So you want to start your real estate career and quit your 9-5 job? You have the zeal and motivation but are just missing the right kind of knowledge to push you in the right direction?
Then some lessons on real estate investing for beginners is what you need to build a repertoire of knowledge across important real estate concepts to establish a successful career in the real estate investing business. Good real estate investors do not become successful overnight, and it goes without saying that a lot of hard work, dedication, and self-learning are involved in the process. You want to make money and become rich? You have to pay your dues and work hard to materialize your goals into financial success. Fret not, we will give you a complete breakdown of the basic real estate concepts and notions that you need to be aware of before you jump head first into the world of real estate investing.
How to Start: Real Estate Investing for Beginners
- Figure out the type of investment strategy you want, i.e., traditional or Airbnb
- Determine how much time and money you want to spend on your chosen investment strategy and rental strategy
- Set your budget: A budget for fund investors is between $1,000-$5,000 and a minimum of $50,000 for direct real estate investors.
- Choose the investment strategy as per your schedule and financial resources: Less time and money works for REIT investing compared to direct real estate investing.
- Make sure to have money saved up for investment related expenses which are inevitable.
Make Money in Real Estate Investing for Beginners
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 which increase in their price or value in the long run. Smart investors seek prime locations when they decide to invest in real estate. Why? Location is a key factor in appreciating or depreciating your home. If you buy in good areas, your property’s value shoots up and vise versa. To make money in real estate, find appreciating real estate properties in prime locations. Factors which qualify a good location include: growing and highly developed cities like San Francisco and safe neighborhoods with good amenities, i.e., schools, shopping centers, dining areas, entertainment, and others. Remember: location, location, location is key to successful real estate investing.
2. Rental Income and Cash Flow
Cash flow from rental income is a great way to make money in real estate investing for beginners. Simply put, the most popular type of real estate investing is about investing in a rental property to collect 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. Beware of vacancy though as it could burn a hole in your pocket.
Types of Real Estate Investing for Beginners
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 and renting it out for a steady stream of cash flow. If you are starting out, we highly recommend that you hire a 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, and tax benefits. With Mashvisor, you can find an abundance of rental properties across the States based on your preferences and budget. Not only that, you are also given readily made calculations on any rental property of choice, from average rental income through cap rate to cash-on-cash return.
Different types of real estate property you can invest in?
- Single family homes
- Multi-family homes
- College rentals
- Vacation homes
- Commercial real estate
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, aka 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 piece of the profits produced from the real estate investments without actually having to buy an investment property.
3. Real estate investment groups
Another type of real estate investing for beginners is 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 at the same time. Win-win!
4. Short term rentals/home rentals
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. The benefits of this: you earn extra cash and meet people from all walks of life. If you are not ready to delve into traditional real estate, consider Airbnb to get the gist of things. Real estate investing for beginners can kick start from your own home.
Real Estate Investing for Beginners Glossary
1. Gross Scheduled Income (GSI): annual rental income an investment property would generate if all units were rented and rent collected. In case of vacant units, count it in your calculation at their market rent.
Gross Scheduled Income = Rental Income + Vacant Units
2. Gross Operating Income (GOI): 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: costs associated with operating the investment property, i.e., 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): rental property’s income after discounting all expenses.
Net Operating Income = Gross Operating Income – Operating Expenses
5. Cap Rate: rate of return on your investment property based on the income the property is expected to generate.
Cap Rate = Net Operating Income/Market Value
6. Cash on Cash Return (CoC): the annual return/income an investor receives in relation to the down payment. To make life easier, CoC can be readily found for any rental property of choice with Mashvisor’s rental property calculator. Nevertheless, below is the CoC formula:
Cash on Cash Return = Net Operating Income/Total Cash Investment
7. Operating Expense Ratio (OER): ratio between the total operating expenses to gross operating income (expressed as a percentage).
OER = (Operating Expenses/Gross Operating Income) x 100
8. Debt Coverage Ratio (DCR): ratio that expresses the number of times annual net operating income exceeds debt, i.e., total loan payment
Debt Coverage Ratio = Net Operating Income /Debt
- 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
In order to prepare yourself for real estate investing for beginners, keep checking Mashvisor on regular basis for more real estate investing tips and advice.