Summary: In this article, learn how to get into real estate investing and why right now may be the time to find great deals. Topics also include coming up with an investment strategy, recognizing a strong market, analyzing rental properties and ways to make money through real estate investing.
So far, 2020 has brought much more than just a new decade. Nobody could’ve predicted how much damage the COVID-19 pandemic would cause. We are dealing with the loss of 350k+ lives worldwide, millions of people are out of jobs and the economy is on its way into a recession.
Last week, protests were being organized after an incident involving Minneapolis police left George Floyd, an African American man dead. What started out as peaceful protests, quickly turned violent in cities across the country. Riots broke out, police cars were turned over and burned in the middle of streets, state buildings were vandalized and businesses were looted. It’s a crazy time right now, to say the least.
Having said all that, there have been some silver linings during the Coronavirus crisis–one of them being certain real estate markets holding strong. After seeing a couple of down months, inventory of for-sale homes on the market has already started to rebound. Housing demand and prices are also rising along with it.
One of the best things about real estate is that there will always be a demand for a place to live–regardless of a pandemic, epidemic, recession or depression. Because the pandemic has put us in uncharted territory, many are afraid to make any big financial moves during these times of uncertainty. But any smart real estate investor knows to never stop looking for good investment opportunities and unique ways to turn a crisis into potential cash flow.
Your next question may be, “How do I start?” You’re in luck because in this comprehensive article, learn exactly how to get into real estate investing and why right now is a great time to do it.
How To Get Into Real Estate Investing
Phase I: Come Up With a Strategy
We all probably know those people who got lucky and bought a house during a great time–a buyer’s market. They now probably have a ton of equity in it, which means it was a good buy. But, those of us who wish to rely on something other than luck, I’d stress the importance of putting together a step-by-step plan with the help of an experienced real estate investor. This will help you avoid painful and often costly mistakes as a new investor.
Determine Your Investment Goals + Time Frame
A trusted CPA or accountant, ideally with experience in real estate, can make a huge difference when you’re first trying to figure out how to get into real estate investing. Other new investors have found it extremely helpful to network with other investors and find a real estate mentor that’s willing to help you come up with a plan of action.
These experts can help you define your investment goals and the timeframe in which you hope to achieve them. Generally, real estate is a very safe long-term investment. Thanks to factors like appreciation and inflation, for example. While people have found success in many short-term real estate investment strategies (i.e. flipping, short-term rentals, etc.), it almost always comes with a lot more risk–especially if you’ve never done it before.
Determine Your Risk Tolerance
Whenever you make a big financial decision, like buying a rental property, it’s massively important to have enough cash reserves in the bank. We’ve recently been reminded by COVID-19 that you never know what could happen. A tenant’s ability to pay rent can change at the drop of a dime. It’s so important, now more than ever, to have at least six months of money in the bank to cover your rental property mortgage in the event of vacancies and other unexpected expenses.
If you can’t afford to lose your investment, then your risk tolerance would be considered low. If your investment tanks and your finances remain relatively unaffected, at least for a while, then your risk tolerance is much higher. Understanding the level of risk you are able to tolerate will help you figure out how much money you should invest.
Decide How Much Money You Want to Invest
If you’re new to investing in general, it’s a good rule of thumb to only invest as much as you comfortably can. The last thing you want to do is throw too much money into an investment and ruin yourself financially if it falls apart.
Assuming you’re just starting in real estate, you don’t have to buy a rental property to invest. Although this can be really affordable – in some markets you can buy an investment property in a strong B neighborhood for as little as $100,000. However, if you’re not ready for that yet there are a number of different ways to get into real estate. Many online platforms offer options to buy a percentage of a larger real estate fund. Some offer minimum investments as low as $500. More on that later…
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Decide What Type of Real Estate You Want to Invest In
There are several different types of real estate you can buy. Each one is a bit different and explained below.
Residential real estate has a bunch of different sub categories. They include, single family and multi-family homes. Fixer uppers and foreclosures can also fall under this category. If you’re a first time investor, a SFH will be cheaper than buying a multi-family home and in good markets actually have better appreciation. SFHs are also easier to sell when the time comes.
There are, of course, disadvantages to SFHs, including a higher cost per unit between tenants as there is more square footage. There tends to be more demand for these types of homes, which can make it difficult to get a good deal when there are multiple offers on one property.
Multi-family real estate has more than one unit. They can be duplexes, triplexes, townhomes, condos or apartments. Owners of multi-family real estate have a better opportunity to make more money, quicker. Buyers also only have to get one insurance policy, one mortgage and one property tax bill. Whereas investors that own more than one SFHs must carry multiple mortgages, insurance policies, and pay property taxes on every rental.
For example, let’s say you own four townhomes. Every year, you raise the rent $50 per month. Instantly, you would be getting $200 more a month every year. It’s much easier to scale profits with multi-family homes.
The biggest issue with investing in multi-family homes is that they are more expensive upfront. As a beginner to the real estate investing world, it may be a better idea to start out small and work your way up to bigger deals as you gain experience.
We won’t get too much into the details of investing in commercial real estate, because it’s not all that common for people looking to get into real estate to jump right into the deep waters of buying a commercial property.
Commercial real estate includes offices, warehouses, industrial buildings, and retail. One major benefit of commercial real estate is that tenants usually stay longer. On the other hand, it can take more time to replace a tenant in commercial properties.
Investing in land is a less expensive way to get into real estate investing, especially long-term. Expenses will be low because you won’t be paying a mortgage, property insurance or utility bills. The only bill you have to cover is a property tax, which should be pretty minimal.
Many people who get a good deal on land may choose to not even build on it. As long as a property can be built on the land at some point, it should appreciate in value long-term–assuming you recognize what a strong housing market looks like (which we’ll discuss in the next phase). Buying land is also a super passive or “hands off” type of real estate investment.
Decide if You Want to Be an Active or Passive Real Estate Investor
If you’ve ever invested in anything, you probably have at least an idea of what it means to be a passive or active investor. There’s no “best” type of investor. Rather, it’s all about preference. Some people prefer a more hands on, active approach, while others may like the freedom and time that passive investments provide. Next we’ll discuss the difference and help you decide the best fit for you.
Passive Real Estate Investments
Passive real estate investing is a hands off approach that typically comes with less time and stress. Basically, someone else manages your real estate investment. However, because you won’t be actively handling your property, these investments can come at a price.
- REITs or Real Estate Investment Trusts can be a great option for new investors who may not want to part with a large sum of money. REITs let investors buy a portion of a real estate investment property, with the idea that a percentage of any return would go back to you. If you’re only looking to invest between $500 or $5,000, check out REITs. They’re easy to find and set up online.
- Turnkey Rentals – Turnkey rentals are ready to rent. Oftentimes, these types of rentals will be managed by a property manager or management team where the owner would pay a fee every month. While that takes money out of the investors pocket, it’s worth it if you can’t or don’t want to manage the property. Plus, a lot of expenses, including property management fees are tax deductible.
- Buy-and-hold Single Family Rentals* – This type of investment is considered passive, assuming a property manager/management team oversees day-to-day operations and responsibilities.
Active Real Estate Investments
Active real estate investments can produce better returns but they take a lot more time, energy and experience. Real estate professionals and landlords would be considered active investors.
- Flipping Houses – A flippers strategy includes buying a house, fixing it up and then turning around and selling it for (hopefully) a profit. This is a very active and hands on strategy and usually comes with a good amount of risk.
- Become a Landlord – If you don’t want to hire a property manager and manage the rental yourself, go for it! Just make sure you do a ton of research and understand what you’re getting into. Being a landlord isn’t for everyone.
Phase II: What to Look For in a Rental Property & Rental Market
Key Indicators of a Healthy Housing Market
There are a few key indicators you should always look for in a strong housing market. Population growth, appreciation or equity growth and job growth. If all of these statistics are trending up, chances are it’s a strong housing market. A few other factors to consider when looking at different markets is, median household income, median home prices and average monthly rents.
Due Diligence Will Tell the Story
- Get an Inspection & Appraisal – Even if you aren’t financing the property, it’s best practice to order both a third-party inspection and appraisal.
- Verify Rents in the Area – Reach out to other property managers in the area with rentals similar to the one you’re looking to purchase. They can help verify how much rent you can expect from your investment property.
- Get the right insurance (if financing) – Interest rates are extremely low right now. And even though lenders have tightened their standards during the pandemic, if you can qualify, you’ll get a crazy good rate right now. It’s also usually a smart idea to get pre-approved on a loan within your budget before finding a rental property.
Check out more due diligence tips for smart buyers.
Analyzing a Property
Even though the property will be inspected and appraised by professionals, it’s your job to take it a step further and look at all the other characteristics of a good rental property. Consider the following:
- Neighborhood and area
- Size/square footage
- Size of lot
- When the house was built
- Amenities and features (balcony, deck, fireplace, swimming pool, etc.)
- Proximity to local amenities
- Recent improvements
Here’s a more extensive list of how to analyze a property before buying.
Do the Numbers Work?
In other words, will the property most likely do what you want it to do–based on your long-term investment goals?
A great way to figure out if a rental property is a good investment or not is to perform a comparative market analysis or CMA. Basically, you would compare the rental property you’re considering with other properties similar to yours. A CMA won’t provide you with a definitive number, but it will give you insight into the value of houses similar to yours in the area.
Rental property expenses are often very difficult to predict for anybody, but especially for investors just getting into real estate. Buyers must account for property taxes (which vary by city and state), potential vacancies, expected and unexpected repairs, etc. A good rule of thumb when writing out a list of property expenses is to overestimate and over prepare by keeping enough cash in the bank.
Take the information you gathered while performing your due diligence, CMA and property expenses and bring it all together. This will give you a better idea of whether the rental property you’re looking to buy is a good investment or not.
How to Make Money in Real Estate Investing
Real estate can be an incredible vehicle to build real wealth and gain financial independence. There’s a number of ways an investor can make money through real estate, which we’ll break down next.
Investing for appreciation is where you buy in a growing market, with the goal of building equity over time as the property increases in value. This type of investing inherently comes with more risk because there’s never a guarantee that property values will rise in your market. But with the proper due diligence, the risk can be more manageable.
Investing in property with the goal of making money from rents is another way to build equity and potentially cash flowing income. There’s still moderately high risk involved with rental income, but again, there are ways to reduce risk.
Investing in debt or for interest can produce ongoing income with less risk. If you can lock in a low interest rate for 30 years and hold onto the property long-term, returns will likely be much higher.
Do Cash Buyers Have an Advantage Right Now?
With mortgage interest rates so low right now it almost seems like a no-brainer to finance an investment property. But it’s also harder to qualify for a loan right now due to the COVID-19 pandemic and lenders wanting to avoid any unnecessary risk.
Cash buyers may also feel hesitant to drop a bunch of money right now when the economy is declining and heading into a recession. But some real estate experts are saying that if you’re a cash buyer, it could actually be a great time to find a deal on a home.
Borrowing money to buy a house can take a long time. Whereas buying in cash typically pushes the deal through quickly. If a property has been listed for awhile, the seller will probably be more inclined to negotiate a great deal on a cash offer. Because of all the stress and chaos the Coronavirus has caused, people may jump at the chance to offload the property and walk away with some cash.
Clint Coons, founder partner of Anderson Law Group and expert in business and real estate taxes shares, “Right now, from an investment standpoint, there are lots of deals to be had, especially if you’re a cash buyer.”
Another Option: Join Our Network
Sorry in advance for the shameless self-promotional pitch here, but I couldn’t leave it out. At RealWealth, we try to simplify the process of investing in real estate. Here’s how it works:
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Learning how to get into real estate investing, especially right now, shouldn’t be a scary or daunting task. Armed with your own knowledge and research, your next step may be to reach out to experts who have a proven track record of successful real estate investments and ask for help or advice. Anyone can get into real estate investing, it’s just a matter of having the right knowledge, help and tools to be successful.