Have you heard the Mark Twain quote, “Buy land, they’re not making any more of it”? That quote sums up why real estate investing for beginners is such a popular topic. There’s only a finite amount of land, meaning real estate can be a lucrative investment.
To help you get a feel for some of the most popular real estate investment options for beginners, we're going to take you through some real estate investing basics and tips to set yourself up for success.
4 Ways to Start Investing in Real Estate
1. Buy REITs
Real estate investment trusts (REITs) own, operate, and finance commercial real estate. An REIT portfolio can hold specific types of commercial real estate, like apartment complexes, healthcare centers, office buildings, retail centers, hotels, etc. The focus of an REIT is income-generating real estate.
Until 1960 when Congress passed an amendment to the Cigar Excise Tax Extension, investing in commercial real estate was out of the question for your average, individual investor. But REITs allow average investors to start earning dividends from the profits of the company, and you can also sell your shares in the future as their value increases. Generally, REITs pay higher than average dividends, which is a major benefit, and you can reinvest your dividends for future growth.
Buying REITs allows you to invest in real estate and potentially reap the benefits without owning any physical property.
You can purchase publicly or non-publicly traded REITs. Publicly traded ones can be purchased through a brokerage, and they traded similarly to stocks. Non-publicly traded ones are a little less liquid and can be purchase through real estate platforms (more on these in a second), like Fundrise. Fundrise calls their offerings eREITs because they aren't publicly traded.
One thing to consider about REITs is that the IRS doesn’t classify the dividends you earn on REITS to be “qualified dividends.” This is important because qualified dividends are taxed at a lower rate than ordinary income.
Pros and Cons of Buying REITs
2. Crowdfunded Real Estate
Crowdfunded real estate started as part of the JOBS (Jumpstart Our Business Startups) Act of 2012, which allows the public to fund private real estate projects. As a result, there is a growing number of crowdfunding real estate platforms like RealtyMogul, DiversifyFund, and CrowdStreet.
Developers list projects on these platforms, and individuals can browse through different projects and invest for as little as $500. Each platform has a vetting process to ensure the legitimacy of each project before investing.
Debt and equity investing are the two main types of real estate crowdfunding. Investing in debt may sound counterintuitive, but you earn some of the interest on a loan as it’s paid back. Equity investing is earning income on property as it turns profits.
Most crowdfunded sites require a multi-year commitment because they rely on investor money to fund and realize large-scale projects. Five years is about the average commitment, and you can pull your money out early, but you’ll pay a small penalty.
Disclosure: We earn a commission for this endorsement of Fundrise.
Pros and Cons of Crowdfunded Real Estate
3. Invest in Rental Properties
Another way to start investing in real estate is through rental properties. The benefits here are initial cash flow and long-term capital appreciation that you can use to boost your retirement.
Some investors purchase single-family or multi-family homes to rent them out, and there’s also the option of investing in a multi-family unit that you can live in while renting out the additional units. The latter strategy is something called house hacking, and as long as there are no more than four units in the property, you can qualify for a residential loan.
No matter which approach you take, it’s essential to find a property you can afford. Rental properties can be a great investment, but you’ll eventually have to pay to fix broken appliances or utilities. There’s also the risk of having an empty rental or a renter who’s unable to pay their rent.
You can hire a property manager to help manage your rental, and they can take a lot of stress out of finding renters, collecting rent, and managing repairs. Of course, it’s an additional expense, but many landlords use a property manager because it makes their investment more passive.
Pros and Cons of Investing in Rental Properties:
4. Flipping Houses
No matter what it looks like on TV, there is a higher level of risk with flipping homes (no matter what it looks like because you have to be very accurate in your estimates of cost vs. benefit.
Buying a house isn’t cheap either, even rundown ones, so there are some major factors you’ll want to consider before trying to flip houses, There’s the initial cost of the property, the time and cost of the work, deciding to hire out or DIY, your flipping timeline, etc.
The reality is that buying and flipping homes are considerably more difficult than it looks on TV. You’ll be better suited for this type of investment if you have experience doing renovations and rehabs. The cost of fixing up a house and how long it takes to sell your flip can lower your profits, especially if you’ve taken out a loan to purchase the property.
Pros and Cons of Flipping Houses
Tips for Real Estate Investing Beginners
We've just explained several ways to start investing in real estate, and there’s serious and legitimate potential in all of them. To help you mitigate the risks and get the most out of your investment, below are some tips for getting into real estate.
Tip #1: Consider your finances first
People with a lot of student loan debt, high credit card debt, personal loans, etc. should focus on paying their debt down first. You’ll need a solid cash cushion if you’re thinking about investments like flipping or rental properties. It’s also important that you’ve established your retirement savings first. Real estate is too risky if you don’t have your own financial house in order first.
Tip #2: Location, location, location
Spend time researching the neighborhood or market your investing in, even if that’s through crowdfunded site or REITs. Look for places that are on the rise, not in decline even if the price looks good. If the investment is local to you, take time to visit the area so you can gauge what the market is really like.
Tip #3: Watch out for high-interest rates
Mortgage rates dipped in 2020 through 2021, but they are back on the rise. High rates mean a higher mortgage payment if you finance, and that’s tough on cash flow and makes it difficult to sustain a property that’s sitting unsold or vacant.
Tip #4: Take your time research real estate platforms
There are a lot of crowdfunding platforms out there, and there are real estate platforms popping up left and right for different facets of real estate investing. This gives investors lots of choices, but many of these companies are still very new and don’t have a proven track record.
Tip #5: Accurately estimate costs
One of the nice things about REITs and crowdfunded real estate is that the costs are straightforward, but rental properties and flipping houses come with lots of unexpected costs. Never underestimate what those costs will be, and make sure you have a large enough cash cushion to protect yourself.
Tip #6: Set a realistic budget
A good estimate is the key to starting to invest in real estate, and it will help you budget accordingly. For example, you’ll be able to understand how much to save each month for a downpayment and how that will fit in with the rest of your expenses.
Tip #7: Draft a business plan
Investing in real estate is a business, even if you’re a beginner. Drafting a real estate business plan will help you determine you define your motivation, goals, and outline the steps you need to take to accomplish them.
Tip #8: Read as much as possible
You can’t read a couple of blog posts and know everything there is to learn about real estate investing for beginners. There’s just too much information out there. Here’s a list of recommendations for real estate investing books so you can grab a few and learn more.
The Final Word on Real Estate Investing for Beginners
Before anything else, think about your financial goals and how investing in real estate will help you achieve them.
Real estate investors make money in a few different ways, so the type of investing you do may affect your ability to reach your financial goals. That being said, here are a few questions you’ll want to ask yourself:
- Are you looking for a passive real estate investment?
- Are you trying to increase your income monthly income?
- Are you looking for an investment property, as in something that you might want to sell later on to fuel your retirement?
- Is real estate investing part of a potential business venture?
Buying eREITs and crowdfunding are some of the easiest ways for beginners to get started. It’s passive, and you don’t need a large initial investment, especially if you go with Fundrise because you can start investing for as little as $10.
But if you want to get more hands-on and have the finances to take on a larger initial investment, purchasing an investment property to rent out can increase your cash flow and provide long-term gains.
The point is, consider your goals and current budget to make the best investment choice for you.
Disclosure: We earn a commission for this endorsement of Fundrise.