Real estate is a great investment, but it can be risky. Knowing the basics of real estate investing for beginners can help minimize the risks.
Table of Contents
- How to Start: Real Estate Investing for Beginners
- 3 Ways Beginners Can Make Money in Real Estate Investing
- 4 Types of Real Estate Investing for Beginners
- 8 Real Estate Investing Terms Beginners Should Know
Many new investors find real estate investing to be intimidating. It’s quite understandable because investing in real estate involves several risks. If you don’t know what you’re doing, you can end up losing a lot of money. That is why it’s essential to learn the basics, tips, and tricks of real estate investing for beginners before you get started.
As a beginner, you might think that investing in real estate only involves finding a property and renting it out or fixing it to sell it for profit. While this is the general idea of a real estate investment, there are several important steps in between that are crucial to an investor’s success. Knowing the process is essential to ensure profitability.
One of the best things beginner investors can do when they start with their real estate investment is to work with a reliable real estate analytics provider. For instance, Mashvisor is an online platform that provides the essential services and tools that can help new and seasoned investors find the best investment.
In this article, you will learn:
- That there are several types of real estate investments
- The crucial steps in finding the right investment for you
- How to make money from real estate
- The tools that you need to be a successful real estate investor
How to Start: Real Estate Investing for Beginners
When you’re just starting with your real estate investment, it’s normal to feel excited about finding a property to invest in. However, you need to exercise caution and not buy just any property you think will be a good investment. To be successful in real estate, you must be aware of the important factors that can help you choose a profitable investment property.
The following are a few of the expert-approved tips that can help beginner real estate investors get started:
Read Books About Real Estate Investing
If you’re a total beginner, reading books related to real estate investing can be a great way to start. Several real estate books are available in the market today, amid the growing popularity of real estate investments. Reading books can help you understand the basics of investing in real estate, which is important if you’re totally unfamiliar with it.
Good real estate books also allow you to become familiar with the terminologies often used in real estate investing. This way, you won’t be confused when you talk with other real estate professionals, such as lenders, brokers, property managers, appraisers, and contractors. Books can also give you ideas on how to invest even with no money to buy a house.
In lieu of books, you can also read quality and informative real estate blogs to help you become more knowledgeable in this field. Mashvisor publishes investor blogs to help you understand the ins and outs of real estate investing. And since blogs give tips and advice on a per-topic basis, you won’t get overwhelmed with information overload.
Determine the Different Types of Real Estate Investments
Real estate investing doesn’t necessarily mean buying a property and renting or selling it for profit. There is another type of investment strategy that allows beginner investors to test the waters without spending a substantial amount of initial capital. Such a strategy is referred to as real estate investment trust or REIT.
If you don’t want to spend a lot of time managing your investment, it’s better to start with REIT as a fund investor. REITs only require you to contribute funds, which usually start at $1,000, for income-producing real estate. They allow you to finance properties and enjoy the benefits of real estate investing with no money that’s too large for an initial investment.
However, if you can spare more time and money for your own real estate investment, you can choose the direct real estate investment strategy. It is the type of real estate investment where you buy a property and rent it out or get it fixed and improved so you can sell it for profit. This type of investing strategy usually requires you to spend at least $50,000 or more.
Know the Different Rental Investment Strategies
When we talk about real estate investing, most investors refer to rental property investments. After all, rental property owners are among the most successful investors in real estate. If you are planning to invest in rental properties, it’s important to know the different investment strategies and figure out what type of strategy you prefer.
There are two types of investment strategies for rental properties:
- Traditional (long term) rentals
- Airbnb (short term) rentals
If you invest in traditional or long term rentals, it means that you will be seeking tenants who are planning to rent your property for more than a month. Most traditional rental investors find a property close to business areas with several job opportunities. Others choose peaceful neighborhoods that are near education facilities, ideal for families with kids.
On the other hand, if you want to invest in short term rentals to be listed on home-sharing platforms like Airbnb, it means your renters are usually tourists or business travelers. Most vacation rental investors choose a property that’s near top tourist destinations. Others also choose a property close to business districts to target visitors on a business trip.
The type of property that you should buy, as well as its location, will depend on what strategy you plan to do. Thus, by knowing your preferred type of investment strategy, you will also know what to look for when finding a real estate property. Keep in mind that each strategy has its own challenges and benefits, so it’s best to study the market carefully before making a decision.
Set Your Budget
Once you’ve decided on a rental strategy, the next important step to real estate investing for beginners is to set a budget. You should determine how much money you are willing to spend on your chosen investment strategy. When setting a budget, it’s crucial to know how much you can afford. Even if you take out a loan for the purchase of your property, you still need to pay for it.
In addition, your budget should include all the possible expenses for your investment property, such as the following:
- Purchase price
- Closing costs
- Loan interests
- Property insurance
- Costs of repairs and improvement
- Property management fees
- Marketing fees
The associated expenses will vary depending on your property and your rental strategy. As a beginner investor, finding accurate figures for potential expenses can be challenging. The best way to do so is to work with a real estate analytics company. Mashvisor can provide all the relevant figures, so you won’t need to find them manually.
If you search for an investment property using Mashvisor’s platform, you will also be provided with all the necessary property details. It allows you to identify which property can be a good investment. Among the crucial details are the potential expenses associated with the property.
Study the Market Before Choosing a Location
When we discuss tips on how to invest in real estate, one of the most common tips that experts often mention is to choose your location carefully. Your investment location is a major factor that can significantly affect your profitability. Investing in a bad location can cause a lot of stress and headaches, and it may even lose you money in the long run.
To ensure that you’re choosing your location wisely, it’s important to know how to study and analyze the market. You need to take into account several factors to determine whether or not a location is good for real estate investing. Some of them include the overall economy, job opportunities, population, tourism, crime rate, general safety, and other available facilities.
However, a good location is not only determined using the abovementioned factors. To ensure profitability, you should also determine the cash on cash returns of real estate comps in the area, as well as the cap rate, average monthly income, appreciation rate, and expenses. You can easily find all this information using a real estate analytics provider like Mashvisor.
After searching for a property through Mashvisor’s database, you’ll get access to all property information. Plus, you can also see the neighborhood comps so you can compare similar properties within the area. Moreover, you’ll also have access to an investment property calculator that can help you assess if an income property is worth your time and money.
Related: How to Spot a Good Real Estate Investment Deal?
3 Ways Beginners Can Make Money in Real Estate Investing
Investing in real estate comes with several benefits, and one of them is earning an extra income. If you prefer to invest in REIT, you can enjoy earning passive income without having to worry about managing income-generating real estate properties. Likewise, being an active real estate investor also allows you to earn generous profits if you know how to do it correctly.
There are three common ways a real estate investor can make money from real estate, such as follows:
1. Real Estate Appreciation
If you want to make lots of money in real estate, find homes that will appreciate or increase in value over time. Just like land, homes are fixed assets that increase in value in the long term. Smart investors seek prime locations when they decide to invest in real estate. It’s because the location is a key factor that decides whether your home appreciates or depreciates in value.
If you buy in good areas where the population keeps on rising, the value of your property value will shoot up in less time than expected. This is due to the continuously increasing demand caused by an increase in population. So to make money in real estate, you should find appreciating real estate properties in prime locations.
There are factors that you should consider when choosing a good location. For instance, growing and highly developed cities like San Francisco will surely see fast appreciation rates. It means your real asset can be worth double or even triple its value after a few years. Also, consider safe neighborhoods with good amenities, like schools, dining, and recreation.
One of the best tips for real estate investing for beginners is that you should study the economic conditions in the city you are planning to invest in. A place with a good economy will definitely thrive. Remember: location is key to successful real estate investing.
However, progressive cities usually have expensive real estate, making it more difficult to find a home you can afford. When finding a good location, make sure to find a balance between affordable housing and appreciation rates. Typically, locations with very high appreciation rates tend to be too costly. So it’s best to find a good balance to ensure profitability.
2. Rental Income
Another way to make money from real estate investing is through rental income. When you invest in rental properties, you will earn income from the rent that you collect from tenants. Whether you invest in a multi family property so you can rent it for the long-term or you buy a condo unit to rent out as an Airbnb rental, you’ll generate income from your investment.
The most popular type of real estate investment is investing in a traditional rental property because investors want to generate a steady flow of rental income every month. You become a landlord with a set of responsibilities towards maintaining your rental property, as well as managing your tenants. However, beware of vacancy as it can burn a hole in your pocket.
On the other hand, if you choose to invest in a short term rental, you will earn income when guests book your rental unit. Some Airbnb owners earn more money than traditional rental owners, especially if they are located in a prime location that is frequented by visitors. Similar to traditional rentals, there are also risks of vacancies, especially during the low season.
To avoid this risk, one of the effective tips from experts is to become flexible with your investment strategies. For instance, if you own a multi family property and rent it out as a traditional rental, you can also choose to list a unit on Airbnb if one gets vacant. This way, you don’t need to wait until it gets occupied by a long-term tenant for it to generate income.
3. Other Forms of Income from Rent
If you choose to rent out your property as your investment strategy, you can also earn extra money from other fees that you can legally charge to your tenants. Depending on the local law in your chosen area, it is applicable to both traditional and Airbnb rental strategies.
For example, you can charge a non-refundable pet fee from tenants or guests with pets. You can also earn extra income from cleaning fees, parking fees, and fees charged to additional guests.
4 Types of Real Estate Investing for Beginners
As mentioned, there are different types of real estate investing for beginners, and it’s important to explore each of these options to find out what is best for you. The best real estate investment strategies will depend on your budget, time, and personal preference. Even if you’re only a beginner investor, you can still become successful if you try to learn the ropes early on.
1. Rental Properties
Owning a rental property is the epitome of real estate investing for beginners. Your most basic type of real estate investing is buying a real estate property (e.g. a multi family home) and renting it out for a steady stream of cash flow. Two common rental strategies are traditional (long term) rental and Airbnb (short term) rental.
One of the best tips for new investors who are just starting out is to hire a reliable real estate agent to help you find the best real estate investment deals. Most importantly, find positive cash flow properties to ensure a good investment and high cash-on-cash return (definition below under glossary).
Some of the benefits of rental properties include:
- Rental income
- Positive cash flow
- Real estate appreciation
- Tax benefits
It’s also great to work with the best real estate platform to find a lucrative investment. With Mashvisor, you can find an abundance of rental properties across the US based on your preferences and budget. It includes all types of properties, like single family and multi family homes. Plus, you can access readily made calculations on any rental property of your choice.
Mashvisor presents comparable data based on different investment strategies. Moreover, it provides all the necessary tools that you need for real estate investing, including the rental property calculator. This calculates the average rental income, cap rate, and cash-on-cash return of an investment property based on its expenses and your preferred method of financing.
Here are the different types of real estate property you can invest in:
- Single family homes
- Multi family homes
- College rentals
- Vacation homes
- Commercial real estate
- Unique properties like cabins
2. Real Estate Investment Trusts
Real estate investing for beginners does not require taking on high risk. If you are risk averse, consider investing in real estate investment trusts, known as REITs. To put it in simple terms, REITs allow anyone to invest in large real estate investment portfolios through the purchase of stocks. In turn, shareholders earn a share of the profits generated from the investments.
The best thing about REITs is that you can invest in real estate even with no money to buy a property. In fact, you don’t need to actually buy an investment property to enjoy the benefits of real estate investing. Moreover, you won’t need to spend a lot of time trying to figure out how to grow your investment because REITs are managed by expert and seasoned investors.
3. Real Estate Investment Groups
One of the best real estate investing strategies for beginners with no money to buy a property is through real estate investment groups. Similar to REITs, real estate investment groups allow you to mitigate your risk by pooling your money with other investors to buy rental properties. This way, you diversify your risk and get the same benefits of owning a rental property. Win-win!
Investing in real estate groups is ideal for those investors who lack the funds to buy a property on their own. Through real estate investment groups, new investors with no money that’s large enough to buy a property can pool their funds so they can collect enough money to invest in real estate.
4. Short Term Rentals/Home Rentals
Depending on where you are located, you, too, can use your own home and become a landlord. Short term rental websites like Airbnb allow you to make money by renting out your home anytime you want. It is an excellent opportunity to invest in real estate with no money to buy a second home.
You can enjoy earning extra income and meeting people from all walks of life. If you’re not yet ready to delve into traditional real estate, consider Airbnb to get the gist of things. After all, real estate investing for beginners can kick start from your own home.
Related: How to Start a Real Estate Business With No Previous Experience
8 Real Estate Investing Terms Beginners Should Know
One of the most important expert tips for real estate investing for beginners is to understand the terminologies that are frequently used in real estate. By doing so, you can confidently talk with professionals without getting confused about what they mean.
Here are the most common real estate investing terms new investors should know:
1. Gross Scheduled Income (GSI)
Gross scheduled income refers to the annual rental income an investment property would generate if all units were occupied (rented out) and rent payments were collected. In the case of vacant units, include it in your calculation at their market rent.
Gross Scheduled Income = Rental Income + Vacant Units
2. Gross Operating Income (GOI)
Gross operating income refers to the amount of rental income you will actually collect to service the rental property.
Gross Operating Income = Gross Scheduled Income – Vacancy and Credit Loss + Other Income
3. Operating Expenses
Operating expenses refer to the costs associated with operating the investment property. Examples of operating expenses are property taxes, insurance, utilities, and maintenance costs. They do not include payments made for mortgages, capital expenditures, or income taxes.
4. Net Operating Income (NOI)
Net operating income is the rental property’s income after discounting all expenses.
Net Operating Income = Gross Operating Income – Operating Expenses
5. Cap Rate
Cap rate is the rate of return on your investment property based on the income the property is expected to generate. It doesn’t take into account whether you purchased the property in cash or through a loan.
Cap Rate = Net Operating Income/Market Value
6. Cash on Cash Return (CoC)
Cash on cash return is the annual return or income an investor receives in relation to the down payment. To make an investor’s life easier, the CoC return metric can be readily found for any rental property of choice with Mashvisor’s rental property calculator.
You can also calculate the cash on cash return manually using the following formula:
Cash on Cash Return = Net Operating Income/Total Cash Investment
7. Operating Expense Ratio (OER)
The operating expense ratio is the ratio between the total operating expenses to gross operating income (expressed as a percentage).
Operating Expense Ratio = (Operating Expenses/Gross Operating Income) x 100
8. Debt Coverage Ratio (DCR)
The debt coverage ratio expresses the number of times annual net operating income exceeds debt, such as total loan payment.
Debt Coverage Ratio = Net Operating Income /Debt
When calculating the DCR, the following should be taken into consideration:
- Less than 1.0: Not enough NOI to cover the debt
- Exactly 1.0: Just enough NOI to cover the debt
- Greater than 1.0: More than enough NOI to cover the debt
Related: 7 Metrics You Should Know When Buying Investment Property
Subscribe to Mashvisor
Investing in real estate is definitely not an easy task. However, if you keep the above expert tips in mind, you’ll be ready to get started. Remember that there is more than one way to invest in real estate, so new investors don’t need to get intimated thinking that only experienced investors will become successful in this venture.
If you can afford to buy a real estate property, make sure to work with the best real estate platform that can help you start right and build a profitable portfolio. Mashvisor’s database is easy to use, and it contains thousands of properties from across the country.
Whether you’re looking for a single family, multi family home, or condo unit, Mashvisor got you covered. With Mashvisor, you can’t go wrong with choosing an investment, because all the data that you need to make an informed decision is provided for you.
Real estate investing for beginners is not that difficult if you work with the right partner. Subscribe to Mashvisor to access the necessary tools that can help you become a successful investor.
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