blocked, you can focus on the actions you’ll take during that time.

Flipping Houses

Like the day traders who are leagues away from buy-and-hold investors, real estate flippers are an entirely different breed from buy-and-rent landlords. Flippers buy properties with the intention of holding them for a short period—often no more than three to four months—and quickly selling them for a profit.

The are two primary approaches to flipping a property:

  1. Repair and update. With this approach, you buy a property that you think will increase in value with certain repairs and updates. Ideally, you complete the work as quickly as possible and then sell at a price that exceeds your total investment (including the renovations).
  2. Hold and resell. This type of flipping works differently. Instead of buying a property and fixing it up, you buy in a rapidly rising market, hold for a few months, and then sell at a profit.

With either type of flipping, you run the risk that you won’t be able to unload the property at a price that will turn a profit. This can present a challenge because flippers don’t generally keep enough ready cash to pay mortgages on properties for the long term. Still, flipping can be a lucrative way to invest in real estate if it’s done the right way.

Ways to start investing in real estate

The options for real estate investing can include traditional property ownership or making an investment without owning property. 

Here are the best ways for young people to enter the real estate investment market and build wealth long term. 

Real estate investment trusts (REITs)

Real estate investment trusts (REITs) are funds that you can buy shares from on the open market. Unlike private real estate projects, REITs are traded just like stocks. Like stocks, REITs are essentially liquid — as long as you don’t mind losing money if you have to cash out quickly.

You won’t have to worry about property management or any of the day-to-day issues with REIT investing, but you should be concerned with the leadership of any REIT and how their money is being spent. Like with other fractional real estate investments, you want to be sure their debt is low, that they have a fair amount of equity they can tap in case of a market downturn, and that they have a long-term vision for their properties.

REITs are very transparent and have to disclose a lot of information about their income and expenses, making them a great way for first-time real estate investors to add a little real estate exposure to their portfolios. The risk with REITs is the same as with any kind of stock — the company could fold or you could lose considerable money due to someone else’s mismanagement. Be sure to really explore the REIT before you make a buy.

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Property flipping

By now, everyone knows about property flipping. But what you see on television isn’t the whole picture of what’s involved in successfully purchasing a residential property, fixing it up, and selling it to someone who will love it. You’ll need substantial capital to cover labor and supplies, as well as a construction crew or subcontractors you can trust. You also will likely be subjected to multiple inspections, all of which you must pass before being allowed to market your property.

Construction loans are possible, but they are often difficult to obtain as a first-time flipper due to experience requirements and other bank-imposed terms. However, in the current real estate market, a flip that’s priced accordingly and will appraise for the asking price may not sit very long at all. Be prepared to make additional repairs that the buyer’s inspector finds. No house is perfect, no matter how many people have been working on it.

In a worst-case scenario, your flip house can be converted into a rental property. This isn’t ideal, of course, and it will take a lot longer to recover your investment, but it can be a solution if the property can’t find a buyer. Sometimes the market turns after you’ve started a project, and the only option you have is to keep going forward. Always have an exit strategy when getting into property flips.

Summary

Real estate has proven to be a highly successful investment vehicle time and time again. However, the challenge of breaking down real estate investing for beginners is one of the most considerable barriers to entry. The great news here is that anyone can learn how to invest in real estate – you just need to dedicate the time to educate yourself. That’s why we put together this guide just for beginners. No matter what your starting point is, there is no reason real estate should be off-limits. Several investing strategies can serve as a gateway into a successful career in real estate. Take some time to learn about real estate investing for beginners and find the right strategy for you.

Are you interested in learning more about today’s most lucrative real estate strategies?

Whether you’re brand new to investing, have closed a few deals, or are a seasoned investor— our new online real estate class reveals the best real estate strategies to get started with real estate investing in today’s market. Hosted by expert investor Than Merrill, you’ll learn how these time-tested strategies can help you to find success in real estate.

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