If there is one investment that has withstood the test of time, it is real estate. In fact, independent landlords own around 22.5 million rental units across the US!
Well, you could be joining in on this lucrative industry for even less than you think. However, you need to know how to get the most out of your investment. Let’s talk about real estate investing for beginners.
Know The Different Investment Types
Before we give some valuable tips, we need to make sure that you know about the different types of real estate investments. There are plenty of them and they work out for different investors with different needs. Here are some of the most popular examples.
Real estate investment trusts (REIT) are similar to stocks or bonds with a few key distinctions. For a company to be considered an REIT, its primary assets need to involve real estate, and at least 90% of the profits need to go to investors in the form of dividends.
REITs are excellent investments for earning passive income, getting started with real estate investing, or diversifying your portfolio. You can invest as little or as much as you want and start earning dividends annually, quarterly, or even monthly.
Some REITs yield dividends of 0.75% annually, while some yield as much as 8%. These trades don’t tend to overwhelm investors on growth unless there is a bubble forming in the housing market. Most of the time, investors want dividends.
Let’s say that you have $50,000 and you want $75,000 to get started on your first investment property. In that case, reinvesting your dividends could secure you that extra $25,000 within a few years, and you can even choose to keep reinvesting them and earning more later on.
Flipping properties is a great way to start with real estate investing, especially if you’re handy and low on funds. However, neither are necessary if you want to take on this challenge.
The process is simple: buy a fixer-upper, fix it up, resell. At least, this is the standard practice for flipping homes.
Let’s say you buy a house for $150,000 (including interest and fees) and it needs $50,000 worth of work. Well, assuming that it’s in the right area, you can resell it for $300,000 or more, netting a $100,000 profit.
Sometimes, you don’t even need to do any repairs. Many investors choose to buy homes that they find for a deal or when the market is low and resell them without even touching the properties.
Houses aren’t the only way to flip a property, as you can even flip land. Some investors choose to turn land around by doing some landscaping, pouring concrete, felling trees, hooking up plumbing, or simply waiting for the market to increase.
Also, you don’t even have to resell. You can use the property, live in it, or rent it out.
It doesn’t matter if they are commercial properties that you rent to businesses or 6-unit homes that you rent out to families, renting out properties is one of the greatest investments of all time. In fact, many millionaires still say that real estate is the best investment.
Whether you flipped the property or bought it turnkey style, the process is simple: buy a house, rent it out. However, there are still variations to choose from.
Short-term rentals are absolute cash cows with the right location and marketing. Think of Airbnb or similar rental solutions. Here, you can charge between $100 and $350 per night for a regular apartment or home.
Let’s say you live in an area with year-round tourism like Miami, Florida, or Stow, Vermont. If you manage to average 20 nights out of the month for your apartment at $200 a night, that’s a gross income of $4,000 a month. Not bad for one unit, huh?
However, the downsides are fairly straightforward. You aren’t guaranteed to book your location every night, tourism may falter during certain times of the year, and you will have to be a lot more involved. It is work, but the potential income is high!
These are the most common types of rental property investments because, while long-term landlords charge less per night, the income is far more secure.
A two-unit property with $1,200 a month for rent each, a mortgage of $800, and property taxes and maintenance breaking down to $300 a month, an investor would net $15,600 at the end of the year. Once the mortgage is paid off, that would increase to $25,200. Not a bad addition to your income!
The best part is that one pays for the next. If you put away $15,000 a year, you’ll be ready for another downpayment within 4 to 6 years.
If it’s a similar property, then you’ll have over $50,000 a year when the mortgage is paid off, which could secure your retirement later on! It’s no wonder why the average landlord has a salary of $97,000.
Real Estate Investing Tips
Okay, now we can talk about the tips before jumping into your real estate endeavor. Here are some tips on how to buy your first investment property!
Choose an Investment Type
Now that you know the most popular types of investments, you can make an informed decision about your preferred method. If you have plenty of free time and you’re looking to take on a new project, then consider being a landlord for a short-term or long-term rental property.
If you think you live in the right area for a short-term investment, it has the highest potential payout. Do some market research, download Airbnb, talk to others who have used it, and see how well you think you can do.
Keep in mind, this takes a lot of time, so don’t jump into a project if you don’t know what you’re doing. You will have to market, meet with strangers, go over rules, clean up after them, and pay for amenities. If you’re comfortable with that, you have the space, and the market is right, then by all means.
If not, a long-term property is a great way to earn consistent income. However, one bad tenant can cause serious damage to your investment, so screening is very important. This will also come with less (but still some) work than short-term rentals.
Flipping properties is also excellent if you have some time for a short period. For example, if you have summers off of work and you have a few months to involve yourself in the property, it could be the most profitable summer of your life!
If you want to generate more passive income, you can always hire a property manager or an Airbnb manager to handle marketing, tenant screening, upkeep, and more for a small portion of your rent. Alternatively, you can choose to invest in an REIT.
First, you need some initial funds for a downpayment on whatever property you want to buy. Whether you’re looking to flip or rent, you will need initial capital.
Fortunately, there are few investments quite like real estate in this regard. What other investment has a barrier of entry of only 15%?
While it’s best to make as big of a downpayment as possible, you only need 15% upfront to qualify for a loan, and you may need some extra cash on hand in case something goes wrong.
Don’t Forget Inspections
Whenever you’re buying a property, inspections are key. The last thing you want is to put all of your capital upfront for an investment only to need a new roof 6 months later.
Inspections are just as important as tenant screening and they need to be done as thoroughly. An investment property is only as good as the property itself, so if you don’t know what you’re buying, then you’re gambling with high stakes.
Choose the Right Neighborhood
Similar to inspections and tenant screening, the last piece of the puzzle is slightly out of your control. If a neighborhood goes south, so does your investment.
Choosing a neighborhood near important landmarks or locations is the safest option. For example, a property that is near a school, college, train station, body of water, or shopping area is far less likely to lose its value than a more distant property.
Remember, you can never keep your investment entirely safe. You can only do your diligence and set yourself up for likely success. Entire cities can lose value, so you should always look for the best housing markets.
Reinvest Your Earnings
Once you start renting, flipping, or investing in real estate, the best way to set yourself up for long-term success is to reinvest your earnings. Then, you can continue to invest more into your real estate endeavors later on.
If you rent out a property, short-term or long-term, that property will quickly turn into two. If you continue saving, two will turn into four, and before you know it, you have a real estate empire, and all it takes is 15% for your first property.
The same goes for flipping properties. If you save your profits from your first venture, you will have more buying power for future investments.
Maximize Profits By Following the BRRRR Method
For a final tip, the BRRRR method is said to be the wisest investment type in real estate. It’s a time-tested and comprehensive strategy for getting the most out of your investment. Here’s how it goes.
First, you want to use the tips mentioned above to buy your first property. It’s entirely up to you if you want a single unit, duplex, or a large commercial building.
Once you have enough saved up for a down payment, all you have to do is find a fix and flip loan first and buy a property that fits your needs.
You’re not ready to start earning just yet! Fix up your property and get it ready to be livable. Buying a property that needs some work will play out in your favor financially, but a house that needs major structural repair should generally be avoided.
However, if you get a house that needs new drywall, wiring, and carpeting, you may only be out $20,000 for a discount of over $60,000. Always get an inspection and a quote before purchasing to decide if the numbers work out in your favor, which they often will.
Once the building is livable, find the right tenants and rent it out. Even if you were initially looking to resell right away, selling a property with existing tenants is often easier and more profitable. Also, you’ll earn some extra income in the meantime!
All you have to do is secure a rental loan. Refinancing gives you cash from your bank when you show that your property is more valuable than you initially paid for it. For the BRRRR method to work to its full potential, you would take it out in cash for the next step.
Use that extra cash to purchase another property. Again, this is the easiest way to start out from scratch and build a serious real estate portfolio, so if you’re looking to secure your retirement income, then keep investing!
Grow Your Business!
Real estate is a business, and now that you know some tips on real estate investing for beginners, you can build your business into an empire today! Secure a loan and you can get started right away. Stay up to date with our latest real estate investing news and feel free to contact us with any questions!