Real estate investing has gained popularity as a means of portfolio diversification and generating passive income. If you're a beginner looking to enter the real estate market and achieve your financial goals, this ultimate guide is here to help you get started.
Benefits of Real Estate Investing
Real estate investing offers various benefits, including rental income and property value appreciation. According to data from the fourth quarter of 2022, the median asking rent for vacant rental units was $1,322. Real estate is also known for its relative stability and the opportunity for part-time or full-time involvement. Additionally, while real estate investing can be expensive, there are options for small investments, such as Real Estate Investment Trusts (REITs).
How to Invest in Real Estate (Even if You're a Beginner)
There are several methods you can use to invest in real estate, even as a beginner:
1. Flipping Houses
Flipping houses involves purchasing properties below market value, making improvements, and selling them for a higher price. This strategy allows you to profit from the potential future value of the property after renovations. The new expected value, known as the after-repair value (ARV), is key to calculating your potential profit. However, keep in mind that this method may require a longer time commitment and the investment may be illiquid during renovations.
2. Investing in REITs and Real Estate Funds
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance real estate properties that generate passive income. You can invest in REITs by buying shares in publicly-traded REITs or real estate funds like mutual funds and exchange-traded funds (ETFs). REITs specialize in various types of real estate investments, such as multifamily properties, healthcare facilities, or commercial buildings. This option provides a low-cost entry into real estate investing and offers the advantage of regulatory oversight.
3. The Buy, Rehab, Rent, Refinance, Repeat (BRRRR) Method
The BRRRR method focuses on purchasing undervalued rental properties that can be improved to increase their market value. After upgrading the property, you can rent it out and refinance it based on its increased market value. The cash flow from rental income and potential property value growth contribute to your overall net worth. However, be aware that the real estate market can experience periods of depreciation that may impact your return on investment.
4. Real Estate Crowdfunding
Real estate crowdfunding platforms offer investment opportunities in commercial buildings and rental properties. These platforms allow individual investors to pool their money together and invest in real estate projects. Examples of real estate crowdfunding platforms include CrowdStreet, Ark7, CollabHome, Fundrise, and DiversyFund. These platforms offer various investment options with different minimum investment requirements, enabling you to start with as little as $10.
5. Wholesaling
Wholesaling involves acting as a middleman between a seller and a buyer to make a profit. Unlike real estate agents, wholesalers technically own the property they sell. This method typically falls into one of three categories: land wholesaling, residential wholesaling, and commercial wholesaling. Land wholesaling involves undeveloped land, while residential and commercial wholesaling focus on different types of properties. Wholesaling can be an option if you're looking to enter the real estate market with little or no upfront capital.
How to Fund Real Estate Investing
When it comes to funding real estate investments, there are several options available depending on your financial situation and investment goals:
Personal Savings
Using your personal savings is the cheapest source of financing available. Having money set aside allows you to act quickly without incurring loan or mortgage interest charges. This option is particularly useful for wholesalers who may only need a small pool of money for deposits on real estate contracts.
Conventional Loans and Government Programs
If you're planning to reside in the property you're purchasing, conventional mortgages and government programs may offer funding options. Conventional mortgages can be obtained from credit unions or banks, while government programs like FHA, VA, and HUD loans have different eligibility criteria. Keep in mind that a down payment less than 20% of the home value may require mortgage insurance premiums.
Financing Secured Through a Mortgage Broker
Working with a mortgage broker allows you to shop around for the best mortgage terms and rates from various lenders. Online websites like Rocket Mortgage also provide similar services. Mortgage brokerages charge a fee for their services, typically ranging from 1% to 2% of the loan amount.
Home Equity Loan or Line of Credit
If you own existing property, you can tap into your home equity through a home equity line of credit (HELOC) or home equity loan. This allows you to use the equity in your home to purchase investment properties. A HELOC is generally more flexible and economical than a home equity loan.
Personal Loans and Lines of Credit
Personal loans and lines of credit are unsecured financing options that are not tied to the property you're purchasing. They provide cash flow flexibility without waiting for appraisal or underwriting approval.
Seller/Owner Financing
Seller or owner financing involves buying a property and making payments to the owner instead of a bank. This method can be advantageous if you're unable to get approved for traditional bank financing.
Credit Cards
Credit cards can be used to pay for repairs, utilities, insurance, and other real estate expenses. Depending on your credit score and the cards you qualify for, you may earn rewards or benefit from 0% APR promotional offers.
Hard Money Loans
Hard money loans are an option for investors willing to accept higher interest rates and fees. While they can be more expensive, hard money lenders are often more likely to approve your loan. Hard money loans are typically short-term and require full repayment within a year.
How Much Money Do You Need to Invest in Real Estate?
The amount of money required for real estate investments varies depending on the method and other factors. Here are some general guidelines:
- Flipping Houses: Follow the 70% rule, which suggests spending no more than 70% of the after-repair value (ARV) of the property minus renovation costs.
- Investing in REITs and Real Estate Funds: Low-cost entry options allow you to invest with as little as $1,000 or even less.
- BRRRR Method: The amount needed can vary widely depending on the property and location. The general guideline is to invest less than 70% of the property's value.
- Real Estate Crowdfunding: Platforms like Fundrise and DiversyFund enable you to invest with small amounts, starting as low as $10.
- Wholesaling: This method typically requires little or no upfront capital, as wholesalers act as intermediaries between buyers and sellers.
Remember that additional methods and factors can influence the amount of money needed, such as short-term rentals and commercial real estate. Consulting a financial advisor before investing is advisable to align your plan and manage potential risks.
How to Find Your First Property
Location is crucial in real estate investing, as well as other factors that contribute to profitable investments. Here are some avenues to find real estate investment opportunities:
Real Estate Agents and the MLS
Working with a real estate agent gives you access to their local market knowledge and the Multiple Listing Service (MLS). The MLS is a database of properties for sale available only to licensed agents. Online platforms like Redfin and Zillow aim to replicate the MLS but may have limited data.
Auctions
Auctions offer potential deals, often involving properties not suitable for sale through the MLS. Types of auctions include tax lien auctions, trust auctions, government auctions, and foreclosure auctions. Auctions usually require a deposit to bid, and winning bids must be paid shortly after closing.
Wholesalers
Wholesalers are always seeking prospective buyers, making them a great resource for finding investment properties. Communicate your specific property criteria to wholesalers, enabling them to share opportunities that align with your investment goals.
Best Real Estate Investing Credit Cards
Credit cards can be valuable tools for real estate investment. They help build credit history, provide cash back and rewards, and offer 0% APR promotional periods for low-cost financing. Here are some recommended credit cards for real estate investing:
- Ink Business Cash® Credit Card: Earn cash back on office supplies, internet, cable, phone services, gas stations, and restaurants. New cardholders can earn $750 bonus cash back after reaching a spending threshold.
- Ink Business Preferred® Credit Card: Earn points on travel, shipping, advertising, and other eligible purchases. New cardholders can earn 100k bonus points after reaching a spending threshold.
- Ink Business Unlimited® Credit Card: Earn unlimited 1.5% cash back on every purchase. New cardholders can earn $750 bonus cash back after reaching a spending threshold.
- The Blue Business® Plus Credit Card from American Express: Earn Membership Rewards points on eligible business purchases. Enjoy a 0% intro APR on purchases.
- Citi Double Cash® Card: Earn up to 2% cash back on every purchase and enjoy a 0% intro APR on balance transfers.
Is Real Estate Investing a Good Idea?
Investing in real estate offers several potential benefits, such as hedging against inflation, diversifying your investment portfolio, and providing semi-stable asset appreciation. Real estate also offers tangible investment opportunities, allows for part-time or full-time involvement, and is accessible through various investment options. Consulting a financial advisor is recommended to assess your individual circumstances and align your investment plan with your goals.
FAQ about Getting Started in Real Estate Investing
How can I invest in real estate with a little money? Even with a limited budget, you can invest in real estate. Platforms like Fundrise and DiversyFund allow you to start investing with as little as $10 or $500. Other options include using REITs and real estate ETFs or seeking financing and forming partnerships to pool funds.
How to invest in real estate as a beginner? As a beginner, you can start real estate investing by flipping houses, investing in REITs and real estate funds, using the BRRRR method, getting into wholesaling, or exploring other investment strategies. Choose the method that aligns with your goals and risk tolerance.
In conclusion, real estate investing offers promising opportunities for diversifying your portfolio and generating passive income. With the right knowledge, funding options, and investment strategies, you can embark on a successful journey as a real estate investor. Remember to continuously learn, adapt, and seek advice along the way to maximize your investment potential.