Real estate investing for beginners is a guide to help those new to the REI world learn more about identifying opportunities and how to invest. If you have questions or would like to learn more, contact the team at King James Lending.
Real estate investment can diversify your portfolio, and it’s an easier market to enter than many think. If you want a guide on investing in real estate, you’re in the right place. Real estate is an excellent investment opportunity, and there are many strategies out there to help a novice get started and begin making money.
Beyond a side hustle, many REIs see it as their main source of income. But, how do you start if you’re new to investing?
It’s easy to feel overwhelmed when you try to navigate such a tricky process. That’s why we offer one-on-one coaching to help our clients learn more about new markets, network, and identify new opportunities. Below, we offer advice, strategies, terms to understand, and mistakes to avoid.
How to Invest in Real Estate
When done right, real estate investing is a lucrative opportunity. This is true even when we see a shift to higher interest rates. Real estate investing for beginners is a great way to diversify a portfolio, and for many, the goal is a passive income stream.
While it might not sound appealing to be a landlord fielding calls about problems in a building, there are other opportunities that don’t require this. So, how do you start investing in real estate?
Understanding Real Estate Investments
Let’s start with the basics: What is real estate investing? Put simply, it is the purchase of real estate, which is a property or piece of land. That land includes anything natural or man-made within the boundaries, and it’s all real estate.
In some cases, REIs use real estate, property, and land interchangeably. However, there are slight differences between these terms.
- Land is the natural surface and airspace.
- Real estate is the land as well as any man-made additions, such as a house.
- Property, or “real property,” are the benefits and incentives aligned with owning real estate.
So, real estate investing for beginners means buying land and any man-made additions. Under the umbrella of real estate investments, there are several categories. However, the most popular options are residential, commercial, and industrial.
Now, you might be thinking that it’s too expensive for a novice. However, REI is a proven way to build wealth. Let’s take a look at how they invest in the real estate market.
How REIs Make Money on Real Estate
Real estate investing is a time-tested way to make money. Moreover, there are multiple ways to earn a profit. The two main options are rental income and value appreciation.
One of the main tactics for a passive income in real estate investing for beginners is to build a rental portfolio. When you rent out a property you own, the property appreciates value over time as you earn a monthly income. Moreover, your level of involvement is up to you.
For many rental building owners, it’s worth it to hire a property manager to take care of tenants’ needs. Then, you can truly label it passive income.
Ideally, your tenants pay off the mortgage or loan, and you earn some profit off the top. Once you pay off the loan, it becomes pure profit. All you need to do is ensure you factor in repairs and maintenance.
Value appreciation is the increase in value over time. Historically, property values continually increase. Overall, location is the top factor that impacts this.
That’s because property value increases alongside the desirability of an area. As you learn more about real estate investing for beginners, you may hear some people say “Buy the worst-looking house in the best neighborhood.” If you want a short-term project, it’s a good idea to buy a house to flip in a great neighborhood rather than an okay house in an undesirable area.
However, that’s not to be confused with an area that’s gaining popularity. In some cases, you can find a great opportunity in an area that is trending upward.
8 Strategies: Real Estate Investing for Beginners
If you’re a novice REI, getting your start in the industry seems intimidating. That’s entirely normal, and many investors don’t feel comfortable and confident in those early years. However, if you have a beginner-friendly investment strategy, you have a good place to start.
While these are targeted at investors with limited experience, there’s still a lot of opportunity to profit. Finding the right niche to break into the industry is a great way to learn the ropes and build a network. With a more accessible strategy, you learn more about your local market, connect with other investors, and learn how to build capital without committing to more than you can handle.
Then, you can use your profits and experience to invest in different strategies down the line. Let’s take a look at eight beginner-friendly investment strategies.
- Wholesaling is a strategy in which the investor acts as a middleman between sellers and buying. You enter into a contract with the seller and assign a buyer to that contract.
- REIT investing refers to a real estate investment trust (REIT), which is a company that manages properties that produce income. As an investor, you can purchase shares and view it as a stock investment.
- Prehabbing is when you position a property for resale after minor cosmetic changes. Typically, you sell it off to another investor who finishes out the full rehabilitation.
- House flipping is a popular strategy in which you buy, renovate, and sell a property at a profit.
- Real Estate Investment Groups (REIG) are businesses that focus mainly on real estate, pooling capital from multiple investors to invest in a larger opportunity, such as a commercial property.
- Online real estate platforms allow investors to connect with developers in order to finance projects. In exchange, the investors receive monthly or quarterly payments with interest.
- Real estate syndication is similar to crowdfunding, but there’s a team approach. Investors pool skills and resources to buy larger properties and share the profits.
- Rental investment properties can help you secure a monthly income stream, especially if you want to be a landlord. However, you can also work with a property manager instead.
One of the fastest ways to break into the REI world is wholesaling. First, you secure a property under the market value. Then, you find an end buyer and assign them to a contract.
You never actually own the property. Instead, you add a fee to the contract at the end. The key to success in real estate investing for beginners here is to build a strong list of buyers. Essentially, it’s a list of investors looking for a new opportunity.
Luckily, this strategy does not require significant capital to start. You may need some funds to market yourself or your opportunities, but you never directly purchase a property. Moreover, you build a network over time and gain a better understanding of your market.
2. REIT Investing
REITs let you invest in real estate without specifically identifying and purchasing property. Often, people compare these trusts to a mutual fund. An REIT is a company that owns commercial real estate, such as retail spaces, hotels, offices, and apartments.
Typically, they are a common investment for retirees because they tend toward high dividends. If you don’t need a passive or regular income, you can reinvest dividends into additional growth.
But, are they a good investment for beginners? They can be either simple or varied and complicated. Some trade like a stock, but others aren’t public. If you invest in an REIT, the type is important because it impacts the risk you take on. A non-traded REIT is harder to sell and harder to value.
For beginners, it’s a good idea to start with a publicly traded option, which you can invest in through a brokerage firm. To do so, you just need an account, which is easy to set up.
With real estate investing for beginners, prehabbing is an excellent option. Unlike a flip, which involves more of a financial investment to make significant updates, a prehab focuses on small changes.
Typically, investors enhance the property just enough through sweat equity to make it more appealing to other investors. Here are a few examples of how they might update the property.
- Landscaping is a great way to improve the curb appeal of the property. If someone doesn’t want to look at the outside, they won’t look at the inside.
- Painting can be a simple way to touch up the indoor and outdoor spaces of a property, even for beginners.
- Cleaning up a property, removing any trash or debris, can have a strong impact on the appeal.
If you want to use this strategy, it’s important to understand that not every property is a good fit. Look for opportunities with good structural integrity that just need a little TLC. Always avoid houses that require expensive repairs outright.
Remember to keep location in mind as well. Do some market research to find a popular area or a trendy neighborhood.
4. Flipping Houses
If you’re a fan of HGTV and home improvement shows, this might be the strategy for you. To flip a house, you find an underpriced home that needs work, renovate it on a budget, and sell it for a profit. When it comes to real estate investing for beginners, house flipping is not as easy as it looks.
It’s a more expensive endeavor, especially with higher costs for building materials. That’s why flippers tend to work with cash instead of mortgages. If they do use a loan, they are more likely to work with a private hard money lender.
A lot of the math behind house flipping requires an accurate estimate of what repairs will cost. That’s not an easy thing to do. For a novice, it’s a good idea to find a partner with experience.
If you have the time or capital, you can work with a contractor who knows how to estimate expenses or manage renovations.
5. Real Estate Investment Groups
A Real Estate Investment Group (REIG) focuses on real estate investments. The group pools investor money to buy a commercial property or multi-unit complex. In some cases, they also choose to flip properties for a profit.
These companies are a bit different from an REIT because they offer more flexibility. To leverage more strategies or diversify income, they may change their investment strategies over time. Alternatively, they might invest in different types of real estate depending on the cash flow or income generated.
Typically, REIGs attract investors seeking returns without actively managing properties.
6. Online Platforms
Online real estate investment platforms connect developers to investors in order to finance projects. For investors, the goal is to receive monthly or quarterly payments in exchange for the risk. Generally, you pay a fee to the platform.
As with private REITs, it’s more difficult to value or unload these investments. To put it simply, you need money to make money, so it requires capital you’re willing to part with for a certain amount of time.
Moreover, these platforms remain open mainly to accredited investors. The SEC defines this as someone with an earned income over $200,000 in each of the last two years or a net worth of $1 million or more, without considering a primary residence’s value.
However, there are alternatives, such as RealtyMogul or Fundrise, if you do not meet those requirements.
Real estate syndication is a strategy in which you partner with other real investors. The common goal is to identify and purchase properties. Generally, the group splits responsibilities between the investors and the sponsor.
- The sponsor finds potential investment and secures a contract. Additionally, they may manage the property. However, they don’t always contribute capital to a property, offering skills and time instead.
- Investors provide the funding and cover additional costs for repairs or renovations, receiving payments over time.
The syndication occurs once they complete the exit strategy. For instance, the exit strategy may be to renovate and sell the property. Typically, the sponsor receives an agreed upon amount in exchange for their work.
8. Rental Property Investment
In this guide to real estate investing for beginners, we’ve mentioned rentals several times. One common example is to purchase a multi-unit building, live in one, and rent out the others. This sort of setup can cover the expenses of the property while bringing in a profit.
Often, people refer to this as house hacking, and it’s a way for investors to find their start. Investing in a rental is a great way to earn a monthly income. If you purchase a building at the right time, in a good location, you can cover the mortgage as well as any expenses.
As the owner, you can decide how active or passive your role is. For example, you can hire a property manager to handle the day-to-day business while you enjoy the profits.
Real estate is a proven investment with historical success. However, real estate investing for beginners is a tricky path to navigate. The challenge comes in breaking down how to invest and doing your due diligence to find the right type of investment.
Unfortunately, there’s also a common problem of capital. Luckily, there are private lenders who work with real estate investors to provide flexible, personalized loans that meet their specific needs.
Above, we covered several strategies on how to break into real estate investing. At King James Lending, that’s the type of coaching we provide to our clients every day. Our goal is to help each of our clients grow a stronger investment portfolio and develop a thriving community across Houston, the Gulf Coast Bay Area, and beyond.
Take some time to learn more about the REI world, and contact us to see how we can build a better partnership and find the right strategy for you.