If you’re wondering how to get started in real estate investment, this is the place to begin. Whether you’re brand new or looking to get serious and expand your real estate portfolio, you’re not alone.
While investing in real estate can seem out of reach at first, there are many initial investment tiers that don’t break the bank and still provide one of the most reliable and proven ways to build wealth.
There are several ways to make money as a real estate investor. You can purchase a property, then sit back, let it appreciate in value, and sell it when the time is right. That’s known as a passive investment and it’s an easy way to get started.
A more active (and traditional) route would be to purchase a property and rent it out, becoming an automatic landlord. While this may seem like a big commitment, a property management company can make rental properties incredibly easy to manage.
If you’re investing in a multifamily property or commercial real estate, there’s also the option for ancillary real estate investment income. Ancillary income can accrue through mini-businesses within a building, like vending machines.
Getting started can feel overwhelming, but don’t worry. We’ll review all the basics right here, including:
Just as there are several ways to make money from real estate investments, there are many types of investments you can make:
Before we discuss the many types of real estate investments available, here are a few key terms you’ll want to understand.
Return on Investment/ROI: ROI is calculated by taking the ratio between net profit and how much initial capital was used for the investment. The higher the ratio, the better the return on investment. Here’s a quick way to calculate ROI.
Net Operating Income/NOI: Net Operating Income or NOI, is the profit portion of the investment. To discover NOI, subtract monthly expenses from the monthly revenue.
Real Estate Investment Trust/REIT: A real estate investment trust (REIT) is “a company that owns and manages income-producing properties.” Investors are able to purchase shares in REITs and generate wealth from real estate without owning actual properties.
Real Estate Investment Group/REIG: Similar to REITs, a Real Estate Investment Group (REIG) is a group of investors pooling their wealth together for a larger investment.
Real Estate Owned/REO: An REO property has been reclaimed and is owned by a lender, usually a bank. After foreclosure, the bank will typically remove liens in order to sell a property faster. REOs are an option for investors who want to purchase property below market value.
A savvy investor will have solid answers to the following questions. Knowing the answers will help you decide which type of real estate investment works best for you right now.
How do you work best? On your own or as part of a group? For those just starting out without much time to devote to their initial real estate investment, it can be beneficial to join a group of investors through an REIT or REIG. These have the benefits of no corporate tax, portfolio diversification, and often high dividend yields. They also allow you to learn as you go instead of diving straight into the deep end.
Another group investment option is real estate syndication, a form of crowdfunding where investors “pool resources and skills to buy large-scale properties and split the profits” (Fortune Builders).
Starting “from scratch” is relative and situational. It could literally mean: buy land, build on it, and sell it on. Or something less extreme like house-flipping.
You also have the option to “prehab” a property. Prehabbing is the process of positioning a property for resale by adding minor cosmetic updates. Afterward, you’re in a position to sell the property to another investor who may invest in further updates or rent it out.
If you don’t start from scratch, you’ll be taking over an existing property, which makes you a landlord right away. While it might seem appealing to take over a property that’s already up and running, remember that becoming a landlord means lots more responsibility!
The timeline question is an important one. Consider how long you want to be in real estate investment. Is this a one-year turnaround for some quick cash, a five-year plan, or a life-long investment? The answer will help determine what type of real estate investing is the best fit for you.
Another angle to this question is whether you’re looking at real estate as a side hustle (part-time) or a bridge to full-time employment. If you’re not decided on this yet, then the next question may help you determine what works best.
Here’s where you’ve got to get honest with yourself. How much time each week or month do you actually have to devote to this venture? Consider all your other commitments (family, work, etc.) and decide what time you can realistically devote to real estate. If it’s a few hours each month then you’ll want to consider more passive investment options. If you’ve got 5+ hours each week then perhaps you’re ready for a more active option.
This is a big one. Becoming a landlord is not an easy task. When you take on tenants you automatically accept more legal responsibility which means you must be available when your tenants need you. This requires regular time and energy to devote to your investment. If you’re wanting to become a landlord but don’t have much time available, an alternative would be to hire a property manager so you can be more “hands off.”
Real estate investment is a wise way to allocate finances and grow wealth over time. It can involve as much or as little time as you have available while diversifying your portfolio. But, before you invest, you’ll want to understand a bit more than your basic options, a few key terms, and the answers to our five essential questions.
To further your research before diving in, another excellent resource in identifying new investment opportunities is a property management company. Property managers are able to help new investors make the most of their time and money by handling mundane tasks at cost-effective prices. By thoroughly researching beforehand, you can discover what’s best for you, your timeline, your money, and your energy. Happy investing!