Are you looking for a real estate investing for beginners guide? Well then, you’ve come to the right place. So if you have no idea what real estate investing is and how you can start doing it to generate a passive income, you should read on.
Investing in real estate is not exactly that easy to do, even if it seems simple in theory, it also comes with some risks.
But if done correctly, your real estate can be a great passive income source for many years to come. Who knows, you might even become a real estate mogul. But you have to start somewhere right?
That’s why we’ve put together this real estate investing for beginners guide so that you can get familiarized with a few strategies and terminologies as well as the pros and cons of doing it.
Why invest in real estate?
Well for starters, if you actually want to invest in something that’s tangible and not just numbers on a screen, real estate investing is a great way to achieve that.
Sure, investing in stock is great, but sometimes it’s also nice to see and visit the things that you invest your money into.
Plus, investing in real estate is something that many people consider to be a very safe and wise investment choice, and with the exception of a few special times like the 2008 recession, the real estate market is fairly stable.
And last time we checked, the world population is growing at an alarming rate, with an estimated 9.8 billion living in 2050. That’s a huge amount of people that will need housing.
So because of that, real estate investing will continue to be a flexible choice that will bring you some good passive income if done correctly.
Yes, IF done correctly, there are some downsides to real estate investing, and especially if you’re not careful what you’re doing you can lose a lot of money or time or both.
5 ways to invest in real estate for beginners
1. Investing in rental properties
Have you ever thought of becoming a landlord? Sure, it might not be an easy job, but it provides a great steady income.
You could buy a piece of real estate property and become a landlord, and earn money by renting out space in that property to tenants.
It’s possible to become a landlord without even owning a million-dollar or more apartment complex. You can start out small by investing in a property with 4 bedrooms for example, and rent the bedrooms out to individual tenants.
Bonus, you can even live yourself in one of the bedrooms and get to make some extra money on top. This is called a “house hack” and it’s a great way to save money on expenses and pay for your mortgage, which in turn results in you living in that space for free.
But of course, you could go all the way to the top and start buying full-blown investment properties, like an apartment complex for example.
How you make money investing in rental properties:
- Your number one priority is to make sure that your expenses are lower than your earnings. And also that every tenant pays their rent on time. If all of that happens, then everything that’s left will be your profit.
- Another way to make money by owning rental property is through asset appreciation, this happens when the property you have bought grows in value and you can sell it for more than what you have paid for.
Investing in real estate properties is a great way to make passive income, however, keep in mind the work and duties that you will have to do as a landlord. You can do every repair and maintenance yourself to maximize your profit, or you can outsource the work to others but gain more free time.
2. Buying REITs (real estate investment trusts)
If you’re a beginner looking to get into real estate investing, then buying REITs could be one of the easiest ways to get you started.
Real estate investment trusts (REITs) are companies that own real estate properties such as office buildings, hospitals, shopping centers, apartment buildings, hotels, and more.
Most REITs are traded on the stock exchange, allowing investors to easily pick up a few shares and start learning the ropes of real estate investing for beginners.
As a beginner investor, you don’t really want to buy REITs that are not publicly traded, because those would be harder to sell, and also harder to get an accurate estimate of what they are actually worth.
There are many online brokers where you can buy REITs from, and the stock price is usually under $100, making them a very affordable way to start investing in real estate.
How you earn money with REITs:
- You will get paid in dividends on the shares that you own, based on the income that was generated by the REIT companies.
- REITs have high paying dividends, which is great especially if you don’t need to have a regular cash flow.
- If you have bought REIT shares when they were low and now they have doubled or tripled in value, you could also decide to sell the shares and earn more money that way.
3. You could start flipping houses
Flipping houses is also another way to get started with real estate investing for beginners, especially if you have a few skills that can help you do it.
The goal with making money flipping houses, it to find a house that needs some renovation work done and buy it for a low price and then sell it for much more and earn a profit.
Seems pretty easy in nature, and it can be, provided that you know what you’re doing and if you’re doing most of the work yourself without hiring too many companies to do the work for you.
The most important aspect of flipping houses is the location of the property. A house that’s cheap because it needs work but it’s in a great area, could sell for a lot more money if you buy and renovate it yourself.
The trick is knowing which areas are popular or will become popular, where property values will rise in the future, this will help you make more money when it’s time to sell.
However, it’s not all gravy, there are some downsides of flipping houses, and usually, there’s a lot of financial risks involved. Some properties might require more work than you have expected and you will end up spending way more than you have planned, potentially even losing money instead of making a profit.
If you don’t get to sell the house in time, you might find out that you are also losing money by paying utilities and taxes until you find a buyer.
It’s also pretty time consuming and you will need to be skilled in some areas if you want to maximize your profits, doing most of the work yourself instead of hiring professionals.
How to make money flipping houses:
The only way to successfully make money doing this is if you sell the house for a profit. That’s it.
4. Online real estate investing platforms
You might be familiar a bit with companies such as LendingClub and Upstart, especially if you’ve read our best short-term investments article.
But if you’re not, don’t worry, here’s a quick summary: these are peer-to-peer (P2P) lending companies. Where you could invest your money by giving loans to other people and businesses through the online platform.
Some of these businesses are also real estate developers who are looking for funds to finance their projects. So you could invest in them either through debt or equity.
Keep in mind though that this could be riskier than REITs investing for example, and also it requires some higher minimum investments.
Also since you will be investing in just one company, there is a chance that the company could fail to deliver what they have promised and in the end costing you money.
So you have to be very careful about which real estate company you want to invest in.
How you make money with online real estate platforms:
If you have invested money through debt, it means that you have invested into a loan that you will be earning an interest rate on your money when it gets paid back.
The other option, equity investing, simply means that you are receiving shares of the property, so you will get an income from the money that it generates. You could also choose to sell your shares and earn money that way as well.
5. Rent out a room
Renting out one of the rooms in your house is a great real estate investment for beginners method, especially if you want to have more control over who rents it and if you want the bills to be paid on time.
If you have an extra room in your house that you don’t really use for anything, why not rent it out for short periods of time?
You could be making a few extra couple hundreds of dollars each month, and you get to dip your toe a bit into real estate investing.
All you have to do to get started is to list your spare room or rooms on sites like AirBnB, and they will take care of finding renters and pre-screen them a bit if you will.
You can opt to rent out your room for a few days, or for multiple weeks or months in a row. It all depends on your financial goals.
Including as many amenities in your room can make a big difference over how fast you can rent your room out, so make sure it has wifi, a smart TV, access to a bathroom, etc.
How you make money renting out a room:
You will get paid directly by the platform that you’ve listed your room with, such as Airbnb, after every stay.
Tips for buying your first property investment
Here are some real estate investing for beginners tips to keep in mind when you decide to start any of the above methods:
- First of all, make sure to take a good look at your current financial situation, this includes debt, credit score, amount of money you have for a down payment, time, etc.
- Decide on the way you want to start investing in real estate, and then research that topic more in-depth.
- Always do your due diligence, and gather as much info about an area or market that you’re willing to buy into. Think about the future as well, some areas might become more popular and help you earn more money, others might lose their value and you will end up losing money. So again, research the neighborhood and area properly.
- Get professionals to examine the properties and to look out for potential problems and repairs that might need to be done.
- Take into account ALL the costs that are involved with real estate investing, these include: closing costs, insurances, taxes, renovation work, utility bills, and more.
Pros of Real Estate Investing
One of the biggest pros of investing in real estate is that it’s a more stable option than the stock market. This means a lower overall risk of losing ALL your investments.
Real estate investing is also a good source of cash flow, so if your goal is to build additional passive income streams, owning multiple real estate properties is a perfect way to do it.
You get plenty of tax breaks, if you’re a real estate investor you can deduct a lot of things from your taxes, such as property tax, mortgage interest, and more.
Most of the time properties will appreciate in value, so in the long run, you will earn even more money by investing in real estate. It’s not unusual for a house to double or even triple its value in 10-30 years.
Cons of Real Estate Investing
The stock market returns are usually higher than the real estate ones, but then again, they are also riskier. So there’s this high-risk high reward going on with stocks that you don’t have with real estate.
Real estate investing requires more additional costs such as utility bills, maintenance, management companies, etc. As well as closing costs and interest rates. So you want to factor in all the expenses before you get started.
If you invest in properties you need to keep in mind that your money won’t be liquid anymore. So you can’t just sell out as quickly as you would sell out stock. This makes life difficult in case you need access to more funds or if a scenario like 2008 happens again.
Managing properties is time-consuming, especially if you have tenants that don’t pay their bills on time. You will also have to decide if you want to maximize your profits by doing everything yourself or if you want to hire others to do it for you (ex: the electrical system needs to be replaced).
Real Estate Investing For Beginners: Final Thoughts
We hope that this real estate investing for beginners guide was helpful for you, but before you get started keep in mind a few things.
Consider the amount of risk you’re willing to take, the taxes you will have to pay, and other fees and costs of owning real estate property such as utility and maintenance bills and insurance.
More importantly, do as much research as possible before you do anything that might have a big impact on your financial situation.