If you’re thinking of investing in real estate in 2023, you need the ultimate property investment guide to help you get started on the right foot.
Real estate investing sounds intuitive. After all, most of us buy a house or apartment at some point. However, buying an investment property is different from buying a primary residence. It requires another type of financing and a different set of skills.
Table of Contents
- Property Investment Guide Intro: Why Get Into Real Estate Investing?
- 5 Real Estate Property Investment Strategies for Beginners
- Getting Started With Real Estate Investing
- Real Estate Educational Resources for Property Investors
- How to Find a Profitable Investment Property Guide
This article aims to be a comprehensive guide on everything related to property investments. This includes reasons for investing in real estate, which strategy to choose, how to get started, and locating the most beneficial opportunities.
Let’s get started!
Property Investment Guide Intro: Why Get Into Real Estate Investing?
Investing in real estate can be very exciting because of the benefits it offers. But just like any business venture, it requires a good level of understanding in order to succeed.
Understanding Property Investing
A person considering this strategy should become familiar with the following metrics and concepts:
Return on Investment
Return on investment, or ROI, pertains to an investment property’s potential to bring back more than the initial amount put in by the investor.
Sometimes, investments don’t turn out well, which can lead to either a loss or, at the very least, just enough to recoup the investment amount. Meanwhile, a successful property earns enough to generate positive cash flow.
Real estate professionals and investors look at two crucial metrics to determine a property’s profitability: cap rate and cash on cash return. While both terms measure ROI, they reflect different things.
Let’s look at the cap rate vs cash on cash return.
The capitalization rate, or cap rate, is a standard real estate 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
Experienced property investors recommend using the current market value instead of the purchase price as it gives investors a more up-to-date projection of ROI. Using the purchase price works well for recently acquired properties but not for ones bought many years ago.
While cap rates are more popular in the commercial real estate market, they can be very useful in residential property investments, too. Compared to other metrics, they offer a relatively easy way to calculate ROI for both markets and properties.
Cash on Cash Return
The cash on cash return, just like the cap rate, projects how profitable and viable an investment property is. The cash on cash return formula resembles the cap rate formula, but there are some crucial differences. The calculation entails dividing the annual pre-tax cash flow by the total cash investment. The total cash investment is different from the purchase price and can be more or less than it.
Cash on Cash Return Formula:
Cash on Cash Return = Pre-Tax Cash Flow/Total Out-of-Pocket Amount Invested
If a property is paid in full with cash, then the cap rate and the cash on cash return will be very similar. However, not all investors have hundreds of thousands of dollars to make a purchase. In most cases, real estate investors look for the best loans for investment property.
When using financing, the cash on cash return will tell you how much profit you make on your total cash investment, including the down payment, closing costs, and other startup cash payments.
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 obvious objective of making a profit), an investor must develop 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 business, they need to carefully consider the location to determine whether a long term rental or a vacation rental is more suitable 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 already limited budget go to waste.
Using Technology in Real Estate Investing
The great thing about investing in 2023 is that we’ve already got the technology to make the entire research and analysis process much easier and faster. Before the proliferation of real estate software tools, it took an investor several months to gather all the necessary real estate data and information for a proper real estate market analysis. And that’s just for the market.
It would take several more weeks to perform a rental property analysis on a single property. If an investor is considering more than one property to house from, this can turn into months of research and analysis until another, more knowledgeable investor snatches the deal.
The point is that research and analysis used to be a long, exhausting, and expensive process. Fortunately, nowadays, multiple real estate websites help in various ways.
This is where the Mashvisor real estate investment platform comes in.
Mashvisor helps beginner investors with the following tasks:
- Find the best markets for investment properties for their strategy and within their budget
- Locate the top neighborhoods for long term and short term rental investments
- Search for properties for sale that meet their criteria and requirements
- Evaluate the expected performance of a rental before buying
- Optimize and automate Airbnb Dynamic Pricing after purchasing
In this way, the Mashvisor tools make real estate investing for beginners not only easier and faster but also more profitable. It is because all data and analytics are based on nationwide market analysis, big data, AI, and machine learning algorithms.
To see how Mashvisor can help you go through the steps and recommendations in this property investment guide, check it out yourself. Sign up for a 7-day free trial today followed by a 15% discount on your paid subscription.
The Benefits That Come With Real Estate Property Investments
Many important advantages go with real estate investing that are not found in other strategies. And the best part is that the more properties you add to your portfolio, the more you benefit from these positive aspects.
Here are the main pros of property investing:
Additional Income Stream
Let’s start with the most obvious benefit: income. Real estate investing, when done right, can generate a good positive cash flow and make for a great source of passive income.
The most obvious way to generate ongoing income is with rental properties. However, even if you prefer wholesaling or flipping houses, you can still make an excellent profit regularly.
Another advantage that real estate investments bring is diversification in your portfolio. If you’re a newbie, you will get tips from experienced investors about not putting all your eggs in one basket. It simply means that you should consider several different investment options to protect your wealth.
Unlike other options like bonds and stocks, investing in real estate brings greater stability to one’s profile since it is not correlated to different asset classes. It is not significantly 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.
While investing in stocks, forex, mutual funds, cryptocurrency, 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 guarantee to increase in value over time, even if there are temporary hits.
Most recently, the property industry suffered at the Covid-19 pandemic’s onset, but it started recovering soon and continued to gain momentum. Let’s take the Florida real estate market, 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 May 2023, the value increased by nearly $85,000, or 12%, to $511,517. It’s less than a year and a half that we’re talking about. Imagine how much a property will appreciate over five or 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 investment properties comes with tax benefits, such as breaks and deductions.
Generally, investors can deduct all the reasonable costs and expenses of owning and operating a rental property business. These include maintenance and repairs, property management fees, premium mortgage insurance, travel, and others.
Moreover, owners can deduct the depreciation of their investment property for 27.5 years for residential properties and 39 years for commercial properties. As a result, investors can take advantage of tax deductions and lower their taxable income.
Equity and Wealth
Making a down payment on a mortgage helps an individual add an asset to their net worth and build equity. With each monthly mortgage payment, your equity in a property grows. The greater the equity, the greater your leverage of buying more real estate investment properties. The more investment properties you purchase, the greater the wealth you accumulate.
As already mentioned earlier, real estate investments are not correlated with other asset classes like the stock market. It means that they are not always directly impacted by other market movements, positive or negative. Real estate’s power as a hedge against inflation 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 particular location drives up the demand for rental properties and homes. This, in turn, translates into higher rental rates and higher real estate prices. So, you get to make more money from rental income in the short term and appreciation in the long run.
The Risks Associated With Real Estate Investing
Like any other investment strategy, real estate comes with certain risks.
Listed below are some of the more common cons of investing in real estate that beginners should consider in order to mitigate:
Generally, it takes quite some time for investors to get ROI provided they buy properties sensibly and invest enough to maintain their properties. The length of time for an investor to recoup their initial investment depends 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 excellent potential as a passive income source, one risk with real estate investments is variable income. It means an investor will not get a steadily growing regular income as most people think. Factors like seasonality, location, and economy can 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 initially anticipated.
To minimize the impact of this risk, it’s a must to conduct an investment property analysis before buying to know exactly what income and what return you can expect.
High Maintenance Investment
For one, real estate investments are already expensive, especially if you plan on buying actual physical properties. On top of the initial investment expenses, investors must also be on the lookout for maintenance and upkeep issues.
Depending on how old the property is, repair costs can wipe out your cash reserves. It is why home inspections are crucial. They will help you get an accurate evaluation of the number of repairs a property needs to pass the local building and housing standards for rental properties.
Moreover, you should continue maintaining your property after renting it out. One way to be less involved in this process is to hire a property manager.
While generally, rental property owners enjoy flexibility in coming up with their rental rates, there are cases where the city, county, or state governments implement rent control legislation. It can limit your ability to raise rent as a landlord. So, you should check out the local rental laws before investing in an income property.
Lack of Liquidity
Unlike other investment vehicles, converting a real estate investment into cash cannot be easily pulled off. It will take time to sell a property, especially at a reasonable price. It can be a challenge, especially if there is an urgent need for cash.
Keep in mind that most buyers can smell desperation a mile away and might try to swoop in and take advantage of your situation. They are likely to come in and make a cash offer on your property below the current market value. Depending on your desire to sell, this can result in a significant loss.
All in all, the benefits of real estate property investments greatly outweigh the drawbacks. In addition, most risks can be easily mitigated or even eliminated as soon as you do proper research, analysis, and planning. Remember that investing is a business decision and should be guided by your rationality, not emotions.
5 Real Estate Property Investment Strategies for Beginners
Next in our property investment guide, we’ll look at the different routes beginner investors can take when first getting started in real estate. The diversity to choose from is one of the best benefits of property investing, so you should take advantage of it.
The most viable strategies for first-time investors are:
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. After all, you get to earn a substantial amount regularly while your property appreciates in the long term.
It’s a brilliant way of paying for a mortgage without actually paying for it, as part of the rental price is used to cover your monthly payments. Another part of the rental income goes into taking care of the expenses related to owning an income property. And you pocket the remaining money as profit.
There are two strategies when it comes to rental property investments: You can buy long term or short term rentals for sale. Each of these has its own pros and cons as well as requirements and needs, so you should conduct due diligence to find out which investment strategy works best for you.
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 start.
REITs are companies that own and operate real estate properties like hospitals, commercial complexes, warehouses, and residential buildings. Investors are given the opportunity to invest by buying shares and getting paid dividends.
Since REITs are traded publicly on stock exchanges, it is very easy for investors to buy and sell their shares. However, you should know that most REITs work with qualified investors only and require significant capital investments.
Another option beginners can look into is fix and flip. For people 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. But before you jump in, be ready to allocate a significant portion of your time and efforts to the project.
Real Estate Crowdfunding
Real estate crowdfunding is a relatively new and exciting investment method done online. Real estate crowdfunding platforms allow inexperienced investors to put money into specific 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 interest on the loan. Equity investments, on the other hand, are all about investing directly in the property and taking partial ownership of it.
Crowdfunding platforms are cheaper than REITs, as you can start with as low as $50. This strategy 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 hinges on your 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 provides greater buying power compared to other investment vehicles.
Moreover, you can choose to be the syndicator (who invests little but does most of the work) or an investor (who does not have active responsibilities but invests a lot of money). Your budget, skills, experience, and the other participants’ backgrounds should guide your decision.
Getting Started With Real Estate Investing
This will not be a proper property investment guide unless we provide specific, concrete, actional tips on getting started.
When you are making your first steps towards investing in a real estate property, consider these:
Be Honest With Yourself
First, you need to be brutally honest with yourself about your financial situation.
Ask yourself questions like:
- Where do you currently stand as far as your financial capability is concerned?
- Do you have a huge outstanding debt you’re struggling with?
- Do you have enough liquid savings for a down payment, closing costs, 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. The answers to these questions will help you choose the best strategy, determine your budget, and find the most appropriate financing solution.
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 do their homework and feel good about the investment opportunity.
However, ambition should never get the best of reason. Savvy investors set SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound. Make sure you do the same for your real estate investment before you buy a property.
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.
When you buy your first successful property, you can use some cash flow to save for the next one. The more properties you own, the faster you can grow. This is known as the snowball effect in real estate.
Consult With More Experienced Investors
Look for more experienced investors and industry professionals for guidance. Get the help you need to make your venture a success. There is no shame in asking for help when you’re first getting started. Moreover, most big-time investors are more than happy to guide beginners.
Look for an Investment That Suits Your Profile
Don’t bite off more than you can chew. Look for investment options that are right up your alley. Actively search for strategies and properties that meet your investment needs and criteria.
Work Hard but 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 good chance of succeeding, but those who work smartly significantly increase their chances of investment success.
Real Estate Educational Resources for Property Investors
While investing in real estate does not require formal education, you do need to be knowledgeable and skilled to succeed.
This section of our property investment guide focuses on the best free resources of real estate knowledge for beginner investors:
Real Estate Blogs
Real estate blogs can provide you with invaluable information on various topics, including but not limited to the following:
- Best markets for real estate investments
- Pros and cons of different strategies and investment types
- How to get started with various real estate strategies
- How to finance an investment property
- How to manage and market your property
- The best real estate investment tools
Blog posts give you access to the knowledge and experience of investors and professionals who’ve spent decades in the industry. And all this – usually for totally free.
If you’re looking for the best blog, check out the Mashvisor real estate blog.
Real Estate Videos
Similar to blogs, real estate videos can cover a wide range of topics related to real estate investing. Whether you are thinking of getting into the residential or commercial market, you are guaranteed to find a few YouTube channels with practical tips and advice.
If you’re considering rental properties, you can follow the Mashvisor YouTube channel.
Real Estate Podcasts
Yet another great real estate education source is podcasts. There are dozens of real estate podcasts that are worth subscribing to. The main benefit of this education source is that you get to hear from a different expert (guest) each week, so you can significantly broaden your knowledge and horizon at zero cost.
Real Estate Social Media Accounts
While most of us associate social media with entertainment, this can be a powerful tool for beginner real estate investors. As long as you find and follow the best accounts, you can learn a lot from various professionals and experts, as well as from the successes and failures of other beginners like you. You can even locate promising investment opportunities on certain social media channels.
Real Estate Mentors
Last but not least, we cannot overemphasize the importance of looking for a more experienced investor to learn from. Whether it’s someone you personally know, someone you meet at an event, or someone that you approach online, you can benefit a lot from a mentor. They can even turn into your partner down the road.
How to Find a Profitable Investment Property Guide
If you’ve made it to this point in our guide, it means that you’re genuinely interested in real estate investing. The last gem we want to give to you is how to find investment properties with maximum return in the best real estate markets in all 50 states.
In specific, we’ll go through the Mashvisor tools that can help you in your investing journey:
The Market Finder is one of the newest additions to the arsenal of Mashvisor tools that help investors locate the top deals.
You can use the following filters to find the best markets for your specific needs:
- Short term or long term rental strategy
- Mashmeter score
- School rankings
- Crime and safety score
- Regulatory environment
- Property values
- Property type
- Monthly rental revenue
- Occupancy rate
- Cap rate
As soon as you set up these criteria, you will get the top US markets for your strategy. You can zoom in and out to look at both cities and neighborhoods.
Real Estate Heatmap
Once you’ve identified a few good cities for your investment property, you can use the real estate heatmap to look for the best neighborhoods in them. This tool makes neighborhood analysis particularly interactive, easy, and straightforward.
You can choose from the following filters:
- Median property prices
- Average rental income
- Average cash on cash return
- Average Airbnb occupancy rate
The heatmap can help you find areas with affordable real estate prices and above-average revenue and ROI in a matter of seconds.
Neighborhood Analysis Pages
The next Mashvisor tool to use in your investment property search is the neighborhood analysis pages. These are available for any property with active listings for sale.
As soon as you find a few areas that interest you, you can access a detailed analysis of them.
You can look at things like:
- Mashmeter score
- Property prices
- Rental income
- Cash on cash return
- Number of listings for sale
- Number of rental listings
- Optimal rental strategy
- Rental property types breakdown
You can use the available long term and short term rental analytics to choose the best strategy or to confirm that your preferred strategy is indeed the optimal choice.
You can set up your criteria, including:
- Rental strategy
- Type of property
- Size of property
Once you select your requirements, you’ll get a list of listings for sale that match your exact expectations. Moreover, they will be ordered from the highest cash on cash return down to further facilitate your profitable investment property search.
Investment Property Calculator
The Mashvisor investment property calculator helps you evaluate the potential performance of properties for both strategies: short term and long term rentals. The provided analysis includes absolutely all the data points you need to ensure a money-making real estate deal.
The provided analytics include the following:
- Property price
- Startup costs
- Financing method details
- Rental income
- Recurring expenses
- Cash flow
- Cash on cash return
- Cap rate
- Occupancy rate
- Investment payback period
To get immediate access to all these Mashvisor tools, sign up for a 7-day free trial followed by a 15% discount.
Property Investment Guide Conclusion
Real estate investments come with many big benefits which offset the potential risks. Nevertheless, you need to proceed with caution and conduct diligent research and analysis before jumping on a deal. As long as you choose the right strategy and follow our tips, you can end up with a very profitable investment property.
Using the best data analytical tools also helps a great deal. With a subscription to the Mashvisor platform, you can easily and efficiently search for top markets, locate good areas, find positive cash flow properties, and analyze rentals before purchase. After all, real estate investing for beginners doesn’t have to be complicated or risky.
To learn more about how Mashvisor can become your best friend in your property investment journey, schedule a demo with our team of experts.