Real Estate Investing for Beginners

Real estate investing is a way to build wealth, generate passive income, and take advantage of numerous tax benefits. Becoming an investor requires some education about the business, upfront capital, and the ability to use leverage to your advantage. Real estate investing for beginners usually requires $5,000 to get started.

How Real Estate Investing Works

Real estate investing can be done several ways. Real estate investing for beginners can start in any or all of these investing types. Investors can purchase properties to fix and flip for short-term profits or hold long-term rentals to build wealth and create passive income. Real estate crowdfunding sites and real estate investment trusts (REITs) offer real estate investing beginners less traditional, more passive investment opportunities.

Most investors are looking to create passive income, capital appreciation, wealth preservation, and tax benefits. Real estate investing offers an alternative to traditional stock market investing. There are different types of real estate investing, with some requiring significant time and others less, combining with other investors to diversify risk and create supplemental income and long-term growth without having to spend time managing their investment.

Who Real Estate Investing Is Right For

Real estate investing is ideal for people who want to build cash flow either as supplemental income or as a career. Different types of real estate investing allow different cash-required entry levels, and each class has different levels of risk. Understanding your current financial situation and risk tolerance is a good starting point for choosing the best way to begin investing in real estate.

Some factors for real estate investing for beginners to consider include:

• Cash reserves: Choosing the best way to start real investing should begin with an assessment of how much cash you have on hand. Calculating whether you have enough money for a down payment and closing costs may help you decide if you want to own property.
• Credit score: Knowing your credit score upfront can help you decide where to start. If you have cash but poor credit, consider crowdfunding or REITs. If you have good credit but little cash, you may want to start with an owner-occupied, multifamily property.
• Availability of time: Understanding all facets of a fix-and-flip takes a good bit of real estate knowledge, as will learning the rental market. Taking into account how much time you have available should be part of choosing an investment.
• Risk tolerance: All real estate investing carries risk. No investment is ever guaranteed, so think about what will keep you up at night when choosing the best real estate investment option as a beginner.

When deciding if real estate investing is right for you, it’s good to know where you are starting, how much cash you have available, and how much time you can invest in managing your investment. However, there are also ways to overcome challenges you may be facing. For example, investors can often get started with very little money. For more information, be sure to check out our article on flipping houses with no money.

4 Ways to Invest in Real Estate

Real estate investing for beginners can take several different forms. New investors might want to start with a fix-and-flip project, a rental property, or less-involved investments like crowdfunding or REITs. Which one they choose will dictate how much time and capital are required to get started.

Real Estate Investing Avenues

The four best ways to invest in real estate are:

1. Fix & Flip

Fix-and-flip real estate investing involves purchasing distressed properties at a discounted price, renovating the property, and reselling them for profit. This is typically a short-term investment that lasts about six months and provides an opportunity to profit at the point of sale. Fix-and-flips are considered a high-risk, high-return investment option for real estate beginners.

If you want to learn how to invest in real estate with a fix-and-flip, you will need a sizeable amount of cash or be able to bring something to the table as sweat equity. In addition, a fix-and-flip will require the highest investment of time compared to all of our other options. To learn more, read our article on how to make money flipping houses.

2. Rental Properties

Rental property investing is when you buy property to hold as a long-term investment. The goal of buying rental property is typically to build equity with property values increasing over time, with rental income covering your mortgage and other expenses. In addition, rental property can be a fairly stable source of income for real estate investors, and can be bought as single-family units, multifamily units, and apartments.

New real estate investors may want to consider buying rental property if they have funds for a down payment, have time to manage the property, or the resources to pay for a property manager. Investors should also remember that properties will need ongoing maintenance, which can be expensive. Vacancy risk is another thing to consider with this type of real estate investing. If you lose a tenant for an extended period of time and can’t pay your mortgage, you could face foreclosure.

3. Crowdfunding

Crowdfunding is a third type of real estate investment that allows you to pool money with other investors and purchase property as a group. This allows people to invest in real estate with a low entry cost and a minimum time commitment, removing some of the barriers of investing in their own properties.

Real estate crowdfunding is a fairly new type of real estate investing and offers an alternative to buying REITs. This may be a good option for new investors who don’t have a lot of cash but still want to invest in real estate. Also, if you don’t have real estate experience or contacts, crowdfunding is a way to take advantage of the real estate market without the headaches of learning all the ins and outs.

4. Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a real estate investment vehicle that owns, finances, or operates one or more income-producing properties. REITs are modeled after mutual funds in that investors can buy shares, just like a public stock. Real estate investing beginners can invest in equity REITs, mortgage REITs, and public or private REITs.

REITs are typically for real estate investors looking for income and appreciation as well as diversification. REITs may be a good option for investors looking to save for retirement or those looking for a possible steady stream of income because REITs are required to distribute at least 90% of their taxable income to their shareholders annually.

Costs of Investing in Real Estate

Costs to invest in real estate depend on which type of asset you choose. Purchasing a physical property costs the most upfront—typically 3% to 20% of the purchase price, plus closing costs. If you are investing in alternatives like crowdfunding or REITs, your entry costs could be as low as $500.

Some of the common costs associated with real estate investing include:

• Down payment or equity investment (3% to 20%): When you purchase property, you will either pay cash or get financing. If you need financing, most lenders will require a down payment, which will be higher than what’s required when you buy a residence.
• Closing costs (2% to 5%): Closing costs for a real estate purchase are typically between 2% and 5% of the purchase price, and can include your lender fees, escrow setup, taxes, insurance, and title fees.
• Rehab costs: If you are purchasing a fix-and-flip, you will need to consider the cost to renovate the property. This could include contractor fees, building materials, permitting, and interest cost, and can be considerable.
• Management fees (6% to 12%): If you are buying rental property and want to hire a property manager, expect to pay between 6% and 12% of your monthly gross rent. If you’re investing in crowdfunding or REITs, you’ll likely pay asset management fees of 0.5% to 3%.
• Advisory fees (0.125% to 1.50%): Many crowdfunding platforms and REITs charge advisory fees for things like reporting, automated distributions, tax management, and asset rebalancing. These fees typically range from 0.125% to- 1.50%.
• Taxes (15% to 37%): If you are earning annual income from any of your real estate investments, be prepared to pay taxes on that income. Your tax rate will vary depending on your income level and how long you hold your investment, but expect to pay between 15% and 37%.

Depending on the type of investments you make, you may also have upfront due diligence costs. For example, if you’re purchasing property, you will have home inspection fees, pest inspection fees, and contractor inspection fees. For rental properties, you’ll have marketing costs to find tenants, screening costs to vet them, and turnover costs to prepare the property for new tenants.

Real Estate Investing Resources for Beginners

When you want to learn how to invest in real estate, it’s a good idea to study more about the business using the resources you have available. Beginners can learn a great deal using real estate investing books, mentors, videos, and community networking groups.

Real Estate Investing Books

Beginners who want to learn about real estate investing can start by reading books. There are thousands of books available that give detailed examples regarding fix-and-flips, rental property management, crowdfunding, and REITs. Many offer worksheets, explanations of terms, and best practices for each type of real estate investing type.

Books are an excellent way for real estate beginners to learn terminology, read about other investors in similar circumstances, and build confidence. Books also offer uninterrupted instruction, giving you the freedom to highlight, reread, and take the time you need at your own pace. However, books are best used as a guide and work well in combination with other tools, like working with a mentor. For some suggestions for real estate investing books, check out our article on learning real estate investing.

Real Estate Investing Mentors

Real estate investors of all ages and levels of experience can expand their learning by working with real estate mentors. A mentor is typically someone who has experience in the asset class you are interested in, but not necessarily. In many cases, mentors can be knowledgeable about the asset class even if they don’t invest in it themselves. For example, a real estate closing attorney will know a lot about real estate and will be able to introduce you to other investors.

Mentors tend to be valuable resources for real estate investing beginners. Learning from someone with experience or knowledge can save you from making costly errors when you get started. Look into your own circle of friends, family, and coworkers to find a mentor. You can also attend local investment club meetings and join online communities to meet other investors, or engage with potential mentors if you’re willing to invest the time and want one-on-one instruction.

Online Real Estate Investing Educational Videos

Educational videos can be a good resource for learning how to invest in real estate for beginners. Sites like YouTube offer investing tips for all the major types of real estate investments. Videos are a way to feel like you’re in a classroom with an instructor, and often include chat sessions where you can learn from other investors.

Online real estate investing videos may be a good resource for things like:

• On-demand learning
• Low-cost education
• Watching rather than reading
• Chatting with other investors

When looking for a good video resource, take the time to read reviews from other viewers, and look into the instructor’s background. Don’t be fooled by marketers trying to get you to buy into sales problems unless you’re looking for that kind of assistance. There are a lot of good advisers out there, but also a lot of scams.

4 Steps to Start Investing in Real Estate

Investing in real estate for beginners may be overwhelming at first. Most new investors are eager to get started, but not sure which steps to take first. Educating yourself using the right resources will build confidence in your conversations, but at some point, you have to take the first step.

Four ways for beginners to invest in real estate include:

1. Start by Purchasing a Primary Residence

Real estate investing for beginners doesn’t have to start with owning rental property or completing a fix-and-flip. Start your real estate investing business by purchasing a primary residence, which will give you access to the most affordable loan rates and terms. Taking this as your first step allows you to learn several facets of purchasing and financing property.

2. Leverage Your Home’s Equity

Once you build enough equity in your primary residence, take out a home equity line of credit. This can be used to cover down payments and closing costs on additional properties. Investors who take this step should avoid over-leveraging and stay under 90% combined loan-to-value (CLTV).

3. Deploy Capital in Real Estate Investments

Now that you have taken the beginning steps of becoming a real estate investor, you have a couple of choices. Do your research using the resources listed above. Talk to experienced investors in all sectors and make decisions about where you want to start. Try to start out conservatively to avoid rushing into any investments that you may regret later.

Potential real estate investments for beginners include:

• Buy an affordable three-bedroom, two-bathroom, single-family home: Typically these homes rent well and are easier to sell because they are best for first-time buyers. Even in a down market, there are first time buyers, so this gives you resale stability.
• Buy up for your primary residence: Just like when you purchased your first home, when you buy up for your primary residence you will get the best terms for the down payment and interest rate. Keep your current house as your first rental.

4. Get the Best Financing

One of the most overlooked aspects of real estate investing for beginners is the financing. Loan terms, rates, and qualifications vary with different lenders. Some lenders are geared towards investors, while others are geared towards owner-occupants, with terms that are ideal for homeowners.

If you are starting your investing career, financing a rental takes more time than a quick fix-and-flip. Working with a good lender is imperative to your long-term success. If you want more information on property financing, be sure to check out our article on investment property loans.

Pros & Cons of Real Estate Investing

Real estate investing is an excellent way to build wealth and increase cash flow. In addition, there are tax benefits that can help investors manage their tax liabilities. Real estate investors can also employ leverage to increase returns and diversify across multiple assets to lower their risk.

Pros of Real Estate Investing for Beginners

Some pros of investing in real estate include:

• Property appreciation: When property values increase, your investment grows. This growth can help you build long-term wealth, increase revenue from sales, and collect higher rents.
• Leverage: You can use other people’s money to purchase real estate, and this leverage allows you an opportunity to have a higher return on your initial investment.
• Income: If you purchase rental income, or make a career of fixing-and-flipping properties, you can create a steady flow of income. If you decide to invest in crowdfunding or REITs, you can collect dividend income.
• Risk management: When investing in real estate, you are able to shift some of the risk of ownership by insuring the property, the income, and your liability. Having insurance policies can protect your investment from natural disasters, fire, or loss of rent.

Cons of Real Estate Investing for Beginners

Some of the drawbacks of real estate investing include:

• Price volatility: Real estate investing has times when values decrease, which can be a problem if you need to sell, refinance, or access your equity in a property.
• Over-leverage: Property owners can get over-leveraged when borrowing to invest in real estate. This is why it’s important to take a conservative approach until your income is stable and you’ve built cash reserves.
• Time-consuming: Fix-and-flips require 25 to 40 hours a week, while managing rentals will require a few hours a month. Investors who want to avoid the time commitments can opt for crowdfunding options or REITs, which typically involve professional managers.
• Lack of liquidity: Once you invest your cash in real estate projects, you can’t use it for other expenses. You may be able to pull equity out of a property, but it’s not as simple as going to the bank or stopping by an ATM.

Most real estate investing beginners are looking for ways to get started investing with little to no money. Not having resources shouldn’t discourage you, though. There are creative ways to leverage what you already know or have an ability to know.

Tips for Real Estate Investing Beginners

Real estate investing beginners should start by using resources to learn more about investing in different asset classes, including fix-and-flips, rental property, crowdfunding platforms, and REITs. Below are some expert tips to help beginners when get started.

Some real estate investing tips for beginners include:

Structure a New Entity to Hold Your Real Estate

Consider holding your real estate investments in a legal entity such as an LLC or limited partnership. This is a smart way to manage risk if the investment fails or someone is hurt on your property. An LLC could also offer you protection for your personal assets.

Purchase Real Estate Liability Insurance

Owning real estate does come with risk—not only the risk of losing your initial investment, but also the risk of property damage from things like storms or tenant accidents. To protect your property, it is advisable to purchase the best insurance you can afford.

“When investing in residential rental properties, require tenants to carry their own liability insurance. Definitely require it on commercial leases and require tenants to list you as additional insured.”

– Nick Latto, Account Executive, C.T. Lowndes & Company

Be Prepared to Spend Time or Money

Real estate investing requires beginners to contribute either cash or sweat equity. When you assess your financial situation, also think about how you may be able to contribute to a real estate transaction, such as helping a mentor or contractor, or offering your services in exchange for equity.

“You have to spend either time or money in investing. If you don’t have funds available to fund deals, you’re going to be putting in a ton of sweat equity, which in my opinion is best because you really get to learn the business and see what works and doesn’t work upfront.”

– Cindy Browning, President of Mac Home Development Inc.

Additional Real Estate Investing Resources

One of the great things about real estate investing is that there is no shortage of resources to help you get started. However, searching can be overwhelming. It’s useful to know some of the best books, lenders, videos, and workshops available to help beginners get started.

Additional resources for real estate beginners include:

• Audio books: If you want to read some of the available real estate investing books, but don’t enjoy reading, many books are available as recordings so you can listen to the instruction and advice.
• Blogs: Blogs are an excellent option for new investors who want information and insights regarding real estate investments and market trends.
• Podcasts: Podcasts are similar to blogs in that they are updated often, come in subjects or chapters, and can be downloaded and listened to on demand.
• Workshops: Real estate workshops are typically held over a one- or two-day period and cover a lot of information in a short period of time. They also offer investors a way to network and make potentially valuable connections.
• Community investment groups: Community investment groups offer real estate investing beginners a way to meet other investors and vendors who market to investors. Members can also attend educational workshops.

Real Estate Investing Frequently Asked Questions (FAQs)

Hopefully, this article has answered your questions about real estate investing for beginners, and below are some of our most frequently asked questions regarding real estate investing. If you still have questions, be sure to visit our Fit Small Business forum and post your question there.

1. How much money’s needed to start real estate investing?

Real estate investing beginners can start with as little as $500. If you are only looking to purchase actual properties, you should be prepared to have 3% to 20% of your purchase price, depending on the asset. Also, you may want to save enough to keep a reserve emergency fund to pay for unexpected expenses.

2. What are some tax benefits of real estate investing?

Real estate investors may benefit from some of the numerous tax benefits that come with owning properties. Some of these benefits include being allowed to deduct expenses for repairing and maintaining the property, depreciation, mortgage interest, marketing, and property taxes.

3. Can I invest in real estate with no money?

Real estate investing can be done with no money, but only if you’re willing to invest something other than cash. For example, you can offer another investor your time to help them market their property, manage their subcontractors, or help with accounting. Would-be investors can also try wholesaling properties to get started.

Bottom Line

Real estate investing is a way for beginners to start building wealth, create active and passive income, and take advantage of tax benefits. There are many asset classes to explore when considering to invest in real estate. Some investments can be started with a small investment and very little management time while others require more upfront investment of both time and money.