If you’re interested in becoming a real estate investor, it’s essential that you start learning the basics of real estate investing for beginners. Anyone can break into the real estate market, but only those with sufficient knowledge succeed in the business.
You might be thinking “The real estate market is vast. How can I possibly learn everything?” Well, you don’t need to know everything! Real estate investing for beginners is mostly learning by doing. Nonetheless, there are a number of basic yet important aspects that any aspiring real estate investor should understand before buying an investment property. In this article, we break down 5 important aspects of real estate investing for beginners hoping to start their careers as property investors. So, without further ado, let’s jump right in!
Real Estate Investing for Beginners: “Location, Location, Location”
Many beginner property investors think that the purchase price is the main factor to watch out for before buying a rental property. However, those who make investment decisions based on the purchase price alone, in fact, fail as property investors. What you need to consider first is the location of your target investment property.
Real estate experts usually tell beginner property investors that the three most important factors for a successful investment property are location, location, and location! This term is widely used in the real estate market, so get used to hearing it throughout your career as a real estate investor. This is because location determines profitability!
Purchase price, property taxes, insurance, mortgage rates, property management, and operational expenses are all variable factors from one location to another. These factors play a role in determining the profitability of investment properties. Therefore, some locations are profitable for real estate investing for beginners while others are not.
So, a real estate investor might purchase a cheap investment property thinking he made a bargain and will soon start to make money. However, if this property is in a bad location, then this investor won’t receive the return on investment and profits he aimed for. Thus, make sure you find a good location before buying an investment property.
Real Estate Investing for Beginners: Investment Strategies
The real estate market is vast and there are numerous investment strategies for beginner property investors to choose from.
These are traditional investment strategies that involve buying investment properties and renting them out to long-term tenants. The most common long-term investment strategies are the buy-and-hold and rent-to-own. Many property investors follow these investment strategies for the steady stream of cash flow and potential appreciation they offer (both of which are further discussed below).
These involve listing rental properties on short-term listing sites, such as Airbnb, and renting them out to short-term tenants (typically less than 6 months). Another short-term strategy is fix-and-flip which involves buying cheap investment properties, renovating them, and then quickly selling them for a higher price. Property investors are attracted to these investment strategies because they allow for a quick profit.
Who said you need to buy a rental property to become a real estate investor? Passive strategies allow you to make money from real estate investing without property ownership. One way to do so is through wholesaling where you work as a middleman between a seller and a buyer. Another passive strategy for real estate investing for beginners is investing in a REIT. These investment strategies are great if you don’t have much capital to buy and own a rental property or if you simply don’t want to be a landlord.
Real Estate Investing for Beginners: Cash Flow
As mentioned, investment properties provide property investors with a steady stream of cash flow. In real estate, cash flow is the profit made when calculating the difference between monthly rental income and monthly expenses, and it comes in the form of monthly rent collected from tenants of rental properties. This is an attractive aspect of real estate investing for beginners because property investors use cash flow to pay for their expenses like mortgage payments, running costs, property taxes, etc.
However, to fully benefit from cash flow, beginner property investors have to find rental properties that generate positive cash flow – when the monthly rental income outpaces monthly expenses. On the other hand, if the investment property generates a negative cash flow, you’ll start to lose money instead of to make money which goes against your goal as a real estate investor. Thus, positive cash flow indicates successful real estate investing for beginners and guarantees a good return on investment.
Real Estate Investing for Beginners: Appreciation
The other way to make money in real estate is through appreciation – the increase of the investment property’s value over time. Thanks to appreciation, property investors can sell their investment properties for a price higher than the initial investment and, thus, make a profit. For example, say you’ve bought a rental property years ago for $300,000. Today, the value of this property is bound to have increased, meaning you can make a decent profit from selling it.
However, keep in mind that there are some factors affecting this aspect of real estate investing for beginners. The first and main factor is time: experts agree that in order for investment properties to appreciate, property investors need to hold onto them for at least 10 years before selling. In addition, the location of the rental property also plays a role in how much it appreciates. Some real estate markets have higher expected appreciation rates than others. Other factors that affect appreciation are mortgage rates and demand for rental properties.
Real Estate Investing for Beginners: Investing Tools
Thanks to today’s advanced technology, real estate investing for beginners is not the same as it was years ago. Property investors now can access a number of tools that empower them throughout their careers. Mashvisor, for example, offers experienced and beginner property investors the following tools:
- Investment Property Finder: A powerful and heavily customizable search tool that allows you to search for rental properties based on specific criteria using different filters, such as finding rental properties of a certain price range, in a certain neighborhood, or with a certain cap rate. This will help you easily compare different rental properties in the same location to determine which one is more profitable.
- Heat Map Function: The heat map function for the property finder tool allows you to find rental properties much faster using visual cues. For example, you can set the heat map to indicate the areas with the highest cap rate, and the heat map will highlight areas as hot or cold for this feature. This will make it easier to compare different locations and see which one has more profitability for real estate investing.
- Investment Property Calculator: A versatile tool that allows you to calculate the different values related to an investment property, including the cash on cash return, cap rate, cash flow, and occupancy rate (for both long-term and short-term investments). This will help you evaluate the profitability of buying rental property.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Real Estate Investing for Beginners – Final Words
Real estate is a lot more than just buying a rental property and waiting for it to make money. Before becoming a real estate investor, you need to educate yourself on everything related to the business in order to succeed. The above 5 aspects of real estate investing for beginners are only a simple part of the vast information any beginner property investors should be familiar with.
Mashvisor makes real estate investing for beginners more efficient as we help you make smart investment decisions. To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.