Real Estate Investing for Beginners Overview

Want to get into the world of real estate investing? These are the fundamentals that every beginner should know before getting started.

If done right, real estate can be an incredibly lucrative and consistent form of income. Compared to other forms of investment, real estate can be quite low-risk and offers high potential return, making it an easy stepping stone into the world of investment. Given its potential, it’s understandable why so many people have thought about flipping houses or owning an AirBnB, however it’s not that simple. With that in mind, let’s look into the world of real estate investment a little further so you can understand the pros and cons, and make the right decision with your money.

What To Know Before You Invest in Real Estate

Managing Expectations

Investing in real estate is not as simple as it may seem from the outside. Investment is a long term game and there’s a lot of work involved to be successful. A solid tip for any first time investor is to always start small and work up from there. For example, starting in smaller, residential properties and working your way up to multiple properties or even commercial.

Researching the Market

Finding the right market and knowing what to look for can also make life a lot easier for you when you’re new to the game. Although it may seem easier and more comfortable to invest locally, this may not always be the best option. Researching any potential issues that could cause problems can save you trouble further down the line. Local issues such as student housing, mobile home parks, assisted living areas, and more can affect the value and usefulness of an investment. Naturally, some areas are more expensive and certain factors such as the local economy, employment rates, and incomes can be game changers.

Balancing the Numbers

It’s also important to make sure you have a firm grasp on the numbers. Understanding potential incomes, expenses, and returns can help you get your head around some of the very confusing aspects of real estate investment. With those in mind though, let’s look at the different types of investments you could get into.

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Investment Types

Each type of investment has its own advantages and disadvantages, so let’s get into the three most common varieties: renting, flipping, and trusts.

Rental Properties

Probably the most familiar of them all, rental properties are owning a property and renting it out to tenants to earn a profit. Sounds simple enough, right? While it is the most common and arguably the easiest to get into, there are some details you should know before diving in.

Some of the pros for investing in rental properties are fairly obvious. Having monthly rent income from tenants is a great way to supplement an income or, with enough properties, become a sole income. One of the lesser known benefits is appreciation. As a property’s value increases you can borrow money against its equity which can provide funds to invest in further properties. That being said, it’s not all pros and unfortunately there are some cons to consider.

Owning any property comes with costs. Mortgages, property taxes, and insurances are all expenses that need to be covered no matter what. While the rent should always cover these expenses, that rent is dependent on having tenants. If you cannot find tenants then you suddenly have no income but a lot of expenses. You might find yourself in a rush to find vacancies to stay afloat.

Even with tenants covering the expenses, being a landlord is a constant job and maintenance is a constant worry. If the heater breaks, or a pipe bursts then the landlord must solve those problems. Of course, you could hire a property manager to take on these responsibilities but that will cost extra.

Flipping

Buying an undervalued property with the goal of selling for a higher value is a very desirable form of real estate investment and one many do every day. Typically there are two main types of flipping: repair and update, and hold and resell.

Repair and update is when someone buys a property that is typically in need of renovation. They repair or upgrade part of the property then sell it for a higher price. This style of flipping requires a lot of work and can be arduous, but usually allows for big returns.

Hold and sell, on the other hand, is when you buy a property at a low price, wait for the market value to increase, and sell once it’s high enough. Though this style of flipping doesn’t require anywhere nearly as much work, it does take time. During this time, expenses such as mortgages, taxes, and insurances are adding up every month. Some investors choose to temporarily rent out properties to cover these costs as they wait for the value to increase.

Flipping tends to be a short-term investment, typically spanning a few months. If done right, this short-term investment can provide big returns.

Investment Groups and Trusts

Real Estate Investment Groups, or Trusts, (REIGs/REITs) are organizations that purchase, operate, and sell income-producing properties. Although it will take more time and greater capital to see a return on a group or trust investment, these groups allow investors to grow their investment without much personal effort. REIGs/REITs are typically used for large-scale projects such as housing estates and commercial properties.

Groups and trusts will take care of maintenance, advertising, finding tenants, and more, so investors don’t have to. In exchange, these companies will take a percentage of profits as a management fee.

Why Get Started in Real Estate Investing?

This brief insight into common types of real estate investments should help you to understand the basics and whether you’d like to get involved. But the question remains, why should you do it?

Though it may seem obvious, the main reason people invest in property is money. Real estate is a relatively steady, low-volatility investment that can become a reliable source of income for decades.

Real estate is a great stepping stone into the world of investment and can allow for diversity within a portfolio. Adding on potential tax deductions and an increase in net worth, real estate is arguably the best way for someone to get a foot on the investment ladder. Now that you understand the overview of real estate investing for beginners, explore the next section of our blog to learn if real estate investing is right for you…

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