Real estate investing for beginners doesn’t need to be as complicated as it sounds. Of course, real estate investing isn’t easy, nor is it simple.
Table of Contents
- Real Estate Investing for Beginners: Why Get Into it?
- Different Types of Real Estate Investing for Beginners
- Real Estate Investing for Beginners: Getting Started
- Recommended Reading About Real Estate Investing for Beginners
- Finding a Profitable Investment Property
- Wrapping It Up
However, it doesn’t need to be as hard as some people make it out to be. Investing in real estate for beginners is made easier with the right guidance and tools.
If you lack experience in real estate investing and you’re seriously considering getting started, you came to the right place. Welcome to our guide to real estate investing for beginners.
Real Estate Investing for Beginners: Why Get Into It?
Investing in real estate is a pretty exciting thing because of what it can offer investors. But just like any investment venture, real estate investment requires a good level of understanding for it to be considered a success.
Understanding Real Estate Investing
A person seriously considering investing in real estate understands that the goal is not just to break even but to generate a positive cash flow.
Return on Investment
The term return on investment, or ROI, is used to pertain to an investment’s potential to bring back the initial amount put in by an investor in a business or investment opportunity.
Sometimes, investments don’t always turn out well, which can lead to either a loss or, at the very least, just enough to recoup the investment amount. A successful investment earns well enough to generate positive returns and bring back the initial investment in as short a time as possible.
When it comes to investment properties, real estate professionals and investors look at two very crucial metrics to determine a property’s profitability: cap rate and cash on cash return. While both terms are used interchangeably, they are quite different from each other.
Let’s look at each of them and how they affect an income property’s ROI.
The capitalization rate, or cap rate, is a common real estate investment metric to determine the return on investment. It takes the property’s net operating income, or NOI, and divides it by either the total purchase price or the property’s current market value.
Cap rate formula:
Cap Rate = Net Operating Income (NOI)/ Total Purchase Price or Current Market Value
Of the two dividers, real estate professionals and experienced investors recommend using the current market value instead of the purchase price as it is more relevant and gives investors a more realistic projection of ROI. Using the purchase price to determine profitability might not give accurate results, especially for properties purchased at low prices years ago.
Cap rates are typically a staple in commercial real estate investing for beginners. It is because cap rates are often used to compute ROI for commercial properties. However, when it comes to single-family homes, condominiums, and other similar residential properties, it may not be as applicable compared to cash on cash return rates.
Cash on Cash Return
Cash on cash return rates, just like cap rates, project how profitable and viable an investment property is. It is similar to cap rates in that it also takes a property’s NOI and divides it by the investment. However, it is a bit more specific since its divider only involves the total amount of cash invested in the property. By cash, we mean out-of-pocket money.
Cash on cash return formula:
Cash on Cash Return = Net Operating Income (NOI)/Total Out-of-Pocket Amount Invested
If a property is paid in full with cold hard cash, then the cap rate and the cash on cash return will pretty much be the same. However, not all investors have hundreds of thousands of dollars in cash to make a purchase. In most cases, real estate investors, both beginners and experienced ones, look for financing options to help them purchase income properties for sale.
Cash on cash return takes into consideration an investor’s limited resources and financing aid used to purchase a property. It is an especially helpful piece of information to have about investing for beginners.
Setting clear investment goals and raising sufficient capital to purchase a property help get real estate investors off to an excellent start. However, without the right investment strategy, an investment can go awry.
Depending on the goal (aside from the obviously clear objective to make a profit), an investor must come up with the right real estate investment strategy to protect their investment and make it grow.
For instance, if an investor is in the market to start a rental homes business, they need to carefully consider the location the subject property is in to determine whether a traditional rental or a vacation rental is more suitable, thus more profitable, in the area.
Coming up with a carefully crafted investment strategy is especially helpful when it comes to real estate investing for beginners with no money. Doing extensive research and analysis will help investors avoid certain pitfalls that could make their money go to waste.
Using Technology in Real Estate Investing
The great thing about modern-day investing is that we already got the technology to make the entire research and analysis process a lot easier and faster than ever before. Before the proliferation of real estate websites, it took an investor several months to gather all the necessary information and market data required to make a proper real estate market analysis. And that’s just for the market. It will take several more days (even weeks!) to perform an investment property analysis on a single property. If an investor is considering more than one property to choose from, well… you get the idea.
The point is research and analysis used to be a long and exhausting – not to mention expensive – process. Fortunately, several online marketplaces help investors in more ways than one. From finding the best locations for Airbnb to giving information on how to invest in real estate, the websites can provide investors with a clear edge in making the best possible investment decisions.
This is where real estate website Mashvisor comes in.
The site helps thousands of real estate investors find investment properties in the best real estate markets in the country. It also allows them to make highly accurate projections using a massive and regularly updated database using different investment tools like its real estate heatmap and investment property calculator.
One fun thing about Mashvisor is it also gives a side-by-side comparison of rental properties to see which among the traditional and vacation rental strategies will work best for a particular property. Now how’s that for making real estate investing a lot easier for beginners?
To learn more about how you can use Mashvisor to find profitable investment properties, schedule a demo today.
What Benefits Come With Real Estate Investing?
Certain advantages go with investing in real estate. Whether it’s multi family real estate investing for beginners or a veteran investor starting a rental property business buying multiple rental houses, it comes with several benefits. Here are some of them:
Additional Income Stream
Let’s start with the most obvious benefit: income. Real estate investing, when done right, can generate a very good positive cash flow and, in certain cases, make for a great passive income source. Even if you prefer fixing and flipping houses, you still get to make a very good profit and investment return.
One added benefit that real estate investments bring is diversification to one’s portfolio. If you’re a newbie investor, you will get tips from more experienced investors about not putting all of your eggs in one basket. It simply means that as an investor, you should consider several different investment options to protect your wealth.
Unlike other investment options like bonds and stocks, investing in real estate brings a greater sense of stability to one’s profile since it is not correlated to other asset classes. It is not greatly impacted nor directly affected by the movements in the stock market. It is also almost always sure to appreciate, which is advantageous for long-term investments.
The point is, while investing in stocks, forex, mutual funds, and other similar investment vehicles is good, adding real estate to one’s portfolio makes it more stable.
Real estate is one of the investment vehicles that are guaranteed to increase in value over time. Given the current condition of the real estate market and the global health crisis, the need for real property increased since the pandemic started.
The real estate industry took a hit at the pandemic’s onset, but it has since recovered and continues to gain momentum. Let’s take for example the Florida real estate market, which is considered one of the hottest in the US. To be more specific, we’ll zoom in on Orlando.
In January 2022, the median property price in Orlando was $426,921, according to Mashvisor’s data. In April 2022, the value significantly increased by over $60,000 to $486,404. It is just one quarter we’re talking about. Imagine how much a property will appreciate over one, three, five, and ten years.
People will always need a place to live; thus, the demand for real estate will never go away. As long as the property is well-maintained and demand is constant, real estate investments will hold their value and keep appreciating over time.
Tax Breaks and Deductions
Owning real estate properties also come with certain tax benefits, such as breaks and deductions.
Generally, real estate investors can deduct all the reasonable costs and expenses of owning and operating real estate properties. The depreciation period of real estate over its useful life is 27.5 years for residential properties and 39 years for commercial properties. As a result, investors get to take advantage of decades of tax deductions and lower their taxable income.
Build Equity and Wealth
Making a down payment on a mortgage helps an individual add an asset to their net worth and build equity. The greater the equity, the greater one’s leverage of buying more real estate investment properties. The more investment properties one receives, the greater the wealth one accumulates.
As already mentioned earlier, real estate investments are not correlated with other asset classes like the stock market. It means that it is not directly impacted by any market movement, positive or negative. Real estate’s power as an inflation hedge relies on the positive relationship between demand for property and GDP growth.
Look at it this way: as economies grow and expand, the influx of investors, workers, and business people in a certain location drive up the demand for rental properties. In turn, it also means an increase in capital values.
That being said, real estate balances out the buying power of capital by absorbing inflation through capital appreciation and passing on some of it to tenants.
What Are the Associated Risks of Real Estate Investing for Beginners?
Like a two-sided coin, real estate investing also comes with certain risks. All investments do. Listed below are some of the more common cons of investing in real estate:
Generally, it takes quite some time for real estate investors to get an ROI provided they buy properties sensibly and invest enough to maintain their properties well enough. The length of time for an investor to recoup their initial investment will depend on the type of property purchased and the nature of the tenant renting the property.
In certain cases, investors may need to take on a more hands-on approach to managing the property, which is very time-consuming, to say the least.
While it offers great potential as a passive income source, one risk with real estate investments is variable income. It means that an investor will not get a steadily growing regular income as most people think. Several factors like seasonality, location, and economy can significantly affect demand for real estate.
Sometimes, it is also related to a small down payment that results in larger mortgage payments. It leaves investors either losing money or not getting their ROIs as fast as they anticipated.
High Maintenance Investment
For one, real estate investments are already expensive investments (generally) to make, especially if you plan on buying actual physical properties. On top of the initial investment expenses, investors also need to be on the lookout for maintenance and upkeep issues.
Depending on how old the property is, maintenance costs can literally wipe out your cash reserves. It is why property inspections are very important. Investors already receive a general evaluation of how much repairs and maintenance a property needs to pass the local building and housing standards.
While generally, rental property owners enjoy greater flexibility in coming up with their rates, there are cases where the local city or county government implements certain rent control legislation, which can limit one’s ability to raise rental prices.
Unlike other investment vehicles, converting a real estate investment to cash cannot be easily pulled off. It will take some time to sell a property realistically speaking. This can be a very big challenge especially if there is an urgent need for cash.
Other real estate investors and buyers can smell desperation a mile away and might try to swoop in and take advantage of it. They are likely to come in and make an offer on your property in cold cash only at lower than the property’s current market value. Depending on how desperate a seller or property owner is, it can result in a very great loss on the sale.
Knowing the pros and cons of real estate investing can help would-be investors to evaluate their current situation and see if it’s a good time to move forward or not. Either way, experienced investors and multi-millionaires still attest to the viability and profitability of real estate investing.
Different Types of Real Estate Investing for Beginners
If you’re a beginner, you might be wondering what options are available (and safe) for inexperienced investors. Here are a few investment routes that beginner investors can take:
Rental Property Investments
A lot of investors recognize the money-making potential of rental properties. Buying a property to rent out is one of the most common investment strategies implemented by most investors. After all, they earn a substantial amount regularly but still own the property. It’s a brilliant way of paying for a mortgage without actually paying for the mortgage as the bulk of the rental price is used to pay for their monthly mortgages. Investors use the money tenants pay for rent to take care of almost all expenses related to the property with the remaining money pocketed as profit.
There are two investment strategies when it comes to rental property investments: traditional or long-term rentals and vacation or short-term rentals. Investors need to conduct due diligence to find out which investment strategy works best for their rental houses.
Real estate investment trusts, or REITs, are another excellent way for noob investors to get into the real estate investment game. Among all the choices here, REITs are the easiest way for aspiring real estate investors to get started.
REITs are simply companies that own and operate real estate properties like hospitals, commercial complexes, warehouses, and residential buildings, among others. Investors are given the opportunity to invest by buying company shares and getting paid dividends regularly.
Since REITs are publicly traded on stock exchanges, it is very easy for investors to buy and sell their shares. Shares also cost anywhere from as low as $5 to $100, making real estate investing very accessible to regular folks.
Another option beginners can look into is house flipping. For the people who are unfamiliar with the term, house flipping is the process of buying undervalued properties, making considerable improvements and upgrades, and reselling them at a profit.
Greater capitalization is needed for fix-and-flip investments as the expenses involve the initial purchase costs, home improvements, marketing, and other related costs.
However, if done right, it can be one of the most lucrative business ventures an investor can make in a short period.
Real estate crowdfunding is a fairly new and interesting investment method. Real estate crowdfunding platforms allow inexperienced investors to put money into certain projects whose buyers are looking for loans.
Investors can choose between debt or equity investments. Debt investing refers to investing in a mortgage and getting paid through the interests on the loan. Equity investments, on the other hand, are all about investing directly into the property and taking on part-ownership in it.
Unlike REITs, crowdfunding platforms are a bit more expensive, requiring investments of at least $1,000 to $5,000. It also allows investors to choose which projects to invest in as opposed to a more diversified collection with REITs. It raises the stakes a bit higher as the investment’s success or failure is based on the investor’s decision.
Real Estate Syndication
Lastly, upcoming real estate investors can also consider real estate syndication. It is where several investors pool their money together to purchase or produce real estate properties. As such, the syndication method of investing provides greater buying power compared to other investment vehicles.
While it sounds very similar to crowdfunding, the main difference between the two is syndication focuses more on large-scale projects.
Real Estate Investing for Beginners: Getting Started
Having said all that, here are some very practical real estate investing tips for beginners:
Be Honest With Yourself
First, you need to be brutally honest with yourself about your financial situation. Where do you currently stand as far as financial capability is concerned?
Do you have a huge outstanding debt you’re struggling with?
Do you have enough liquid savings for down payments and emergency funds in case things go sideways?
What is your credit score?
They are just some of the things you need to ask yourself and answer with all honesty if you’re seriously considering getting into real estate investing.
Set Realistic Goals
Goal setting is an essential part of any investment strategy. Understandably, investors are highly optimistic about getting into something, especially if they did their homework and feel really good about the investment opportunity. However, ambition should never get the best of reason. Smart investors set SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound.
Even the most successful real estate investors needed to start with baby steps. Don’t be afraid (or too proud) to start small. Getting started with smaller and safer investments to get your feet wet is a great way to learn about the industry and gain valuable experience and insights.
Consult With More Experienced Investors
Look to more experienced investors and industry professionals for guidance. Get the help you need to make your venture a success. Most successful investors recognize the value of seeking advice from more experienced and wiser investors.
Look for an Investment Option that Suits Your Profile
Don’t bite off more than you can chew. Look for investment options that are right up your alley. Look for the ones that meet your investment needs and criteria.
Work Hard but Work Smart, too
Real estate investing takes a lot of hard work. It also requires a little creativity and practicality for greater efficiency. Hard workers have a great chance of succeeding but hard workers who also work smartly significantly increase their chances of investment success.
Recommended Reading About Real Estate Investing for Beginners
Here are some of our highly recommended real estate investing books for beginners. The following books provide a wealth of knowledge and information about all things related to real estate investing.
The Book on Rental Property Investing by Brandon Turner
Those who are seriously considering investing in rental properties will do well to grab hold of Brandon Turner’s The Book on Rental Property Investing before taking action. It contains helpful information on building wealth with rental properties from simple practical tips to outstanding investment hacks.
The Millionaire Real Estate Investor by Gary Keller
The best way to be a successful investor is to learn how from the successful ones. Author Gary Keller collected precious information and wisdom from over 120 million real estate investors and made it available in his The Millionaire Real Estate Investor book.
The Flipping Blueprint by Luke Weber
People who are leaning toward a fix-and-flip business will learn a lot from Luke Weber’s The Flipping Blueprint book. It covers practically everything about house flipping and all its messes and glories.
What Every Real Estate Investor Needs to Know About Cash Flow by Frank Gallinelli
Whatever the investment is, investors are after one thing: cash flow. The What Every Real Estate Investor Needs to Know About Cash Flow book by Frank Gallinelli is all about crunching numbers and making sure the math checks out. It involves practical tips on using metrics and coming up with data-driven decisions.
The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matt MacFarland
One of the things that complicate our existence is taxes. But it is our rightful duties as citizens to fulfill. In The Book on Tax Strategies for the Savvy Real Estate Investor by Amanda Han and Matt MacFarland, the authors show investors how to stay on the IRS’s good side while using the tax code to our advantage.
Finding a Profitable Investment Property
If you’ve made it up to this point, it means that you’re truly interested in real estate investing. The last gem we would like to give to you is how you can find the most profitable investment properties in the best real estate markets in all 50 states.
As we already mentioned earlier, Mashvisor’s already helped countless folks make successful investments. You can achieve the same level of success by subscribing to Mashvisor and its services. Take advantage of our useful investment tools like the following:
Property Finder. Mashvisor’s Property Finder tool allows investors to easily locate properties by entering the city, neighborhood, or zip code in the search field. The page will then show you the results of all available investment properties listed publicly in the area. It also shows which traditional, and Airbnb properties are available, as well as important data like cap rates and cash on cash return to measure their profitability.
Real Estate Heat Map. The site’s heat map shows users which parts of the area are performing well or poorly under different categories, such as cash on cash return, listing price, and monthly rental income. The tool allows investors to locate properties that align with their needs and criteria.
Investment Property Calculator. Mashvisor’s investment calculator lets users make accurate calculations and projections using the latest data and rental comps in a specific market.
Massive and Accurate Database. Mashvisor maintains one of the largest and most up-to-date databases online that cover almost every market in the country.
Wrapping It Up
Real estate investing for beginners need not be intimidating. Performing due diligence is now a lot easier with the help of technology. Even connecting with more experienced professionals and investors is easier today compared to how it was decades ago.
The important thing is aspiring investors should be honest enough to know their financial situation, diligent enough to do the legwork, smart enough to make the workload easier, and wise enough to recognize which real estate investment tools to use to fully maximize their earning potential.
To get access to our real estate investment tools, sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.