Investing in real estate doesn't have to be complicated.
Sit down with any financial advisor and, regardless of the size of your portfolio, they will likely tell you the importance of reducing investment risk through portfolio diversification. That includes a 13% to 26% increase in real estate, an asset class not directly linked to the stock market. Real estate investing takes many forms, from passive participation to property acquisition and rehabilitation. Here's our complete guide on how to invest in real estate.
1. Line Up Your Cash and Financing Options
Real estate is an expensive investment option, and you need cash and access to financing. If you are buying a rental property, plan for the following:
- Minimum 20% down payment. There are no zero down payment mortgage programs for investor properties. You should plan for a minimum down payment of 20% of the purchase price.
- Initial cost of retrofits and repairs. Buy below market value for instant capital, but be prepared that affordable properties often need renovations. You will need to get the property to the point where it can be rented out profitably.
- License and inspection fees. Most states require that rental properties be inspected for safety risks and licensed.
- Vacancy cost. There will be months, for example during tenant turnover, when you will not receive rental income. You still have to pay the mortgage, taxes, insurance, HOA and other maintenance costs.
- Repair costs between tenants. It could be a minor touch up of paint and a general cleaning of the house, or you may need to do extensive renovations and pay for a junk service to remove an entire house full of tenants' personal belongings.
- Storage costs. Tenants pay their rent to provide a secure location with working equipment and systems. You need a budget to maintain and eventually replace the major systems that keep a home in rental condition.
You also need to have a good credit score to get a loan from a bank. The better your credit score, the more likely you are to get a good mortgage. Your credit score determines not only whether you get a mortgage, but also the terms of that loan. You can use a product like Experian Boost™ to boost your credit score.
Even if you don't want to be a DIY real estate investor, some of the best crowdfunding opportunities require significant capital as a minimum investment. Many also require investors to be accredited. Once you become an Accredited Investor, your potential to generate money can increase significantly.
For example, Origin Investments is a private equity firm that enables high net worth individuals to invest in carefully vetted, diversified real estate funds. Origin's flagship fund requires a minimum investment of $100,000 and boasts double-digit annual returns.
2. Start Slow with Passive Investing in Real Estate
If you don't know much about real estate investing, you can start with a passive strategy. The advantages of passive investing are that you can do it from your computer. Of course, as with any investment, you should do your research and due diligence, but you don't need to physically visit or manage a property.
Investing in a REIT (Real Estate Investment Trust)
A REIT (Real Estate Investment Trust) is a corporation (actually a trust) formed to use investors' money to acquire, manage, and sell income-producing properties such as shopping centers, commercial buildings, and care facilities. medical REITs are required by law to distribute 90% of their taxable profits to shareholders annually. This comes in the form of dividends, often quarterly. Like investing in a real estate mutual fund, your REIT investment is professionally managed, SEC regulated and highly liquid. (Shares can be bought and sold on major stock exchanges.)
Companies we like that sell REITs include: Fundrise and Streitwise.
Investing in Real Estate mutual funds
Real estate mutual funds are a popular way to add real estate diversification to your portfolio without actually owning or understanding much about buying, selling, and managing specific properties.
- Your investments are pooled with others and shares in the fund are issued to you. All purchases, operations and allocations are monitored by the fund manager.
- Analytical and research information is carried out by specialists. You simply buy and sell shares like any other mutual fund on the stock exchanges.
REITs and real estate mutual funds are the most passive ways to invest in real estate and are a great option for those who simply want portfolio exposure to real estate and are not looking for a side job.
Invest in Property through Real Estate Crowdfunding
Crowdfunding real estate investing can also be very passive. But the due diligence you need to do is more complicated than just buying shares of a mutual fund or REIT.
- Crowdfunding platforms provide an online marketplace to invest in a variety of real estate opportunities.
- There are hundreds of real estate crowdfunding platforms to choose from.
- You can invest in everything from high quality real estate loans to single family homes through crowdfunding.
Crowdfunding sites allow individual investors to get into larger businesses (both residential and commercial) that were previously only available to those with significant amounts of money to invest. Like investing in mutual funds or REITs, many crowdfunding offerings offer very affordable minimum investments. The biggest advantage that crowdfunding offers is that you can invest in specific properties and exclusive offers for very little money.
While online crowdfunding platforms make investing fast, many platforms require investors to be “accredited” (a person with an annual income of more than $200,000 and a net worth of more than $1 million, with no primary residence). And for good reason. You are responsible for performing thorough due diligence. Therefore, you should analyze the submitted documents. You must also find and investigate any relevant information not provided. And don't forget to research crowdfunding staff and management policies.
Real estate Crowdfunding is a passive investment. You don't have to quit your job and become a homeowner, but you can still benefit from investing in real estate. One crowdfunding service that shines is Crowdstreet, which allows you to invest in real estate for as little as $25,000.
Buy a pre-screened rental property
Another alternative to traditional real estate investing is a platform called Roofstock. You can use this platform to buy pre-screened rental properties. These are turnkey opportunities. you don't need to do any renovations or bathroom renovations in the middle of the night. Simply use the Roofstock database to select and purchase rental properties that are already cash flow positive.
Invest in Real Estate Limited Partnerships
A Real Estate limited partnership (RELP) is another way to invest passively. Since some real estate investments require a lot of money (for example, building a shopping mall), partnerships are a common way to raise the necessary funds.
- A RELP is an entity formed to develop or buy and hold a portfolio of properties, generally for a limited number of years.
- Experienced real estate managers or real estate development companies manage them, and outside investors finance the real estate project as limited partners.
- As a limited partner, you will receive regular distributions from the income generated by the RELP and receive a larger payout when the property is sold and the RELP is liquidated.
- Although being a limited partner is a passive activity, your investments are often highly illiquid.
- RELPs are typically private investments and are not traded on stock exchanges. RELPs also do not widely advertise their available offerings. Due diligence is essential.
Join Real Estate Investment Groups
Real estate investment trusts are like small mutual funds for real estate rentals.
- The company will buy or build some apartments and then allow investors to buy them through the company.
- As a sole investor, you can own one or more units.
- The company that operates the investment group collectively manages all units. It is responsible for maintenance and operation in return for a percentage of the monthly rent.
This is passive in the sense that investors do not have to worry about locating tenants or managing their units. But you should do your due diligence before investing. This includes checking all fees, services and tenant selection processes, as well as the integrity and experience of group managers.
3. Take an Active Role with Active Real Estate Investing
Many real estate investors like myself play an active role in achieving higher returns. The most common strategies are:
Buy and hold for Rental Income
Owning a rental property is where many investors who want to become the most practical start. Focus is on acquiring and managing residential real estate for profit. The most important considerations are the property's location and market rental rates. You want to pick a location where market appreciation is likely. And you want to make sure you can collect enough rent to turn a profit after covering all your expenses. Expenses include mortgage, interest, maintenance, HOA or condo fees, property taxes, insurance, vacancy, utilities and other direct and indirect costs.
Rental real estate investors generally look for properties that meet the “one percent rule.” This means that the monthly rent covers 1% of the purchase price plus restoration costs. Therefore, if your total cost to get the property “rent ready” is $150,000, your monthly rent must be at least $1,500. Of course, this is a generalization. Numbers work differently in many places based on many factors that must be carefully considered.
Buying rental real estate requires more significant investment. You will need 20% of the purchase price as a down payment. And you'll want to make sure you have the knowledge and time to do it successfully. Even if you plan to hire a real estate agent to find properties and a property manager to handle the monthly operations, there's still a lot to know before you jump in and buy a rental property.
Fix and flip
At the other end of the passive/active real estate investment continuum is renovating and selling properties. Popularized by HGTV reality shows, flipping has found widespread appeal among do-it-yourself investors.
- You are buying a property that is undervalued, mainly because it is in poor condition.
- Then repairs and upgrades it and sells it at a profit a few months later.
- To be successful at flying, you need a wide range of skills, experience and access to a significant amount of money.
- You need to find and acquire properties below market value, manage a successful, quick and profitable recovery and resell quickly.
Transaction costs are high on both sides of the table.
- First, you have fees both when you buy a distressed property and when you sell an improved property.
- Then there are transfer taxes, title investigation and insurance, closing costs and agent commissions.
- You transfer ownership twice in a short period of time, but there are no price discounts.
County and state tax the transfer on both transactions.
- Title insurance must be purchased twice.
- All costs, including acquisition, restoration and transaction fees, should be carefully assessed and factored into the original property price.
Flipping is the riskiest real estate investing strategy. Ignoring a structural problem can wipe out your profits and more. Fix-and-flips also offer the potential to make big profits fairly quickly. But flipping isn't for beginners or those looking for a smaller initial investment. To get the best deals, flippers need access to a lot of money to buy distressed properties, enough funds to do renovations, and enough cash flow in their business to hold the property until it sells.
The wholesaler finds distressed properties with motivated sellers and matches them with investor rehabbers without even taking title. Those signs you sometimes see on the side of the road that say “Cash for your home, any terms” are probably posted by a wholesaler who makes a quick $5,000 for doing the match.
Personally, I have found that the benefits of active real estate investing are well worth my time and effort. (I currently have a portfolio of 8 rentals and change 1-3 properties each year.) Benefits include much higher profit potential (property appreciation), reliable monthly rental income, control over my investment, tax benefits, and pride of accomplishment.
4. Become a Real Estate Expert
In many ways, real estate investing is a craft that is learned by (1) doing and (2) working with others. That said, it's no excuse not to learn and educate yourself as much as possible. If you decide to pursue an active real estate strategy, it is important that you learn by (1) researching and analyzing (2) doing and (3) working with others.
- Take a real estate course — There's no shortage of online real estate courses if you're willing to pay to get up to speed. Check out the trusted Udemy; This online learning platform offers hundreds of REI courses, many of which cost as little as $10 per course. That's not a bad deal.
- Watch lots of YouTube videos. What did you NOT learn from YouTube? YouTube has thousands of videos from professionals and amateurs sharing real estate stories and tips. You can literally watch a video on how to replace the garbage disposal, stopping you every step of the way.
- READ! – This is obvious. YouTube and online courses are great, but you have to learn to become an expert. A classic book we like is Rich Dad Poor Dad by Robert Kiyosaki. It doesn't focus on any specific strategy, but certainly addresses the philosophy of real estate investing.
Regardless of the strategy you choose, you need to know EVERYTHING about your investment industry. At the very least, you should study.
- Property values. The only way to know if you're getting a good deal is to find out what similar homes nearby have sold for in the past six months. Find and hire a local real estate agent who works with investors to create custom MLS searches for you.
- Market rents. If you intend to buy and hold rental income, you need to know the property's rental income potential. There are tons of free websites where you can research rents in the local market and an agent can help you.
5. Connect with Other Real Estate Investors to Dast-Track your Learning
- Frequent Online Forums – I highly recommend the BiggerPockets forums as a place to connect virtually with other real estate investors. You can post a question and the community is so open and helpful that you'll probably get an answer within a day. I recommend posting alerts for topics related to your investment strategy and local area. Use the forums to set up coffee dates with other investors there. Having a network of referrals is key to success.
- Attend local REIA (Real Estate Investors Association) meetings to learn and network. Your city may have local REIA meetings with a mission statement to “develop, support and promote local real estate investor organizations, serving the interests of the real estate investment industry through networking, education, support and legislative leadership.” Usually run by experienced investors willing to share their wisdom, I encourage you to join and participate.
- Meetup.com. What I love about Meetup.com is that there is very little virtual connection…you actually have to MEET! The variety of clubs and groups available on Meetup.com is endless. The invitations describe the planned theme and I can easily see the bios of other contributors who are going to attend to decide if it's worth going.
6. Know the Risks in Real Estate
No article on real estate investing is complete without mentioning risk.
- Like the stock market, the real estate market fluctuates. The biggest profits are made when you buy low and sell high.
- Unlike the stock market, real estate transaction costs are high and selling is a time-consuming process that makes investment properties illiquid assets.
- Real estate investing is not for day traders. It's a long-term investment, which means you have to purchase value and hold it for appreciation, rental income, or both.
- The biggest risk is buying the wrong property and paying too much for it. If you're buying a house to live in for 20 years, it may not matter if you pay more for it, but for an investment property, you need a return on your investment, and the numbers work better if you're buying at below-market rates. .
It is also important to know the laws surrounding landlord-tenant relationships. Even if you own property, your options are often limited by state and local laws. These laws vary by state, so be sure to check the various rules regarding the eviction process, security deposits, and insurance policies. Also, be sure to do background checks on prospective tenants to find out their credit score and criminal history.
Real Estate Investing is Hard Work
There are many books and programs that promise you can get rich in real estate without doing anything. All of them are complete nonsense.
Investing in real estate can be very rewarding, but you have to do it with the right expectations and mindset, and then be prepared to put in the work.
If you want to get started in real estate, choose your strategy. Become an expert in your strategy by researching and connecting with others to network and further your learning. Align your investment capital. Now you're ready to find and invest in deals.