The world of real estate investing, while it seems intimidating, is an exciting one to get into. Starting a real estate business is something that has crossed all of our minds at one point or another. As an investor, you can make great money, be your own boss, and provide a home for individuals, families, and businesses. What’s not to love? Plus, there are plenty of ripe opportunities out there waiting for you to grab them.
But then again, if you’re just considering this investment option, you may have no idea of where and how to start. If investing in real estate is something you’re really passionate about, keep reading this step-by-step guide to starting a real estate investment business. By the end of this guide, you’ll have all the information you need to start your own real estate business and maximize your chances for success.
Step 1: Understand the Real Estate World
Getting educated about real estate investing is the number one key to success as an investor. This is not any different from just about every other entrepreneurial endeavor. You just need to identify and become familiar with several key elements before starting so you can build your business on a solid foundation. After all, how can you make investment decisions without knowing what the real estate business is all about? So, you have to learn the basics and also ask the right questions when presented with information.
You don’t need to attend expensive real estate investment seminars to learn about the industry. Instead, the best approach for beginners is to learn all that they can with useful resources available for free. There are plenty of real estate books, podcasts, and real estate investment blogs online that’ll give you a jump start on the basics of real estate investing. You can also speak with other real estate investors and learn from their personal experiences. Among the most important things to know before getting into real estate include:
- Investing Risks: Yes, owning a real estate business comes with numerous benefits and rewards, but investing always poses some sort of risk. Risks of investing in real estate may involve illiquidity, taking on an additional mortgage, dealing with costly repairs and maintenance, high vacancy rates, etc. Some risks can be controlled, so it’s best to learn more about them and how to limit them.
- Tax Implications: You don’t want to lose a major chunk of the returns you earn from investment properties as taxes. The only way to ensure this is by understanding real estate taxes and their implications in advance. It is important to know that the way property is classified and how it is used affects what tax deductions and benefits you receive.
- Leverage: The power of leverage helps real estate investors use various financial instruments or borrowed capital (debt) to increase their potential return on investment. Some beginners don’t take advantage of this simply because they don’t know how to access leverage. There are also some potential drawbacks of leverage which you won’t know without doing your homework.
There are also numerous terms and acronyms used in the real estate industry. You need to get yourself familiar with terms like cap rate, rate of return, 1031 exchange, short-sale, after repair value, cash on cash return, and dozens of others to succeed in this business. Start now with the 25 Real Estate Investing Terms Every Beginner Should Know.
Step 2: Pick Your Real Estate Investment Strategy
After arming yourself with sufficient knowledge, you can determine what type of real estate investor you want to be. There are many ways (or investment strategies) to make money in real estate. It’s important to understand your options and identify which works best for you as some have higher risks and/or higher investment requirements. The most common investment strategies include:
1- Buy and Hold Real Estate
As the name suggests, this strategy involves buying an investment property and holding it for a long period of time (over 10 years). This type of real estate business enables investors to make money in the long-term from capital growth. Basically, the value of a real estate asset increases the longer it is held – this is known as appreciation. The increase in a property’s value over time translates into profits for the property owner when he/she decides to sell. In locations where property prices are steadily increasing, the buy and hold strategy can be a smart choice given that real estate prices have almost always appreciated over the long-term.
2- Investing in Rental Properties
Owning a real estate rental business is the favorite strategy for beginners because it allows them to make money almost immediately. It falls into two categories: traditional rentals (leased out to long-term tenants on a monthly basis) and vacation rentals (rented out to short-term guests like tourists and travelers on a nightly basis). Both rental strategies allow investors to make money from rental income and cash flow. Historical and predictive real estate analytics have proved that renting out properties can help you achieve a high return on investment in terms of both cap rate and cash on cash return.
Whichever rental strategy you lean towards, you can start your search for profitable rental properties for sale here.
3- Flipping Houses
If you don’t want to invest your money in a property for a number of years until you receive profits, you’ll want to consider the fix-and-flip strategy. Another way of how to start a real estate business entails buying an undervalued investment property in a distressed condition, adding value by renovating it, and then selling it for a profit to another investor or homeowner. Flipping houses has become a popular investment strategy for those looking to cash out quickly without having to deal with tenants. But it should be mentioned that it comes with higher risks, so do more research before starting a house flipping business.
4- Passive Real Estate Investments
One reason why many consider becoming a property investor is that some types of real estate business allow you to make money while doing little to no work. You could invest in a turnkey rental, for example, which is an investment property fully ready to be rented out. Many companies selling turnkey rentals also offer management services, turning them into passive investments. Furthermore, there are passive real estate investments that don’t even involve buying a property. These include investing in REITs, investment groups, and mutual funds. These strategies allow you to create cash flow in the short run and build wealth in the long term.
5- Creative Investment Strategies
In any business, you’re often told to think outside the box or get creative. You can do that in real estate too! Creative real estate investing involves strategies that don’t require you to turn to a bank for financing income producing assets or enlisting the help of real estate agents to find an investment property. Instead, these strategies allow you to start a real estate business from home and with no money. The best creative strategies include house hacking, investing online, real estate crowdfunding, house wholesaling, owner financing, and rent-to-own homes.
To learn the pros and cons of each strategy and get extra tips on how to turn each one into a successful real estate business, read this: 8 Best Real Estate Investment Strategies for Beginners.
Step 3: Write a Real Estate Business Plan
Once you learn about the different types of real estate listed above, you will want to identify the one that fits your budget, time, and requirements and write a plan accordingly. It’s also important to factor in your personal and investment goals because “a goal without a plan is just a wish.” Plans have a reputation for helping people in any industry – including real estate – achieve their goals. A well-crafted real estate investing business plan is especially important if you’re planning to invest for the long-term. It will lay out the benchmarks you need to realize success and focus on your goals rather than on any minor setbacks.
Make sure your real estate business plan includes your investment goals (they have to be SMART: Specific, Measurable, Achievable, Realistic, and Timely), investment strategy, financial plan, and a marketing plan. For example, if your strategy is to rent out traditionally, you should specify the type of rental property you want to invest in, how you’re going to finance the purchase, how many rentals you want to own, what returns you want to achieve, etc. Keep in mind that a business plan is not a document set in stone. Real estate investors continually review and update their business plans as they grow their investment portfolios.
Step 4: Prepare a Real Estate Business Toolbox
If you want to compete as a beginner, arming yourself with the right tools and real estate business software is a must! There are a number of tools that will be handy in your investing journey – all of which you can find right here on Mashvisor. The first tool you need is a Property Finder so you don’t waste time searching for potential real estate investments. This tool will help you quickly identify the best properties for sale in your location of choice before anyone else. The second tool is an Investment Property Calculator to estimate what kind of return on investment you can expect. It also provides the real estate comps that you need when analyzing investment opportunities. Without this tool, you’ll risk making bad choices by going after unprofitable properties.
Of course, location is an important factor that affects your investment’s profitability, so you need a tool to analyze locations as well. The best tool for that is the Heat Map – it gives an overview of the performance of top neighborhoods in your city so you’ll know exactly where the best properties are located. Moreover, off-market properties have a reputation for being a top choice for investors. If you’re looking for one, you can find it in the Property Marketplace where Mashvisor offers a vast supply of off-market properties including foreclosures, short sales, tenant-occupied rentals, and more. Together, these tools represent the ultimate kit any beginner real estate investor needs to get started.
To learn more about our real estate business software and how we’ll help you make faster and smarter investment decisions, click here.
Step 5: Choose Your Investment Location
After all that learning, planning, and preparing, now it’s finally time to take action. And the first order of business is to find the best place to invest in real estate. There’s no rule that says investors need to invest in the housing market they live in. Of course, that is easier, but you need to be realistic. For example, if you live in a high priced market, you may not be able to find a cash flowing investment property. You need to invest in a location with favorable trends as this will affect your success in the real estate business. After all, the golden rule of real estate still persists: location, location, location.
Hence, you need to know every detail about the specific area where you’re planning to buy an investment property. This entails minding due diligence and conducting an extensive real estate market research. This is the only way for you to understand the ins-and-outs of your local market and the factors that affect the profitability of real estate properties. You also need to know how to evaluate the neighborhood you’re investing in to make informed decisions. Some important factors and trends to research here include:
- Supply and demand trends
- Real estate appreciation trends
- Rental rates and monthly income
- Operating costs and expenses
- Job and unemployment trends
- Crime rates and safety
- Walkability and public transportation
- School ratings and desirability
All of these factors affect whether or not a certain location is a good place to start a real estate investing business. These will also affect what kind of return on investment you can expect to earn. As such, doing housing market research is one of the most important steps to successfully get into real estate investing. If you’re unsure of where to start, take a look at our picks of the best places to invest in real estate for beginners to consider.
Step 6: Figure Out & Secure Property Financing
Before starting a property search in your investment location, you need to have acquired the funds to make your purchase. That way, you’ll know exactly how much home you can afford and which investments are worth pursuing further. One of the misconceptions people have about real estate investing is that you need to buy the property with cash. While some experienced investors do that, you certainly don’t have to as a beginner. You just need to have enough money saved to cover the startup costs of your real estate business. These include the down payment (typically 20% of the purchase price), repairs, renovations, and additional amenities. The rest can be financed with a loan – which is not as hard as many beginners make it out to be.
But did you know that you can even start a real estate business with no money? As it turns out, there are numerous ways to start a career as an investor with little to no money. The most important thing that you need to have is good credit. This is something that most lenders request to qualify you for a mortgage. So, make sure you devote time to build up your credit as you save up to increase your chances of getting approved for a loan. As for the types of loans you can obtain for buying an investment property, there are plenty including conventional mortgages, private money loans, hard money loans, fix-and-flip loans, home equity loans, commercial loans, and FHLMC HomeSteps loans.
To explore your financing options in detail, read this: 6 Types of Loans for Investment Properties in Real Estate.
Step 7: Network & Build Your Real Estate Team
Building a real estate business on your own is not easy. Beginner investors quickly realize that you simply can’t be fully responsible for every single task that comes along the way. Some tasks are entirely new to you and require other professionals. As such, it’s best to create a team of real estate professionals ready to help you through the process of getting into real estate. Having a network that you can rely on will not only reduce headaches, but it’ll also provide support and create better investment opportunities which will improve your business. Successful real estate investors realize that embracing other people’s expertise is worth the additional costs.
One of the best ways to network with other professionals in the industry is by joining a local real estate investing club or association. These types of meet-ups specifically aim to help their attendees and there’s always someone willing to lend a hand. Keep in mind, however, that the type of professionals you should add to your network depends on how your investment strategy. Still, a strong real estate team typically includes:
- Agent/Realtor: helps you find real estate properties for sale and close deals
- Appraiser: inspects the property and compares it to similar ones to determine its value
- Home Inspector: examines properties for any defects or issues that may cause problems
- Accountant: handles real estate taxes and prepares financial records and reports
- Lawyer: keeps you updated with the laws and regulations in the housing market
- Attorney: prepares and reviews documents like purchase agreements, mortgage documents, title documents, and transfer documents
- General Contractor: provides the material, labor, equipment, and services needed for rehabbing properties
- Property Manager: oversees the day-to-day running of real estate properties
- Handymen: covers a wide array of tasks, including seasonal chores, small appliance repairs, home fixes, and home décor
Step 8: Start Searching for Potential Investments
This step may take some time, but we’ve got some real estate business tips on how to find the best property to buy for investing. First off, you need to take your investment strategy into account to decide on a property type to narrow down your options. For example, if you want to invest in traditional rentals, you might consider buying a single-family or multi-family home. But if you want to buy a house to rent out on Airbnb as a vacation rental, a beach house or a condo would be a better fit. Also, you need to set a budget before hitting the market to save time as you’ll easily drop options that are below or beyond your budget. Finally, you should study the market to see which type of property performs better as a real estate investment.
As for how to start searching for properties for sale, there are multiple strategies. You could either go with traditional routes like driving around neighborhoods looking for “For Sale” signs or having an agent pull listings from the MLS. However, a faster and more efficient way to find profitable investment properties is through the Property Finder. Mashvisor designed this tool to cut down the time investors need to find properties that match their preferences. It comes with numerous filters to set your criteria like the desired location, property type, budget, etc. The tool will then show you listings of properties for sale that fit your preference and filter out those which don’t. Not only that but the Property Finder also shows what ROI you can expect from each property to ensure that you’re starting a real estate business with a profitable property.
Start and end your investment property search in just 15 minutes with Mashvisor now!
Step 9: Analyze Your First Investment Property
As a first-time real estate investor, you need to always remember that not every home you find makes for a good investment. Real estate is a math game – the better the numbers, the better the property. You might fall in love with a property thinking that it’ll bring you great returns, but the numbers could say otherwise. This is why it’s important that you take a step back, run the numbers, and look at the big picture before making an offer on an investment property. In other words, you need to do an investment property analysis. This analysis involves calculating real estate numbers and metrics to evaluate the performance of the property.
For more details, here’s our complete guide on How to Do Investment Property Analysis.
But what are the numbers that you need to calculate to make sound decisions? If you did the first step of this how to get into the real estate business guide correctly, then you certainly came across a few terms. These include rental income, expenses, after repair value, cash flow, cash on cash return, vacancy and occupancy rates, comps, and more. We know it is easy to get overwhelmed from all these metrics and calculations, so we recommend using an Investment Property Calculator to do the job for you:
Mashvisor’s Investment Property Calculator
When you find a house for sale on Mashvisor, simply go to the Purchase Analysis page. There, you’ll find these numbers pre-calculated using accurate property data and predictive analytics. You can also plug in your own data into this interactive calculator and it’ll churn the numbers and recalculate the return on investment metrics immediately. This allows you to get accurate results and quickly analyze the property before another real estate investor snatches it. But remember, if the numbers don’t work, even on properties you’re in love with, you need to move on to the next one.
To start analyzing the best investment properties in your city and neighborhood of choice, click here.
Step 10: Grow Your Real Estate Business
If you’re aiming to invest for the long-term, then you must be wondering how to grow your real estate business after buying your first investment property. There are different approaches to grow as a real estate investor. Of course, which way you’ll go depends on your personal goals and pace. For example, if you’re looking to quickly jump to buying a second property after renting out the first, consider the BRRRR strategy. BRRRR is short for Buy, Rehab, Rent, Refinance, and Repeat. If you own a good rental property, you can refinance it soon after buying it and take some, all, or even more cash out than you have invested. Following this real estate investment strategy, you’ll have enough cash from the first property to add a second one to your portfolio, and so on.
Another great way of growing a real estate investor business is through diversification. As with any other investment options, putting all of your eggs in one basket is risky. By diversifying, on the other hand, you minimize your overall risk. A few ways to diversify a real estate investment business include investing in different locations, different asset classes or property types, and following multiple investment strategies. For example, you can start your own real estate business by house hacking and save your profits until you have enough to put down on a rental or invest in a REIT. With diversification, not only are you able to grow your business faster, but you’ll be able to multiply your returns as well!
Running a real estate investment business isn’t for everyone – it can be a stressful endeavor that requires a lot of work. However, there’s no doubt that the rewards are well worth the initial effort. If you believe you’re ready to start your own real estate business, sign up for a 14-day free trial with Mashvisor to access all the tools you need today!