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There’s no doubt real estate investment can be an excellent way to diversify your portfolio and tap into benefits that would otherwise not be available to the average investor. Rental properties can increase passive income and provide stable cashflow while also offering some distinct tax benefits. What’s not to love? Well, real estate investing can be more difficult to get into than, say, buying into an index fund. You can’t, after all, own 1/100th of a house or sell a property in a day. (Technically, with REIT’s, you can, but that’s a topic for another time) No, if you want to see an appreciable rate of return on your real-estate investment, it’s best you commit fully to the endeavor over the long term. This can be intimidating for the new investor; entry and exit costs are higher than other investments and the illiquid nature of real estate means you’ll will incur higher risks relative to other investment strategies. With that said, when done right, real estate holdings can be fantastic addition to your portfolio and should be seriously examined by anyone interested in generating serious passive income. In this article we’ll look at the first steps to consider when learning how to start investing in real estate.
Educate Yourself
Investor education is probably the most overlooked item in this list: do not underestimate its importance! Learning about real estate is the single most valuable action a new investor can take when starting out. Best part, it’s free! With countless free educational programs online, there’s absolutely no reason you can’t start learning the trade tomorrow. YouTube is an excellent place to start. Investopedia is another fantastic resource. I also recommend biggerpockets.com, which is, among other things, a forum dedicated to new real estate investors. There are, of course, other ways to get training in this field. Finding a mentor or working within a related industry are common suggestions, but I recognize these options may not be available to everyone. They’re also not a requirement to buying your first property!
Countless people have started in this field without “formal” training, whatever that means. One caveat: be wary of paid programs that advertise some special real estate investing secret or trick. While some of the programs may offer real advice, I’d wager they’re merely repackaging information that is already easily found online. At worst, these “gurus” and organizations are borderline scams, and will happily take your money while providing little in return. Succinctly put, you shouldn’t need to spend a cent to get a foundational understanding of real estate investing.
Save
As powerful as knowledge is, you’re eventually going to need some cash to put down on a property. Saving up thousands for your first rental property can be daunting, but the financial barrier to entry may be lower than you might expect. Financing is a perfectly valid approach when getting started. Keep in mind many seasoned investors with cash to spare still finance new acquisitions. Why tie up cash when you don’t have to? Investment properties typically call for 20% down. So, a bank will ask for $20,000 up front on a $100,000 investment property. Closing costs here would probably add another five thousand, so if you can save up 25-30% of the property’s value you’ll be in good shape. The principles here are the same as any other savings goal. Set aside money as early as often as possible. Live within your means, or below if you can.
You can lower this amount if your first property is also your primary residence. This so-called “house hacking” method would see you living taking up residence in your own multifamily unit while renting out the other spaces. Seen as a less risky prospect by the bank, you – the landlord – will get lower rates and a much lower down payment. This method is popular with young, inexperienced investors looking to get started.
Research your Market
Once you’ve acquired the intellectual and financial capital, it’s time to get the lay of the land. At this point, you probably will have a good idea of what type of real-estate you want to invest in – residential, commercial, or industrial space – and have started looking at areas to buy. You don’t necessarily need to live down the street from the property if it’s not your primary residence, but the closer you are to the land the better. You’ll want to look at data relevant to the market if you’re entering.
If you’re investing in residential property, consider historical performance, population and job growth, nearby amenities, and other quality of life metrics that point to future growth and desirability. New investors typically want to find a sweet spot between affordability and growth potential. The hope is your affordable property will only increase in value over time as the area becomes more desirable. There are many resources online that will walk you step-by-step through a market analysis. Do not skip this step!
Network and Make your Offer
Let’s assume all of the above is set and you’ve found your starter property. Time to cut the check, right? Well, not exactly. Even the smoothest property transaction will take weeks to complete due to the moving pieces. You’ll need to secure your lending (if you’re financing), work with a realtor, employ an inspector and appraiser, a title company, and an insurance agent. These steps may seem expensive and time-consuming to the new investor, but these are all important steps to make sure the buyer and seller are operating legally and satisfied with the transaction. You don’t want to buy a property and get blindsided with major repairs or legal issues once the property’s in your name, after all. Like my earlier point on education, there’s no reason you can’t start networking now even if you don’t plan on acquiring your first property months or years down the line. These parties tend to work closely together on multiple deals, so you may only need to meet one or two of the right people to get started.
I recommend seeing what networking groups are in your area. There are likely real-estate specific agents at a lot of general networking events, and it’s a safe bet there are dedicated real-estate networking events if you live/work in a moderate to highly populated area. Try and get to know one or two people well, to the point you can get trust-worthy recommendations. It’ll take a lot of guesswork out of the process and ensure you’ve got a competent team assembled when it’s time to build your first deal.
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There’s a lot more to unpack on this topic, but hopefully this article has given you a general sense of how to get started on your real estate journey. At its most basic, successful real estate investors are successful because they do their due diligence up front before ever cutting a check. Start saving now, research, and network, and you’ll be a landlord in no time!
If you need assistance, consider partnering with RCN Capital, a reliable lender with diverse loan programs for new and seasoned investors, as we do offer programs for investors at all levels.