Ready to become a big-time real estate investor? You’re on the right track. Real estate investments have outperformed the S&P 500 for decades. While the S&P has averaged an 8.6% rate of return, residential real estate has averaged (nationwide) a 10.6% return. And some areas have done substantially better than that!
Winning in real estate investments is not the easiest way to make money, though. Like any investment, real estate can be cyclical, and it’s critical that you know what you are doing before diving in.
Becoming a successful real estate investor means devoting yourself to education, investigating both active and passive investment strategies, networking, organizing financing, and more.
Your Real Estate Investment Education
You’re already starting! Real estate is a topic with many, many layers, though, so settle in. You will be learning at the beginning of your investment journey, and you will continue to educate yourself throughout your journey.
There are a variety of ways you can educate on real estate and real estate investing:
- Online resources — There are so many free and paid options for online learning, like this Ultimate Beginners Guide to Real Estate Investing. There are online forums and groups for every kind of real estate investing strategy, and you can learn practically anything on YouTube.
- Local groups and mentors — You can probably find a local real estate club or group. (There are more than a dozen groups in Texas.) These are great places to start making contacts and learning from others about real estate specifically in your area. Many of these groups also have courses or training programs.
- National organizations — National organizations also have lots of opportunities for you to learn. One of the most popular organizations is the National Real Estate Investors Association.
There are paid courses you can take, but if you’re putting together your own education based on free resources, make sure you’re covering a complete list of topics:
- Active and passive real estate investment strategies
- Real estate business plans
- Different types of investment properties
- Financing options
If you’re interested in active real estate investment strategies, there is even more to learn, like working with contractors, marketing, and exit strategies.
Active Real Estate Investment Strategies
Active real estate investment is financing a property and using it to generate income, either by renting a residence or reselling it at a profit. It is a more traditional approach to real estate investing and generally appeals to investors who prefer to see and completely control their investments.
There are several ways to get involved in an active real estate investment:
Fix and Flip Investments
Flipping houses has become a popular subject for reality television. While it’s not as easy as it looks on TV, it can be enjoyable and profitable work.
Flipping houses requires a variety of skills, most of which you will learn and grow in over time. You will want to:
- Learn about your local real estate market.
- Investigate financing options for flipping properties.
- Learn how to estimate repairs and upgrades.
- Network with local contractors.
- Find a local realtor with experience in property flips.
- Plan exit strategies.
A fix and flip project is a great strategy for investors who are handy and/or have a good eye for design, although you can outsource a lot of the work to contractors too. They can also be fairly risky, as the property becomes your sole responsibility, and your profit margin is tied to a tight timeline.
Rental Property Investments
Investing in a rental property means you purchase a residential property and rent it out. You are still ultimately responsible for the property, but the rental income is steady and recurring.
Some investors purchase rental properties near their own homes, so they can take care of the property themselves. Other investors hire local real estate agents and property managers to find and care for properties in other, more profitable markets.
These properties often cost more than what you would invest in to flip, because they don’t need much work and/or because they’re multi-tenant buildings. One option for financing a rental property investment is buy and hold financing.
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Wholesale Property Investments
Wholesale real estate investing is when the investor facilitates the purchase of a property for two other parties—without ever taking ownership of the property themselves—while earning a fee for their services.
This usually involves purchasing properties at a deep discount (when an owner is in a hurry to sell, for example) and matching it with a buyer. It can also involve finding and purchasing properties for another investor who is not personally in your local market.
Investing in wholesale properties comes with a reduced risk, because you’re never responsible for the property itself, but it requires some deep expertise. Facilitating these transactions requires quick action. Real estate investors who are successful with wholesale investments have a thorough knowledge of local markets and a broad network of lenders, property owners, and potential buyers.
Wholesale property investments are where transactional funding comes in handy. Investors can transfer ownership of a property between two other parties, and earn a fee for their services, without investing any of their own money.
Active real estate investing can be a great way to start earning more money, especially if you enjoy the work involved.
Next Step: Start Building a Network
If you’re interested in an active real estate investment strategy, start building a network even as you continue to educate. Every successful real estate investor has a robust network supporting them. Real estate investing really is as much about who you know as what you know!
Your real estate network should branch off in a few main directions:
- Other investors — You’ll start to build this network as you get involved with educational groups and communities. This is where you will learn from others’ mistakes, find a mentor, and more.
- Lenders — As you start learning about financing options, you’ll also start learning about lenders. There are large, national lenders, but many investors choose to work with local lenders for lots of reasons. You don’t have to be ready to invest to start meeting and building relationships with local lenders.
- Contractors — Unless you’re a licensed contractor, confident of doing any and all repairs yourself, start getting to know the local experts. Whether you’re flipping a property or investing in a rental, you’ll need to know who to call for quick, quality work at some point.
- Real estate agents — A good, local real estate agent with experience in investment properties is often worth their weight in gold to a real estate investor. They know the market better than anyone, and their experience is especially key for new investors.
Passive Real Estate Investment Strategies
Passive real estate investments are strategies and outlets that allow you to take a very hands-off role in real estate. You can take advantage of those high returns, often without actually purchasing a specific property.
Further good news for new investors is that you don’t usually need a huge sum of money to get started. There are several services, groups, and strategies that essentially do the networking job of pooling resources from smaller investors.
Crowdfunded Real Estate Investments
You can crowdfund anything these days, which is great news for new investors. There are several online platforms that allow individuals to invest in real estate with minimal risk or cost.
These services allow you to pool your investment with other small investors and banks, and then lend that money on your behalf. Some invest your money in real estate trusts, which provide a more diverse portfolio for you. Others invest directly in physical properties.
You will want to make sure that you thoroughly research any platform you decide to try. Most have an investment minimum of $1000, which is fairly low as far as real estate investing but is definitely not chump change for most of us either. Look into the company’s:
- Reputation and history
- Success rate
- Borrower and investor guidelines
- Minimum investment amount
A real estate investment trust (REIT) is a company that owns commercial, income-producing properties like hospitals, malls, apartment complexes, etc. Investing in a REIT (reet) allows you to invest in a diverse portfolio of real estate that is already generating a profit.
And REITs are required, by law, to distribute at least 90% of their taxable income to shareholders every year. They’re considered “risky” compared to other standard investments, like mutual funds, but are less risky than other real estate investment strategies.
REITs should be investigated like other mutual funds. You’ll want to look into their diversification strategies, their management team, and the earnings that translate into money for you (funds from operations and cash available for distribution). Investors can buy shares of REITs on the stock market, like any other public stock, or you can talk to your financial advisor and add them to your retirement portfolio.
Passive Rental Investments
A relatively new option for real estate investing is purchasing rental properties online.
Services like Roofstock allow investors to purchase, or share in the purchase of, real rental properties, without doing any of the property management or marketing. Roofstock is essentially an online marketplace for buying and selling rental properties, with relatively low fees, integrated financing, and even an optional property management service.
Next Step: Organize Your Financing
You probably already have an idea of how you want to start with real estate investing. Although there are a wide variety of strategies and outlets available, they all have one thing in common: They require financing.
Whether you’re looking at $1000 for an initial passive investment, or financing the purchase of a physical property, you probably have some numbers to organize.
- Start saving. If it’s a four-figure sum for a share of crowdfunded real estate or a 20% downpayment, make sure it’s money you can part with. Don’t drain your savings to get started. Real estate has been out-performing the S&P for 20 years, so take a little time to save up that initial investment if you need to.
- Explore financing options. If you’re investing in an active real estate investment strategy, you have options for financing.
Real Estate Investment Risks and Reminders
Finally, make sure you understand the risks of any type of real estate investment before you get involved. There’s no such thing as a risk-free investment, but you should have a clear idea of what a worst case scenario looks like.
Some risks to consider include:
- Market fluctuations — Especially if you’re flipping or wholesaling properties, real estate markets can move quickly. Make sure you have a plan in place in case you can’t sell a property for what you expected.
- Unexpected expenses — Owning a property often comes with surprise expenses. Whether you’re flipping or renting, make sure you have a financial cushion to cover unexpected repairs, etc.
It’s also important to remember that real estate is often a long-term invest and that some strategies come with additional fees.
REITs pay out annually, rental income doesn’t always cover your initial investment for a while, and you won’t get rich on your first flip. Part of the reason that education is so important to real estate investing is that you’re going to be involved for a while.
Real estate also comes with fees. They might be closing fees on the purchase of property, or service fees from an online marketplace. Always keep an eye out for the fees.
Get Into Real Estate!
You’re well on your way to getting started in real estate investing! There are a lot of outlets available, which is exciting for anyone who wants to get involved.
Start by deciding which type of investing you’re most interested in, and then keep educating toward that goal.