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A lot of modern investing is relatively hands-off. You buy a share of a stock or an index fund, then just hold it and let it grow for years or even decades. And while this is certainly a smart and simple way to invest, it’s not the only way.
For would-be investors who are attracted to a more tangible and hands-on method of investing, real estate is a popular option. Granted, it’s not the easiest method and there can be a steep learning curve as you begin. But the payoffs are potentially quite lucrative, and if “becoming a real estate mogul” is on your bucket list, you have to start somewhere!
Let’s go over some of the key things to know as you consider real estate investing for beginners.
Why invest in real estate?
Historically real estate has been one of the most dependable ways to become wealthy. And many of today's millionaires say it's still a smart investment, for a variety of reasons.
For one thing, investing in real estate gives you a way to diversify your investments. "Don't put all your eggs in one basket" is tried-and-true advice for a reason. There are a lot of moving parts to the economy, and there's always the chance that one can crash while the others thrive. Having exposure in several different markets helps insulate you from risk.
Secondly, real estate gives you ownership of a tangible asset that can appreciate. While I enjoy logging into my portfolio and seeing my stock values increase, it's all very abstract. There's something appealing about having a physical investment that you can actually see, visit, and improve.
And since people will always need a place to live, real estate tends to hold its value as long as the property is maintained well and the area is appealing.
There's also a decent amount of flexibility when you own real estate. You can decide whether to rent out your property, sell it, subdivide it, rezone it for a different purpose, and so on. This way, you can respond to changes in the economy in a way that still makes your investment useful.
All of that said, there's also a big note of caution here. Real estate can be a large and expensive undertaking, and as the housing market crash of 2008 illustrated, it's never a sure thing. Especially when it comes to real estate investing for beginners, it's wise to proceed with caution. You don't want to stretch your finances too far before you're ready and end up with debt that you struggle to repay.
Different ways to invest in real estate for beginners
There isn't just one way to invest in real estate, so don't worry—you don't have to commit to buying a whole apartment complex right away! Here are four of the main methods of real estate investing for beginners.
Owning rental property
We'll start with the traditional method: buying a property and renting it out to tenants. You can buy anything from a single-family house to a multi-family dwelling to business property or a warehouse. Then, you can rent it to tenants. If you'd like a hands-on experience, you can be the landlady yourself.
If your goal is to generate passive income instead, then you can hire a property management firm to take care of the day-to-day logistics on your behalf. It will cut into your profits, but also save you time and stress.
Many people also like to "house hack," where they purchase a house, duplex, or other types of multifamily unit, live in one part, and rent out other parts of the property. This can help you pay your mortgage early or even cover your expenses entirely so you're essentially living there for free.
How you make money owning rental property:
- Charging your tenants more in rent than you're paying in expenses
- Asset appreciation (selling for more than you paid when the property has increased in value)
Pros of owning rental property:
- Building equity in a long-term asset that can gain value over time
- Generating reliable cash flow since your tenants will usually pay monthly
- Having the flexibility to sell or use the property for something else if you decide
Cons of owning rental property:
- Assuming risk—the property may not rent quickly, there may be damages, or the property may lose value
- Handling logistics of tenant management
- You're responsible for expenses like repairs, insurance, property taxes
- Can be a long and costly process to sell
REITs are undoubtedly the easiest form of real estate investing, making them an attractive option for beginner investors. REIT stands for "real estate investment trust". These are companies that usually own and sometimes operate a variety of real estate properties such as hospitals, warehouses, shopping centers, residential buildings, and more.
Many REITs are publicly traded on stock exchanges, which is how they become available to individual investors like you. You can choose from several different types of REITs and buy shares of any you choose. Single shares tend to cost below $100 (I've even seen some below $5), making them very accessible.
How you make money with REITs:
- Being paid dividends on shares you own, usually quarterly, from the income generated by the REIT's holdings
- Selling your shares at a higher price than you paid
Pros of REITS:
- Ease of access—you can buy shares of a REIT on just about any investment platform
- Historically good performance with high returns
- Diversification—REITs typically own a lot of different properties, and your investment gets you a fractional share of the income from all of them
- No work and low risk since you're not personally responsible for a property's success or failure
- Money is easily accessible to cash out. Just like with regular stocks, you can sell your shares as long as there are buyers
Cons of REITs:
- Not hands-on, so it might not feel like truly being involved in real estate
- The experience isn't different than investing in stocks
- You don't have a say in a REIT's specific holdings
- No investment is totally risk-free
The idea of flipping houses offers a totally different take on property ownership. Instead of a long-term endeavor managing renters and adding properties to your portfolio, it's meant to be a temporary one.
Flippers buy houses or properties that need renovations, spend time fixing them up to improve the value, then turn around and put them on the market at a higher price. An ideal "flip" is a relatively short-term situation since the intention is to quickly sell and move on to the next.
How you make money flipping houses:
- There's just one way in this case: selling the house at a profit
Pros of flipping houses:
- Extremely hands-on, a pro for those who enjoy that aspect
- High-profit potential—the average gross profit is about $65,000, although that doesn't factor in expenses, which can vary wildly
- Good for those who already have relevant experience or connections in construction, painting, plumbing, realty, etc.
- Can be a shorter-term commitment of a year or less (but this isn't a guarantee)
Cons of flipping houses:
- Lots of financial risks—the property might be more expensive to fix than anticipated and turn into a money pit for you
- If it's not a seller's market, it could take more time to sell than you'd like and cost you even more in taxes and utilities
- Requires lots of work and time to renovate the house and prepare it for sale
- Money is illiquid until sold
- Not a good idea if you don't have a lot of relevant skills or connections to guarantee that work will be done quickly, affordably, and well
Real estate crowdfunding
This one is a unique and fairly new method of real estate investing. Through real estate crowdfunding platforms like Fundrise and RealtyMogul, you can invest in specific real estate projects whose buyers are seeking loans. The platforms vet the buyers and projects to make sure they're legit before presenting them to members.
There are two basic types of real estate crowdfunding: debt or equity investing. It sounds strange to invest in debt, but it basically means that you're investing in a mortgage loan on a property, and receiving a set share of the interest as the loan is paid back.
Equity investing means you're investing directly in a property and receiving a share of ownership, in which case you'll usually receive a part of whatever income or profits the property generates.
Investing in a crowdfunded project is a level up from REITs for several reasons. First, most existing platforms require minimum investments of $1000-$5000.
Second, you'll be investing in single projects that you choose (rather than a diversified collection), which makes an individual property's success or failure a little more high-stakes.
How you make money with real estate crowdfunding
- Regular interest or income dividends from your share of the property, usually paid quarterly
- Redeeming shares (essentially "cashing out") when allowed after a certain amount of time
- A portion of the profits when the property is sold if you've kept your share
Pros of crowdfunding
- Gives you the ability to participate in big real estate projects with just a few thousand dollars
- You get to evaluate the details of each project and choose exactly what you invest in
- It can be very educational to familiarize yourself with loan and real estate terminology so you can understand each deal's prospectus. This knowledge can benefit you in future ventures
Cons of crowdfunding
- It's a new and still relatively untested space, without decades of statistics to look at
- Risky because your investment's success or failure is attached to a single property
- Can be a 5+ year commitment; you can't always cash out when you'd like
So, those are your four basic options. If you're interested in REITs or crowdfunding, you can do it from the comfort of home. For ownership or flipping, you'll need to hit the pavement and start hunting for deals!
Real Estate Syndication
Real Estate syndication is another way to invest in real estate. This is where investors put their money together to buy or build real estate. With real estate syndicates, there is greater buying power than investing as an individual.
They start out with a sponsor who originates the transaction. The sponsor makes money from rental management fees, monthly cash flow from rent, and capital appreciation. Sponsors solicit investors who make money from the monthly cash flow from rent and the real estate appreciation.
Real estate syndication differs from real estate crowdfunding in that they focus on large-scale investments. Syndication also requires a formal investment agreement and cooperation between parties.
Buying your first investment property
If you're going with a traditional method of real estate investing that involves buying a property of your own, the next step is learning how to vet properties.
Of course, this involves a ton of location-specific factors and enough information to fill a book...which is why the next section has some real estate investing for beginners' books for you to check out! As a jumping-off point, here are seven quick tips for buying your first property.
- Before anything else, brutally evaluate your current financial situation to decide if you're ready. Ideally, you should have little to no debt, a lot of liquid savings to use for a down payment, a good credit score to qualify for good loan rates, and the time to dedicate to the work involved.
- Thoroughly research the areas and market trends in the locations you're scouting. Are houses selling well or going stagnant on the market? Is it an area that people would want to live in?
- Start by looking for a smaller, safer investment to get your feet wet; don't jump into an expensive property or a major fixer-upper right away.
- Have someone experienced examine the property with you to assess it for damage.
- If the goal is renting, decide whether you want to manage the property yourself or outsource it.
- If the goal is flipping, take inventory of your own skills that could be useful, and who you know that might be able to help for a quick turnaround.
- Evaluate all associated costs before buying, not just the purchase price. This means closing costs, property taxes, insurance, utilities, repair or renovation estimates, and more. It's okay to ask contractors for quotes before you've committed to a purchase. Ultimately, the goal is to go in with your eyes wide open.
Real estate investing for beginners books
For more, let's turn to the experts! These real estate investing for beginners books take a much deeper dive into many of the topics we've been discussing.
The Millionaire Real Estate Investor by Gary Keller
Who better to learn real estate investing than people who have become millionaires with it? This book collects wisdom gleaned from interviews with 120 millionaire real estate investors. It breaks down their strategies for success, debunks common money myths, and gives actionable advice for beginner real estate investors and beyond.
The Book on Rental Property Investing by Brandon Turner
This one focuses on how to build wealth and passive income with rental properties. It covers tips for finding good property deals, financing options, mistakes to avoid, and step-by-step strategies to follow for success in real estate.
What Every Real Estate Investor Needs To Know About Cash Flow by Frank Gallinelli
This book is all about crunching numbers. You'll learn how to value a property using a wide variety of metrics, so you can make confident, data-driven decisions. Not sure what a "profitability index" or "capitalization rate" is? Time to find out!
The Flipping Blueprint by Luke Weber
For the future flippers out there, this book is a guide to the good, the bad, and the ugly (and how to make it through them all). Learn where to find deals, lenders, and contractors, and how to talk to them. Get practical tips for maximizing profits. The step-by-step blueprint format is perfect for beginners.
The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matt MacFarland
This might sound like an intimidating read, but it's better to learn this stuff early than find yourself scrambling in April. It teaches you how to use the tax code to your advantage while staying on the right side of the IRS. You'll be able to start smart, grow quickly, and potentially save thousands of dollars.
Learning real estate investing for beginners is just the beginning of a long and complex journey. But if you're committed, determined, and willing to keep learning, it can be a rewarding and life-changing decision.