Chances are if you're trying to build wealth, you've probably heard that investing in real estate is definitely the way to go. But then the question is, how do you get started in real estate investing? More specifically, what is the BEST way to get started in real estate?
Like any other investment, investing in real estate is risky. And you can lose lots of money if you don't have the necessary knowledge and skill.
But there is a way to get started investing in real estate that lowers your risk substantially. And by doing it, you'd be able to learn more about real estate as you go.
You can ease into it. Kind of like having training wheels.
So what is it? What is the best way to get started in real estate as a beginner?
House Hacking.
As a newbie, it can be scary to take that leap and jump into investing in real estate. But house hacking will guide you into the realm of real estate investing and help you build credibility with banks.
It is investing in real estate with training wheels. So it's perfect for those of us just starting out.
Now there are many different ways to house hack. And we'll get into the different strategies for house hacking and what it actually is below.
But first let's make sure you have a good understanding of what you are getting into and why.
What is Real Estate?
Real Estate is property consisting of land and anything that is found on, above, or below that land whether it is a building, natural resources such as minerals and water, or any permanent improvements made to the land.
There are 4 kinds of real estate:
- Residential real estate: Houses, Condos, Co-ops, etc.
- Commercial real estate: Shopping malls, Retail stores, offices, etc.
- Industrial real estate: Warehouses, Manufacturing facilities, etc.
- Land: Vacant land, Farms, Orchards, Recreational land, etc.
While you can invest in whichever kind of real estate you like, my advice, as a beginner, you may want to stick to residential or land.
Why Invest in Real Estate?
There are currently 5 different asset classes that you could invest your money in: Stocks/Bonds, Businesses, Real Estate, Commodities (Oil, gas, etc.), and Cryptocurrency.
So why should you choose to invest in Real Estate?
Well, for one, real estate is just that real. You can see it, touch it, feel it. It is not off in the ether somewhere like crypto and not just a bunch of numbers and IOUs like stocks and bonds.
And what's more, land is a limited resource. If you know anything about supply and demand, then you know that the less there is of something, the more expensive it will be.
So as time passes and land becomes more scarce, you know that your investment will, most likely, go up in value.
Everyone needs a place to live. So why not get in on the action on something that will always be a necessity.
Besides, owning real estate diversifies your investment portfolio. It is the perfect hedge against inflation. Unlike stocks and bonds, which would take a hit from serious inflation, real estate won't.
With real estate, you get steady income, tax write offs, and a chance to build your net worth strategically and exponentially.
Ways to Invest in Real Estate
So now that you definitely have the burning desire to invest in real estate right now, let's get into the various ways you can do so.
Real Estate Investment Trusts (REITs)
One of the simplest and cheapest ways to get started in real estate investing is to buy shares of Real Estate Investment Trusts, or REITs.
All you'd have to do is find a REIT in a specific sector (commercial, residential, etc.) or an index fund with various kinds of REITs and add them to your portfolio.
And just like that, you have invested in real estate. Pretty easy right?
The good thing about REITs is that they must give out at least 90% of its taxable income as dividends. The downside is the rule states taxable income which is not the same as earnings.
Sadly, that means the dividends you receive might not be as high as you expect.
Ownership
When it comes to investing in real estate, most people think immediately of buying property and renting it out.
Direct ownership of property is pretty much the popular way to get started investing in real estate. It represents the quintessential buy and hold investor.
Usually, if you chose to purchase property yourself, you are in it for the long haul. You'd want that steady income it provides as well as that boost to your net worth.
When you directly own a property, you can decided what you want to do with it. Many choose to rent it out and make steady income every month.
While others decide to go the route of Airbnb or other short term rentals, resulting in fluctuating income but also a chance to make much more than simple long-term rentals.
Crowdfunding
If you want to dip your toe into the real estate investing waters, you may want to take a look at crowdfunding. Crowdfunding is the pooling together of money from different investors to buy an asset or debt instrument.
It provides a good way for you to invest in real estate without all the hassle of searching for, financing, and managing the properties yourself.
What's more, it gives everyday investors like you and me the opportunity to invest in commercial properties which previously would've been out of our price range.
Sites such as CrowdStreet, Fundrise, and RealtyMogul allow you to invest in individual commercial properties, REITS, private real estate loans, equity, and 1031 exchanges.
Be aware though that these sites do come with fees. Furthermore, some have some pretty hefty minimums and may only be open to accredited investors.
Fundrise is great for beginners as they offer levels with flexible investment minimums and give you suggestions that you can use for your investing strategy.
Real Estate Investment Groups
Another more hands off way to get started in real estate investing is by joining a local real estate investment group. These groups will meet not only to further their investment knowledge but also to pool their money together to buy or finance property.
So if you have your sights set on investing in apartments and other commercial property but don't have the cash for it, you may want to considering joining a group and investing through them.
Flipping
A few years ago, this kind of real estate investing was the new hot thing with everyone in their mother trying to get into it. They even had a quite few TV shows about it as well.
Flipping is purchasing a property for cheap then quickly selling it at a higher price for a profit.
People who flip houses do not have the intention to hold on to it for very long. In fact, it is not in your best interest to do so, as the longer you hold it the more it is costing you.
When flipping real estate, you would look for a fixer upper. Then buy it, fix it up, and resell it for a profit.
Flipping does require knowledge of your market and the costs of renovations. And you must be good at running the numbers or you may end up losing money rather than making it.
Syndicates
A lesser known way to get started in real estate investing is through syndicates.
Investing with syndicates is a bit like real estate investment groups except there is no educational aspect and the investors in these deals are typically ultra-rich.
Typically, how a syndication works is there is a sponsor or syndicator who goes out and finds the deal. Then he or she finds investors to invest in the deal. Crowdfunding is one way they could get connected to investors but many syndicators tend to look within their network.
While you may need to be rich to be an investor in a syndicate, you don't actually need money to be the syndicator. You just have to be good at finding great deals.
Notes/Papers/Tax Liens, etc.
Another simple and not so costly way to get started in real estate investing is through buying tax liens and mortgage notes.
When you buy notes you are taking over as the collector on the debt owed. This means that the person who took out the loan has to pay you every month just as they would've paid the bank.
If they do not make their scheduled payments, you then have the option to foreclose on the property. In this way, you could potentially get a house for pennies on the dollar.
But, there are a lot of pitfalls with note investing so it is best to have a mentor or get an advisor to make sure you pick the right ones to invest in.
As for tax liens, you make money when the owner pays you the back tax with interest. If they don't pay, you may be able to foreclose on the property like with notes but it's not guaranteed that you can get the house.
Crowdfunding platforms could be a good way to dip your toe into real estate investing as a beginner.
The BEST Way to Get Started in Real Estate Investing
If you are looking to get into real estate investing but don't know where to start, then look no further. Because the BEST way to start as a newbie is with a strategy called house hacking.
What is House Hacking?
House hacking is a real estate investment strategy where one purchases a duplex, triplex, or quadplex, lives in one unit, and rents out the others. Purchasing a home and renting out rooms is also considered house hacking as well.
Why House Hack?
There are a lot of reasons you should house hack. The top one being that it is an easy foot in the door to real estate investing but with much lower risk.
Think of it this way. You need a place to live, right? So why not buy a house then rent out your rooms. Not only would you be making money but if done correctly you'll also be living rent free.
Let's look at a few more reason you should house hack.
1. Cash Flow
The number one reason to house hack is CASH FLOW. And if you don't know by now, Cash Flow is Queen. It is the key to your financial security and, ultimately, your financial freedom.
When you house hack you get steady income coming in every month. And all, for not much more effort than buying a house normally.
2. Financing is on Your Side
House hacking, by definition, means you are going to be living in whatever property you purchase. Because of this, you get access to lower interest rates and have the option to take out FHA loans.
With FHA loans, you can opt to only put down 3.5%. Which means you could buy a duplex valued at $250,000 for just $8,750!
And bonus point good news, if you do a 203k loan, you can even include the costs of renovations! I mean could it get any better than that?!
There is one downside though. Not paying 20% down means that you must pay for private mortgage insurance (PMI). This will increase your monthly bill at least until you have paid up to 20% of your mortgage.
3. Gain Real Estate Investing Skills
When you house hack, you learn how to buy a house, you learn about your market, and about the kind of tenants your property attracts.
What's more, you can start learning your numbers. For instance, how much does it cost to renovate a kitchen? How much would this 2 bedroom, 1 bath rent for? How much would it sell for?
By learning these skills and gaining knowledge about your market, you will be better able put together good real estate deals in the future.
The key to real estate investing is knowing your numbers. Without it, you could very well lose everything and end up in a massive amount of debt. With it, you have everything you need to make BIG money in real estate.
4. Get Landlord Experience Without Too Much Risk
Instead of jumping into the deep end when it comes to landlording, you get to wade into the kiddy pool when you house hack.
Dealing with broken pipes and noise complaints are much easier when you live there, know the status of the pipes, and you are the one making all the noise.
Plus, should a big issue arise and your tenant ends up leaving, your property won't be entirely vacant because at least you will still be there and can cover the mortgage payments.
5. Show Banks That You Can Handle Investing in Real Estate
The tricky part about investing in real estate as a beginner is getting banks to trust you. But by house hacking, you get to slide into the deal as a buyer slash investor and earn your stripes.
When banks see that you were able to handle one property well, your credibility will increase and they will be more willing to lend to you for your future projects.
7. Reduce Your Taxable Income
As a property owner, you can reduce your taxable income through credits and deductions for homeowners.
Furthermore, as a real estate investor, you can depreciate your asset so that you won't be taxed on any of the cash flow or money you are making from your investment property.
6. Reduce or Eliminate Your Housing Cost
For me, this is the biggest reason to house hack. Because, as I'm sure you know by now, housing is probably the biggest expense you have. And if you could find a way to reduce that or get rid of it all together, wouldn't you do it?
By house hacking you can essential reduce or get rid of your housing costs entirely.
How? Because you have tenants who are paying the rent for you!
With each rent check you cash each month, you can use the money you're not spending on rent to boost your savings or pay off your debt so much faster.
House hacking for the win!
When you house hack, not only will you save money on rent but you'll also be able to reduce your taxes!
How to Get Started with House Hacking
So have I convinced you to start your real estate investment journey with house hacking? Yeah? Well, here are the steps you need to follow to get off on the right foot.
1. Start Building Your Savings
First things first, you're going to need to save up some money for that down payment. So take a look at the houses in the area you want to live.
How much do they cost? And how much would you need for that 20% down payment (or 3.5% down payment if you do the FHA loan)?
Nows the time to be building up your savings. Because buying a house comes with a lot of fees and possible renovations. So you'll want to make sure you have enough cushion in your savings to cover any unexpected expenses.
2. Choose Your Property Type & Market
Once you've gotten the ball rolling on your savings, you'll need to choose what kind of house hacking you will do.
Do you want to simply buy a house and rent out the rooms? Or the garage? Or do you want to go the multi-plex route?
Renting out rooms may be a little easier maintenance wise as you'd only have just one property to deal with but you'll have people living all up in your space.
If you go with a multi-plex, you'd get your own space but will have to deal with having a few tenants and increased maintenance. Not to mention, it will probably cost more to purchase so you'd have to prepare for that as well.
While you're deciding that also take some time to determine where you want to live. Are you looking to change cities? Always wanted a house on the Eastside?
Well now's the time to do it. Just be sure to pick a good neighborhood where property values are likely to raise.
3. Build Your Team
Now that you know where you are looking to buy property, it is time to start building your team.
And first on the list is finding your real estate agent. This is the person who will help you find your ideal home for the price point you want.
And if they are good, they will also be able to give you comps on other houses in the area as well as tell you how much you can expect to get in rent.
Next, you'll want to find your lender, who you'll need to finance your real estate deal.
Because you will be living in the house, it will be much easier for you to get a loan. You could check out regular banks that offer mortgages or hit up the specialist lenders.
A few other people you'll also what on your team are a good contractor, who can handle the renovations in a timely, efficient manner and a great lawyer, who can check all the necessary documents and agreements and make sure that everything is in your best interest.
4. Analyze Deals & Make Offers
So now that you have your team together and your financing set, you can now start analyzing deals and making offers.
Search for properties that fit your investment strategy and which are in good communities. As you are just starting out I'd probably go for one that doesn't need a complete overhaul as miscalculating renovation costs is what hurts most newbie real estate investors.
My advice, pick a house that's nice and doesn't require too much fixing up.
And don't be surprised if you have to submit a few offers for these houses. Buying property can take time.
You might have to dig up a few blocks of coal before you strike gold.
Check out this property calculator from calculator.net.
5. Continue Your Education
Once you've bought your house hack, your real estate investment journey doesn't stop there. Well... unless you want it to.
But, I have a feeling you've gotten the real estate investing bug and are in it for the long haul. That means you're going to need to start learning your new found craft.
There are many ways to make money and lots of it in real estate but there are also just as many ways to lose it.
And if you want to get out on the other side of this investing journey with few battle scars and loads of wealth, you might want to crack open a book or two.
If you don't know where to start, check out my book recommendations below!
If you plan on being in real estate for a while, choosing the best team is KEY!
Strategies for House Hacking
When purchasing a property specifically for house hacking there are some things you'll want to look out for. Here are some strategies you can use to ensure you get the biggest bang for your buck.
Multi-Family
Buying a duplex, triplex, or quadplex, is the most used strategy when it comes to house hacking. Why? Because it allows you to get up to 3 additional rental properties for the time commitment and sometimes money of buying just one.
And because you are living in it, you can get it with good loan terms and for very little down.
Couple that with the extra income you get from the other units and that is just a match made in house hacking heaven!
Additional Dwelling Units
Of course there are other ways to house hack besides buying a multi-family property. One way that is typically done is renting out a room in your house.
And the more rooms you have the more money you could potentially make. So look for homes with plenty of rooms, furnished basements, or decked out garages. Or even those that come with an "in-law" suite in the backyard.
All these additional dwelling units mean just one thing for you: more money.
The Value Add
The good old, time tested value-add play. This strategy entails taking a property and upgrading it in some way so as to increase its value.
This could be something as simple as making all the floors hardwood or something more such as looking at the floor plan and creating an extra bedroom.
Creating extra bedrooms is one of the best ways to increase a property's value and how much it would rent for.
So as you are looking at properties, keep an eye out for the possibility of adding an extra bedroom here or an extra bath there. Those additions just might be the thing that sets your property apart from the rest.
Plus, you'd make quite a bit extra in terms of income.
Other Considerations
- Transportation: Is your property near public transportation? People prefer to be near transportation and they would be willing to pay for it. Plus, maybe you can save yourself some gas money as well!
- No HOAs/ restrictions: You want to make sure you buy a property that doesn't have restrictions such as limitations on what kind of renovations you can do or restrictions on Airbnb-ing your place.
- Parking: Every household has 1 or 2 cars so having parking on site would be beneficial.
- Extra Bathrooms: Everyone loves extra bathrooms. Not just women.
Recommended Books on Real Estate
Want to learn more about investing in real estate? Check the books I recommend below. Some I've read and others are on my to read list!
- The Millionaire Real Estate Investor by Gary Keller
- Emerging Real Estate Markets By Dave Lindahl
- Long Distance Real Estate Investing by David Greene
- The Book on Investing in Real Estate With No (or Low) Money Down by Brandon Turner
Renting out your furnished basement could net you an extra couple hundred dollars a month. Not a bad chunk of change!
All in All
If you are a newbie investor, the best way to get started in real estate investing is to House Hack. It's easy to do and can save you tons in rent!
Not to mention, it opens the door to your real estate investing journey by allowing you to gain knowledge, skills, and credibility.
Now...the best way to actually get started in any worthwhile endeavor, especially real estate, is to JUST DO IT!
You can spend your days analyzing and over analyzing in an attempt to find the perfect deal at your ideal price and perfect neighborhood.
But with all that analyzing and back and forth, you'll wake up a year or two later and realize you haven't bought a thing.
The best way to learn after you've gotten the basics is by doing. So get out there, cut a few deals, make a few mistakes, and start building your wealth with real estate.
Happy Investing!
Want to learn about investing for retirement? Check out The Complete Guide to Investment Options for Retirement.
*DISCLAIMER: The Information provided in this post is simply the opinions of the blogger and is given in the spirit of educational fun. It is not investment advice. Please do your own research and decide what is right for you before investing in any asset. If necessary, seek the help of a certified professional in discussing your options.