Real estate investing is one of the most reliable forms of investment in the world. Land almost always appreciates in value and most properties can make you a profit while you wait. Just buying empty tracts of land is a fair enough investment, you can put your savings into a long-term value-building portfolio in this way,
Rental properties are one of the most reliable sources of investment in the world. Land, homes, and commercial properties all typically appreciate in value over time, and even empty lots can provide significant returns whether you choose to develop them or sell them when developer interest peaks. Through real estate investment strategies, you can put your savings into a long-term, value-building portfolio and reap the rewards months, years, or even decades after your initial investment.
Of course, mastering real estate investment is a practice that takes years. It’s important to understand the basics before your first investment. If you’re just starting, we have more than a few helpful tips on making smart choices and identifying profit opportunities in real estate investing for beginners.
Getting Started with Real Estate Investing
Those new to real estate investing should start looking at both the big picture and studying each possible stage of the investment process. Investing can be quick-cycle or long-term. You can focus on residential for a rental property or flipping houses, commercial to rent out to SMBs, or undeveloped properties like a vacant lot or parking lot. As a new investor, you might be investing with personal funds or you might be a pro at finding others to invest alongside you to distribute both risk and reward. You may be seeking passive real estate investing or active profit opportunities. Each approach offers a different experience and may be suited to different types of investor personalities, wealth profiles, and profit plans, but both can help you build wealth.
Let’s explore the basics of real estate investing for beginners and how to invest in real estate when you’re just getting started.
1. Understanding the Real Estate Market
The first thing you should know about your investment strategy is your playing field: the real estate market. The real estate market typically follows a cyclical pattern, hot in the summer and cold in the winter. However, there are nuances based on the type of property and the market environments you are looking for.
In the housing market, the cyclical nature of the market follows both the local seasons and the school year – summer is better for travel and parents prefer to move while kids are out of school. But winter home sales tend to be more rapid, you will find properties that didn’t sell in the summer with both sellers and buyers who didn’t manage to close during the summer.
In commercial real estate, deals tend to take longer and the cycles adhere more to local economics. Market prices and trends also shift from region to region, so you’ll want to study these nuances when deciding both where and when to invest.
2. Types of Real Estate Investments
There are three primary types of real estate investment: residential, commercial, and land. Real estate investing for beginners often starts with the type you are most comfortable with, and some investors eventually expand their portfolios as they become more skilled.
Residential Real Estate
Residential real estate is the most common choice for investment because most people can come to understand the housing market. You can buy houses, townhomes, and apartments for long-term rental or you can look for ideal properties for vacation and other short-term rental strategies. This can be a very hands-on strategy unless you turn over property managers who cut into your profit.
Commercial Real Estate
Commercial real estate involves buying larger properties and leasing them to tenant businesses. This requires a more nuanced understanding of large-scale deals and the businesses you will be renting to.
Empty and Undeveloped Land
Undeveloped land can be used as open space, developed, or allowed to appreciate until a developer offers you a profitable bid. It can be a long-term or short-term investment depending entirely on the quality and location of the land. Renting parking spaces for RVs, boats, trailers or monthly parking are both great passive options. This type of strategy often sees a quick ROI compared to the other two.
3. Real Estate Investment Strategies
There are several different real estate investment strategies that you can explore depending on your style and how long you want to hold onto the properties you buy.
- Buy, hold, lease
- Buying and holding property usually involves a rental strategy. You can improve and lease the property to turn it into a source of passive income. This works with both residential and commercial incomes, and sometimes with undeveloped land.
- Fix and flip
- The fix-and-flip strategy involves buying distressed and unattractive properties, then renovating them to sell at a profit. Fix-and-flippers or home flippers are an essential part of the ecosystem and bring older or poorly maintained homes back into the fold as family residences.
- Wholesaling is a more detached way to seek out distressed properties at a discount and then resell them to other investors at a profit.
- Real Estate Investment Trusts (aka REITs)
- REIT investing involves investing in a pre-managed real estate portfolio, which feels more like traditional investing but is based in real estate appreciation and investment strategies.
4. Financing Real Estate Investments
How do you finance real estate investing for beginners? You can finance your first investments through a number of channels. If you choose a mortgage lender, you will need to put 20% of your money down or more in a down payment for a non-primary residence. If you choose commercial properties or to skip the mortgage on residential properties, you can seek hard money loans, and cash investments, or try to invest with a group of others for shared profits. You can also take a HELOC (home equity line of credit) from your own house for the downpayment as a way to bootstrap your way into real estate investment opportunities.
5. Evaluating Real Estate Properties
When exploring potential investment opportunities, it is crucial to understand your specific requirements. If you are considering purchasing properties to rent, your focus would typically be on acquiring houses that are ready for immediate occupancy or require minimal preparations. These types of homes have the potential to attract tenants and provide excellent accommodation for families. On the other hand, if you are interested in short-term rentals, you would prioritize finding delightful spaces that can serve as inviting hospitality options for renters. When it comes to commercial buildings, developing a comprehensive investment strategy in collaboration with a team of consultants is essential. However, when evaluating vacant lots, one option worth considering is their potential for appreciation in value and the ease with which they can be transformed into profitable ventures, such as vehicle storage solutions or parking rentals.
Be sure to examine local market trends to understand the pattern of appreciation, location to estimate demand, and calculate ROI (return on investment) to determine how long it will take before your investment pays off. For properties that will generate money, examine your potential cash flow and consider how maintenance will factor into your plans for passive real estate investing.
6. Risks and Challenges in Real Estate Investing
What are the risks of real estate investing for beginners? What are the challenges? For most beginners, the biggest risk is selecting an unprofitable property, perhaps one that requires more renovation or maintenance than you realized. However, securing funding comes in a close second, as investment real estate has a different financial profile compared to buying a primary residence or a single-family home.
- High-maintenance properties
- Securing funding
- Volatile real estate markets
- Marketing and leasing properties
- Selling at a profit
- Maximizing your investments
Other risks include volatile markets and the to advertise and sell/lease your properties to make a profit. However, the most rewarding challenge is learning how to maximize your properties so that each one offers the most profitable opportunities, like renting extra parking spaces or storage space through a platform like Neighbor.com in addition to seeking long-term tenants.
7. Building a Real Estate Team
The smartest way to approach real estate investing for beginners is to build a team. Even experienced investors trust their team to help them seek, evaluate, and strategize each investment they make.
Your team should include real estate agents who understand your strategy, contractors with experience in your chosen style of building, property managers who will manage each location you buy, and legal professionals to handle paperwork and compliance. The right team will help you choose profitable properties and maximize their value through renovations, advertising, and smart management tactics.
Real estate investment offers a plethora of avenues to build wealth, whether it’s through rental income, flipping houses, or buying and holding properties. Investment property, for instance, has the potential to generate a steady stream of income if managed correctly. For novices seeking to learn more about this field, there is an abundance of resources available, such as educational real estate podcasts, which can offer insightful guidance and advice from industry professionals.
However, amidst the diverse options available, capitalizing on vacant lot opportunities might present the easiest lift for beginners. These plots offer a comparatively affordable entry point into the market, the potential for short-term income through rental for storage or parking, and the potential for substantial long-term appreciation. They also require minimal upkeep compared to residential or commercial properties, making them an ideal choice for those looking to minimize ongoing time commitment and cost.
Remember, all these routes can lead to prosperity in the real estate realm. The most successful real estate investors find the approach that aligns best with their investment goals, financial capability, and personal preference. As always, careful planning, diligent research, and thoughtful execution are essential for success in real estate investment.