The Ultimate Beginner’s Guide To Investing In Real Estate
I’m often asked about the best way for someone to get started in real estate investing. If you’ve been wanting to get into real estate investing but are sitting on the sidelines and not exactly sure how to jump in, you are not alone.
There are TONS of ways to get involved in real estate investing, which is why those who do it love it, but it’s also why those who haven’t yet taken the plunge are left feeling completely overwhelmed and intimidated.
If you’re one of those spectators on the outside looking in, rest assured that there are many ways to get involved. In this article, I will walk you through how to diagnose where you are, what you want out of investing in real estate, and the best way(s) for you to get started.
Here’s an overview of what we’ll cover:
- Get a Macro View of Where You Are
- Determine Your Why
- Decide How Hands-on You Want to Be
- Assess Your Risk Tolerance
- Determine How Much You Want to Invest
- Decide Which Types of Real Estate Investments to Pursue
- Recap and Takeaways
Step 1: Get a Macro View of Where You Are
First things first. Before you decide on where to plunk your money down, you need to take a step back to assess where you are in life and your financial journey, and what you hope to achieve through investing in real estate.
Are you just graduating from college, mid-career, retired, or somewhere in between? How much money do you have to invest? What are you hoping to get out of investing? Are you looking for a one-time payoff or smaller ongoing payoffs? How much would it take for you to become financially free?
Getting a good high-level picture of where you are will help you assess how much risk you’re willing to take on, how aggressive your real estate investing strategy should be, how much money you can comfortably invest, the types of returns you’re looking for, and the timeframe you’re aiming for.
All of these elements will come in handy as you decide how and when to get started in real estate investing.
Step 2: Determine Your Why
Because there are so many different opportunities in real estate, from investing in notes to corporate housing, from house hacking to investing in syndications, and everything in between, it’s very easy to fall prey to shiny object syndrome.
One day you’re set on buying a fancy downtown condo for Airbnb, the next day you look into mobile home parks.
Trust me, I’ve been there.
In pretty much every real estate investment opportunity, there’s a good chance you’ll make some money. That’s why it’s hard to say no when you come across an opportunity. Someone will tell you a jaw-dropping story about how they are making boatloads of money investing in X, and suddenly, you think, hey, I could do that too!
Then, hopefully before you get too far down the path, you realize that it would take too long, or it’s not long enough, or it’s too hands-on, or it’s too passive, or it’s just not the type of investment that’s right for you.
This is why it’s so important to determine your why.
What’s the reason you want to invest in real estate? Why did you seek out this article? Are you hoping to create passive streams of income so you can quit your job and spend more time with your family? Are you hoping to go into house flipping full time? Are you in it for the tax benefits? Perhaps you’ve heard about house hacking and want to give it a go?
Whatever your reasoning, make sure to take some time to step back and gain clarity around what you hope to get out of real estate investing that you’re not getting out of your current financial vehicles (stocks, bonds, CDs, savings accounts, etc.).
This will better prepare you to resist the temptation when shiny object syndrome strikes.
Step 3: Decide How Hands-on You Want to Be
I’m sure you’ve seen all those house flipping shows on HGTV, where they do the whole shabam, from dilapidated junker through gorgeous showstopper, complete with a champagne-laden open house.
They go into the house with sledgehammers, masks, and protective eye gear. They crawl through moldy spaces. They come across unexpected critters. Sometimes there’s yelling, sometimes there’s drama. But in the end, they get that incredible sense of achievement from having turned an eyesore into a work of art.
If the previous paragraph excites you, fantastic. Then perhaps you want to be more of an active, hands-on real estate investor. More power to you. I’ve been there, and I know it to be incredibly gratifying, yet often very difficult, work.
If, on the other hand, that description made you cringe and almost close this article, don’t fret! The world of real estate investing has options aplenty for you too. Perhaps you want to be more of a passive, hands-off investor.
You put in the money, leverage other people’s expertise and sweat equity, and reap the rewards. Of course, they will take a piece of your returns, for all their work, but it’s a small price to pay not to have to deal with cockroaches and dirty toilets, don’t you think?
The decision of whether to be more of an active or passive investor is an important one, so take some time to step back and feel out where on the spectrum you’d like to be, given your current life situation and goals.
Step 4: Assess Your Risk Tolerance
Every real estate investment, just like every stock, every mutual fund, every dental procedure, heck, even walking out your front door, comes with a level of risk.
As with any investment, in real estate, there’s a correlation between risk and reward. The greater the risk, the greater the potential reward. The lower the risk, the lower the reward.
For example, a ground-up development in a transitioning neighborhood might come with a higher level of risk, whereas an existing apartment building, whose current as-is rents would cover the mortgage and expenses, might come with lower risk.
In real estate, because there are physical assets and paying tenants, there are often ways to mitigate risk. However, there’s always that teeny tiny chance that you could lose it all.
If the thought of losing money makes you fidget in your seat and your palms start to sweat, take that as a sign to start off slowly and with smaller amounts of money. This will help you learn the ropes on a smaller scale. Your cash returns might not be as big, but your educational returns will more than make up for it.
Step 5: Determine How Much You Want to Invest
Now that you’ve got a pretty clear picture of where you are, why you’re investing, how hands-on you want to be, and how much risk/reward you’re willing to take on, it’s time to think about the size of your investment.
Obviously, you don’t want to put your entire life savings into real estate, and especially not into a single investment. If you’re starting out, choose a modest amount you would be comfortable losing, or at least living without for a few years.
Unless you’re doing a short-term project, you should be prepared to have your money invested in the asset for a few to several years, so make sure you’re not investing so much that you don’t have enough to pay for your groceries next month.
When choosing an investment, make sure to take exit strategies into account as well, just in case you need to get your money out sooner than you’d expected.
Step 6: Decide Which Types of Real Estate Investments to Pursue
Now comes the fun part. You’ve taken time to reflect on where you are, where you want to be, and how real estate investing can get you there. With that information in mind, you can begin to narrow down the types of real estate investments into those that best fit your situation and goals.
Most likely, you fall into one of these categories:
- The Lots of Money / Little Time / Hands-off Investor
- The Little Money / Little Time / Hands-off Investor
- The Little Money / Lots of Time / Hands-on Investor
- The Lots of money / Lots of time / Hands-on Investor
Using these loose categorizations, let’s take a look at some different types of real estate investments that would fit into each of these scenarios.
The Lots of Money / Little Time / Hands-off Investor
Let’s start with those of you who may have some money saved up. Perhaps you’ve invested in the stock market, perhaps you have a decent amount in your savings account. You’ve heard about the many benefits of real estate investing, the tax breaks, the passive income, and the impact your money can have on families and communities.
But, given that you’re a very busy person, you simply have no time to put in all the research it takes to feel comfortable investing in something, and you definitely don’t have the time to actively renovate or manage a property.
There seem to be a bazillion real estate listings out there…how would you ever have time to research neighborhoods and markets, nevermind tour properties with agents and sign all that paperwork? Just thinking about it makes you exhausted.
Recommendation: Become a Passive Investor
If you’re in this camp, one of the best options for you to get started in real estate investing is through passive real estate investments, either through turnkey rental properties or through commercial real estate syndications.
Turnkey Rental Properties
On a smaller scale, you could get into turnkey rental properties. Turnkey is exactly what it sounds like; you buy it, and it’s ready to go, with minimal involvement or work needed.
Commercial Real Estate Syndications
If you want to go bigger, you can get into commercial real estate syndications, perhaps one of my personal favorite ways to invest.(LINK why I absolutely love investing passively BLOG)
What is a syndication, you ask? Quite simply, a real estate syndication pools together money from different investors.
Let’s say I’m a syndicator. I’ve spent tons of time researching markets, analyzing properties, and meeting up with brokers, contractors, and property managers. I find an apartment building that I think would be a homerun investment.
This apartment building costs $4 million, which requires a $1 million down payment. I have $100,000 to put in, which leaves me with a $900,000 deficit. I need to find investors to fill in the rest.
As an investor in my syndication, you rely on my time and expertise. I take care of all the day-to-day operations, renovations, accounting, etc. You just put in your money, and every quarter, I send you a check with your percentage of the returns. You would also get a portion of the profits when the apartment building is sold.
Your money goes toward revitalizing and improving an apartment community, and you see great returns. Win-win.
Overview of These Types of Real Estate Investments
What you put in
Your money
What you leverage
Other people’s time and expertise
What you get
Ongoing passive income, confidence knowing your money is being put to good use by an experienced team
The Little Money / Little Time / Hands-off Investor
Now, on the flip side, let’s say that you don’t have very much money or very much time or interest in real estate. You just know that it’s a good investment, but you have different passions and goals in life.
That’s okay. There’s a place for you too, in the world of real estate investing.
For you, one of the best and easiest ways to get involved in real estate investing is through real estate crowdfunding sites.
Recommendation: Invest through a real estate crowdfunding site
That’s right, just as Kickstarter crowdfunds new products, real estate crowdfunding sites crowdfund commercial real estate projects. However, unlike Kickstarter, these investments come with cash returns, rather than rewards in the form of t-shirts and sneak peeks of beta releases.
Real estate crowdfunding sites are available to the public, often have very low barriers to entry (as low as $500 minimums), and serve both accredited and non-accredited investors (what the heck is an accredited investor again? Find out here) .
These conditions make commercial real estate much more accessible to the general public than it once was. It used to be that you needed to know someone directly involved in a real estate syndication in order to invest in one.
And while this is still true in many cases, new SEC regulations have opened up a channel to allow certain types of syndications to be advertised to the public, which has led to the birth of many, many real estate crowdfunding sites.
So, if you’re strapped for both time and cash, but you still want to try out real estate investing, crowdfunding is a great place to start.
Overview of These Types of Real Estate Investments
What you put in
Your money (in small amounts)
What you leverage
Crowdfunding platforms, experienced deal sponsors, strength in numbers (i.e., lots of people all putting in small amounts of money)
What you get
Tons of choices on crowdfunding platforms and real estate projects, ability to invest with very little capital, various types of projects and project lengths to suit your investment goals
The Little Money / Lots of Time / Hands-on Investor
If you’ve been bitten by the real estate bug and want to start investing but don’t have a lot of capital at the ready, yet you are not afraid to roll up your sleeves and get dirty, you might fall into this category.
Even though you might not have saved up as much as you would have liked, you are interested in learning more about real estate investing and are willing to put in some time and effort (aka, sweat equity).
In my opinion, this is perhaps one of the most fun positions to be in. Count yourself fortunate that you actually have a passion for real estate, as many people get headaches just thinking about the analyses, paperwork, and potential rehab nightmares.
There are many ways to get into real estate investing with little or no money, as long as you’re willing to hustle and be creative.
Your Strengths, Interests, and Goals
Take stock of which aspects of real estate investing interest you the most. Is it the thrill of the hunt for those great deals? Planning and executing renovations? Running the numbers? Analyzing neighborhood trends and markets?
Figuring out what you’re most passionate about, as well as where your strengths lie, will help you hone in on how to start your real estate investing journey.
Moreover, what are you in it for? Are you looking to create short-term capital, or long-term equity? Passive income, or a quick buck?
Recommended Real Estate Investment Strategies
Below is a quick rundown of some of the most common ways people with little money and lots of time and interest can get started in real estate investing.
1. Fix and Flips
As seen on HGTV, this is where you buy a fixer upper and then put in the sweat equity to renovate and sell it. If you have no money to put down, you can look into short-term private loans, which will give you several months to a year to complete the renovations. Once you sell, you can pay off your loans and take the profits.
2. The BRRRR Strategy
The BRRRR strategy is similar to fix and flips, except that you hold onto the asset long term, rather than selling. BRRRR stands for buy, renovate, rent out, refinance, and repeat.
Similar to the little/no money down option mentioned above, where you take out a private loan to cover the down payment, except you pay off that loan upon refinance.
If you buy and underwrite correctly, the after-repair value (ARV) will be significantly higher than the purchase price, allowing you to do a cash-out refinance and pay off any private loans you might have taken out for the down payment.
3. Wholesaling
Those of you who love to network and find off-market deals might love this one.
Wholesaling is when you find a deal and get it under contract for a low price. Then, while the asset is under contract (i.e., you haven’t completed the purchase yet), you wholesale it to another buyer for a higher price.
Who pockets the difference? That’s right, you do.
4. House Hacking
Depending on your market, house hacking might be a potential option for you. This is exactly how I got my start in real estate investing many years ago.
Basically, you buy a property (typically a duplex, triplex, or fourplex) where you can rent out some of the rooms or units. The rent from your tenants helps pay down your mortgage.
Pro tip: If you’re able to get an FHA loan, you can put down as little as 3.5% of the purchase price, making this an even sweeter deal.
5. Real Estate Crowdfunding Sites
If you’re interested in commercial real estate and/or running your own syndications some day, real estate crowdfunding sites might be a great place to start. This allows you to learn about syndications without the pressure of having to run one.
You can learn how to find and compare deals, what to look for in deal sponsor teams, and what types of communications and returns investors can expect. All of this will come in handy if and when you decide to lead your own syndications.
Overview of These Types of Real Estate Investments
What you put in
Your time
What you leverage
Other people’s money
What you get
First hand experience, potential for great returns on very little cash investment
The Lots of Money / Lots of Time / Hands-on Investor
Hi. Can you be my best friend?
If you’re in this category, you’re perfectly positioned to make your money work hard for you. Perhaps you have a large amount of capital in the stock market and are looking to shift some of that over to real estate. Perhaps you’ve already built up a healthy portfolio of rentals and are looking to go bigger, or transition into a more passive role.
Recommendation: Lead commercial real estate syndications
If you’re looking to be an active investor, you might want to pursue leading your own syndications. This puts you in the driver’s seat. You can find the deals, put together the team, raise the capital, and deal with day-to-day operations after acquisition, or you can partner with others to create a real estate syndication business.
Recommendation: Become a passive investor in commercial real estate syndications
If you’re looking to become a passive investor, you can still be involved through finding and vetting deals, either through real estate crowdfunding sites or direct connections to real estate syndicators or private equity firms.
To be a savvy passive investor, you will need to know the lingo (cap rates, equity multiples, and IRRs, oh my!), as well as have some basic understanding of how deals are structured and underwritten. After all, any team can put together a fancy marketing package, but savvy investors know the right questions to ask to ensure that the deal and team are solid.
Overview of These Types of Real Estate Investments
What you put in
Your money and your time
What you leverage
The power of others’ expertise, time, and money to help you go bigger, faster
What you get
The freedom to carve your own path and maximize how hard your money is working for you
Recap
By now, your head may be spinning a little. It’s okay, that’s natural.
Here’s a quick recap.
We started out by getting a macro view of where you are in life, your investing goals, how involved you want to be, your risk tolerance, and how much money you want to invest.
Given your current profile, we then explored a few different scenarios, with some real estate investment recommendations for each.
The Lots of Money / Little Time / Hands-off Investor
Consider investing passively in commercial real estate syndications
The Little Money / Little Time / Hands-off Investor
Consider investing small amounts through real estate crowdfunding sites
The Little Money / Lots of Time / Hands-on Investor
Lots of options: Fix and flip, BRRRR method, wholesaling, house hacking, crowdfunding, and more
The Lots of money / Lots of time / Hands-on Investor
Active: Consider leading your own commercial real estate syndication
Passive: Invest through real estate crowdfunding sites or directly through syndicators and private equity firms
Takeaways
As you can see, there are many, many ways to get involved in real estate investing. And, the options included above barely skim the surface.
If you walk away with nothing else, remember this. No matter where you are in life, how much money you want to invest, and how much time and interest you have, there are ways for you to get started in real estate investing.
If you’re still overwhelmed or anxious, there are ways for you to start small, with a few hundred or few thousand dollars. If you lose it all, consider it tuition for the College of Real Life. Each lesson you learn makes you a savvier investor, so don’t be afraid to fail. Even the most successful real estate tycoons have lost money, but they kept going.
Above all, remember that real estate gives you a unique investment opportunity, different than any other type of investment. Real estate allows you to invest in places where people live, work, and make memories. Investing in real estate allows you to make your money work for you, and also to make an impact on families and communities. And that’s something that a stock certificate could never give you.
