Investing in real estate can be one of the best decisions you’ll make to diversify your investment portfolio and have the ability to build wealth over the long run. But as a beginner, you should never get into real estate (or any type of investment for that matter) without some knowledge about the industry first! And who’s better to teach you how to invest in real estate than the pros who are already in the business. Here are 20 tips on real estate investing for beginners that we’ve gathered from nationwide pros that you need to know before buying your first investment property:
1) Stan Mead, CEO of Summit Home Buyers
If you’re just getting started in real estate investing, it can be a bit overwhelming. Many people don’t realize there is a huge variety of investment options in the real estate world. Therefore, the best way to start is by narrowing down your preferred investment strategy to determine what niche you want to start with. Do you want to fix-and-flip houses? Do you want to buy and own multiple rental properties and become a landlord? Maybe you dream of buying raw land for development purposes. Pick one or two investment strategies that interest you for making money in real estate, then hit the books hard. Do as much research as you can to prepare yourself for the inevitable real estate investing challenges. Then, take the plunge! There is no better way to learn about real estate investing than by taking action.
To start exploring the different options to choose from, read: Top Six Real Estate Investment Strategies.
2) Lane Shuler, Real Estate Broker at LeConte Realty
Get a dedicated realtor to work with. This may sound like a no brainer, but this is the first step to making sure you have access to all lots of properties AND have someone who can help you navigate the waters of buying. The biggest benefit of having a buyer’s agent is getting to “put their brain on retainer” at any time during the buying process. Interview several real estate agents before settling on one. You want to make sure your agent is well connected, with knowledge and experience in investing, but preferably not one that is actively in a heavy property acquisition phase of their career. You want to make sure that you are getting the best possible investment properties you can get, as oftentimes the best deals get gobbled up before they get to the open market.
3) Melanie Hartmann, Owner of Creo Home Solutions
Network! I believe it was Tim Sanders who said: your network is your net worth. If you want to learn how to invest in real estate, find those who do! Start asking your friends and family, you just may be surprised to know they invest or know someone who does that they can connect you with. Another good way to build your network and gain knowledge is to attend local Real Estate Investor Associations (REIA) or groups. There are plenty of aspiring investors who attend these groups, so you’ll be in good company.
There will also be experienced real estate investors who you may be able to build a relationship with and have them mentor you or help you decide which investment strategy may be best for you and your goals. Contractors, lenders, and property managers also attend these meetings and are a great way to build your real estate network. Simply surrounding yourself with those more knowledgeable than yourself will help guide you on the right path to successful real estate investing for beginners.
4) James McGrath, CO-Founder of Real Estate Brokerage Yoreevo
My tip for beginner real estate investors is to be sure they have a long enough time horizon to be investing in real estate in the first place. Real estate is illiquid and is expensive to buy and sell. Meaning, if you don’t have a long enough time horizon, there’s a good chance you’ll lose money. To throw out a conservative minimum investment time horizon, I’d suggest a plan to own the investment property for at least 10 years before considering a purchase. Of course, successful real estate investors sell in less than 10 years all the time but if that is your expectation going into the investment, you probably have the right mentality and are likely to do well. In New York City, we find a lot of investors are actually speculators who plan to buy an investment property and flip it in a few years. Those investors are rarely successful.
5) Scott Royal Smith, Founder & CEO of Royal Legal Solutions
- Just like many types of investing, never invest any money you aren’t willing (or worse, can’t afford) to lose. There are no guarantees in real estate investing for beginners. You may make money, you may lose money. Be sure you can handle a poor outcome.
- Understand that some real estate deals won’t be profitable for a long time – possibly for years. You absolutely need to have the staying power, especially financially, to ride out that time.
- Once you’re sure real estate investing is for you, find mentors who are already winning in the real estate market. Learn from them. This can take the form of reading books from real investors who’ve both succeeded and failed in the business, attending quality real estate seminars, or even shadowing someone who is willing to show you the ropes while they actively work deals. Learning what to do (and what not to do) before putting down any money is important and can save you thousands! It’s worth the small investment you’ll make during your learning time.
6) Mihai Cornu, Real Estate Consultant at NewSilver
Real estate investing for beginners means you need to learn how to find properties for sale. Nowadays, finding great real estate deals is tougher than it used to be and that’s because more and more people are getting into real estate as a reliable way to build wealth. Real estate experts agree that the key to finding the best opportunities is to diversify your investment property search efforts across different channels to maximize potential reach. From using the internet to sending out direct mails, there are several ways to find good deals that sometimes are not available on the open market. For instance, a connection with an experienced wholesaler is a good way to get in touch with great off-market properties. In addition, bank or foreclosure auctions are other great places to find cheap properties.
You can also find on and off-market properties in a matter of minutes using Mashvisor!
7) Hanif Bayat, Founder & CEO of WOWA Leads
Like equity investments, the main factors for real estate investments are the investment income, tax rate, long term appreciation, and timing. So, the best real estate investing for beginner tips are:
- You should always remember that net income from a rental property is taxed at your marginal tax rate while real estate appreciation is treated as capital gains and consequently taxed at a significantly lower rate.
- When predicting the potential price appreciation of a property, you should consider the future population growth of the neighborhood. For example, the population growth rate of Texas is higher than that of many other states, implying increased demand and possible growth in real estate valuations.
- Finally, never buy a rental property based on FOMO (fear of missing out). Elevated valuations without any supporting fundamentals can quickly lead to a market crash, especially with the high leverage seen in real estate. As Warren Buffet said, “Be fearful when others are greedy.”
8) Sacha Ferrandi, Founder & Principal of Source Capital and Texas Hard Money
How can someone tell when an investment property is right for them? Why might they choose to avoid it? Of course, knowing which investment property is the right one depends on the individual investor and their end goal. But a general rule of thumb that real estate investors like to follow when narrowing down their options of properties for sale is the 1% rule. The 1% rule means the monthly rent should be around 1% of the total cost. For example, if a rental property is worth $100,000, the total monthly rent should be at least $1,000.
Having extensive knowledge about the local housing market helps you determine whether the investment is worth it. If the local area can’t afford the 1% rent, you may want to avoid this real estate investment. Aside from the 1% rule, cap rate is also an important factor in determining whether to move forward with an investment property. Cap rate helps you determine your overall rate of return on the rental property.
To learn more about it, read The Beginner’s Guide to the Cap Rate Calculation in Real Estate.
9) Logan Allec, CPA & Owner of Money Done Right
When it comes to real estate investing for beginners, there is perhaps no calculation that I see beginners getting wrong as the depreciation and amortization calculations. And getting these calculations right is extremely important because the IRS will tax you on your gain as though you calculated depreciation correctly, even if you don’t. A key component of calculating depreciation correctly is a proper allocation of your property’s basis to land and building. The difference is that you can take a depreciation deduction on the basis allocated to the building but not for the basis allocated to land.
This being the case, most people want to allocate as much as possible to building and as little as possible to land so that they can get more depreciation deductions. Now, the everyday way to allocate between land and building is using the county assessor’s determination of land vs. improvements for property tax purposes. But, there are other reasonable methods that can be employed to determine the land/building split, like based on the replacement value of your building. The point is, you must allocate some reasonable amount to land, or you just may find the taxing authorities knocking on your door.
10) Daniel Huertas, CEO of Washington Capital Partners
Don’t be afraid to use leverage to buy rental properties, but be smart! There are plenty of lenders out there saying don’t empty your savings account, use our money, but it’s not that simple. Private and hard money lenders can be an exceptional tool to finance your investment property purchase, but always ask the following questions when vetting one:
- What are ALL of the fees I will incur working with you? (Ask for an itemized list)
- How fast can you close? (This is a loaded question since there are tons of variables, but a good one to ask nonetheless)
- Do you charge prepayment penalties if I complete my project before the loan matures?
- What are your inspection and construction draw process/turnaround time?
A dependable lender can be one of your biggest assets when starting or growing your real estate investing business. So, make sure you partner up with one that delivers on both rates and performance.
11) Maria Smith, Finance & Real Estate Blogger at Handful of Thoughts
- Know the tenant profile for the property before you buy it. Some neighborhoods will attract a certain tenant profile and some will not. For example, if you’re buying rental property thinking a professional will live there but it is in a neighborhood that is undesirable to a professional, you will have a hard time renting it for the rent you desire.
- Create systems or checklists for every step of the process. As you do something for the first time, keep a running checklist of what you do. Adapt and change the checklist as you learn new things. So when you do it again, all you have to do is take out the checklist and follow the steps. This is especially useful if you have years between buying new rental properties.
- It’s easy to get caught up with emotion when buying a property. But in real estate investing for beginners, the property is your product. Sometimes what you like as a homeowner doesn’t have an impact on the property’s rent-ability. You can like a property that doesn’t generate positive cash flow. Even if it is the nicest property, it’s not a good investment if it doesn’t make you money!
To start looking for and analyzing lucrative real estate investments in your city/neighborhood of choice across the US housing market, click here.
12) Jesse Silkoff, CO-Founder & President of MyRoofingPal
When it comes to real estate investing for beginners, it’s common to be nervous and watch your expenses very closely. This is a smart and prudent way to start off and get your toes wet. However, do not cut costs when it comes to paying for top-notch property inspection! The first real estate investment that I ever made I was watching my budget extremely closely. I chose the lowest cost service providers for everything. In the long run, I lost money on that first deal as a result. It turns out, there was dry wood rot that was previously concealed behind drywall. This caused significant delays to the project and added costs on top of what was projected. If I had hired the best inspectors, there would have been a higher probability that they would have found this problem beforehand and steered me clear of this investment. So, don’t make this mistake and always use the best home inspectors specialists to make sure you end up with the best real estate investments. Even though this cuts into your profits, it also significantly lowers your risk.
13) Lukasz Kukwa, Real Estate Advisor at Coldwell Banker Residential Brokerage
If you’re interested in flipping houses as an investment strategy, you should always keep a “quality over quantity” mindset. Meaning, look to build relationships with people who take pride in their work and deliver a quality product and you’ll go far in house flipping business. In the end, this is your brand and there are too many people in the real estate investing business who are looking to cash a paycheck cutting corners. But that approach for real estate investing for beginners never yields positive results! Therefore, doing quality work that lasts will set your brand apart as well as go far with your buyers, giving you a good reputation for future projects and sales and even in acquiring new investment opportunities.
14) Matthew Yu, Vice President of Socotra Capital
Another tip when it comes to real estate investing for beginners interested in fix-and-flip is to follow the 80% rule. This rule of thumb states that you should spend no more than 80% of the final value of the investment property. What does that mean? Here’s an example to clear things up: If the property is in tip-top condition and is valued at $100,000, then you should spend no more than $80,000 on that project. If the calculated cost of improvements is $20,000, then make your offer for the investment property at under $60,000. With a property in contract, you’re now ready to make some money.
Related: How to Make Money Flipping Houses – Tips for Maximum Profits
15) Mike Roy, The Money MAINEiac
If you’re looking for a way to get into real estate with no money, consider making your first investment a house hack. This concept was pioneered by early retirees whereby you generate rental income from your residence to offset its cost. Essentially, you buy an investment property as your personal residence, live in one unit, and rent out the rest. This way, you put less money down, get a better interest rate, and have tenants to cover your mortgage payment. Four-unit buildings are ideal for house hacking because they are eligible for conventional financing (30-year fixed-rate loans) and as little as a 3.5% down payment with an FHA loan. 4-unit buildings also provide the best hedge against vacancy risk while generally providing a higher income/price ratio than duplexes and triplexes.
16) Krista Goodrich, Investor & Author of The Boss Lady Investor
My favorite real estate technique for beginner investors is turning an area of your personal property or investment property into an Airbnb rental. This is a great way to have short-term tenants (but still see the issues that come up). And if you cannot afford to buy an investment property, you still get the same experience in your own home. An important real estate investing for beginner tip here is to be sure to check local zoning! For property investment, a well-done short-term rental can be a very lucrative investment and a nice way to start to build your real estate investing portfolio.
If you’re interested in making money in real estate by renting out on Airbnb, be sure to read Mashvisor’s Guide to Investing in Short-Term Rental Properties with Ease.
17) Alan Yeung, Property Consultant at Location Property Group
- Seek Advice: Find out whether your lender favors the area that you’re looking to invest in. Check that the area isn’t associated with any lending risks, otherwise, you may be wasting your time. Talk to your local real estate agent to find out about opportunities in your local real estate market. They’ll be able to provide you with up-to-date advice on market trends and areas which may provide good ROI.
- Spend and Upgrade: It’s smart to invest in some small upgrades to the rental property like putting in new blinds, curtains or installing a dishwasher or a new cook-top. New appliances and small upgrades can help beginner real estate investors to attract higher rental yield for the property.
- Keep Some Money in the Bank: Make sure you have a bit of liquidity after you have purchased for any shortfall or unexpected payments. You could find yourself without a tenant for a while or may need to make some repairs to the rental property that could put you out of pocket. If you find you can’t afford things that are in front of you, then change the market and consider buying a rental property out of state.
18) Erik Danielson, Real Estate Attorney at Danielson Law Firm, PLLC
I highly recommend that beginners meet with an attorney before getting into real estate. An experienced real estate attorney can walk you through the steps you need to take before you buy your first rental property, such as how to set up an LLC to protect your personal assets from your business. Many don’t think it is worthwhile to spend money upfront to meet with an attorney. However, this is an important real estate investing for beginners tip because, just like with any other business venture, it’s best to build your business on a solid foundation rather than fixing mistakes later. It’s also cheaper to hire an attorney to review or draft your purchase and rental contracts than it is to hire an attorney to represent you in a lawsuit over a contract provision that wasn’t written in your favor.
19) April Struhs, Real Estate Agent with Coldwell Banker Schmitt Real Estate
If you’re looking to start flipping houses as a real estate investment, know your numbers! Know how much it will cost to fix the house and the carrying cost. You should also have an agent who can pull correct real estate comps, so you know how much you can resell for. Another factor to remember is time! The market is consistently changing up and down. Make sure you could rehab the house and get it back on the market in the shortest amount of time, so hopefully, the market didn’t change too much while it was off the market. Another important thing to remember is cash is king! You need to have the cash to play this real estate investing game. Most of the time, houses that need flipping are not able to be financed so the only way to buy them is with cash. Plus, you could sometimes offer less if you were paying cash.
20) Christopher Linsell, Real Estate Analyst at FitSmallBusiness & The Close
Beginner real estate investors often get scared away by the list price of properties. But when you’re buying real estate for profits, the sticker price isn’t your first question. Instead, investors should be doing the math on what their cash on cash return will be. Meaning, how long will it take you to make back your initial investment? For example, say you’re considering buying a duplex house for $200,000. If you’re like most buyers, you’ll be securing a loan to finance the real estate deal. If you agree to a purchase price of 200k, put down 10% and finance the rest, you’ve got $20,000 in the game. Now, if your new duplex rents for $1,000 per unit, your mortgage is $1,250 a month (leaving you $750 a month in profit), it will only take you 26 months to completely recoup your initial investment of 20k. Yes, the purchase price is important but – especially when you’re financing your investment with a loan – what is most important is your cash on cash return.
Related: What Is a Good Cash on Cash Return?
21) Darrell Hurmis, Executive Vice President of Henry S. Miller Brokerage
- Understand the Market: Beginner investors especially are at risk for buying the wrong property at the wrong time. While it’s true that investment properties tend to go up over time, this doesn’t mean that you should rush into a decision if the market is doing well. So a real estate investing for beginners tip is to thoroughly understand the market and sub-market so you don’t overpay (which lowers your return over the long run). This requires you to look at population and job growth, the unemployment rate and property taxes among other stats and market trends.
- Account for Operating Expenses: Sale price isn’t the only number you need to be concerned about when considering a real estate investment. You must also calculate the operating expenses and find out how much money it takes to run the building before buying. The best way to do this is to simply ask current owners for a report of average monthly operating costs.
- Plan an Exit Strategy: Whether things go well with your real estate investment property or not, having an exit strategy is always a good idea. Let’s say the property appreciates, and you’re ready to sell. You need to have a plan for what will happen to the funds. This way, you don’t end up paying a lot of taxes. For example, a 1031 exchange allows you to defer the tax if you purchase a replacement property of equal or greater value within a certain time frame following the sale. On the other hand, if your investment doesn’t work out, then an exit strategy can be an important safety net.
22) Justin Pogue, Real Estate Consultant, Asset Manager & Author of Rental Secrets
The final real estate investing for beginners tip is to schedule the closing for your property in the morning. The first time you’ll see your closing documents will be on the closing day. If you schedule it for the morning, you’ll have time to read each and every page. Ignore the evil look you’ll receive from the title company representative! You’re signing for a 30-year long term commitment. They are more worried about what’s for lunch and will not be helping you make those payments. Another reason to schedule the closing early is that you may find clauses in the contract that you have questions about or that you’d like to negotiate. You’ll want plenty of time to reach out to the lender and get the answers you need. Avoid the pressure of being under the gun because they leave work at 4:00 pm. The situation is already stressful enough, so there’s no need to add more.
These tips for real estate investing for beginners will put you on the path to becoming a successful investor with your first property! Remember: It’s OK if you’ve made some mistakes as long as you learn from them and follow the footsteps of the pros to find solutions and take action accordingly. Whenever you’re ready to start your investment property search and analysis, make sure to come back to Mashvisor and use our tools to find the best properties for sale in the US housing market.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.