If done right, real estate investing could be highly lucrative. If done wrong, however, it may end up costing you
Real estate investing has numerous benefits. These include predictable cash flow, diversification, and excellent returns. Not to mention tax advantages.
However, unless you know the best way to begin real estate investing, it may be more trouble than it is worth. On the far end of the spectrum, there is a risk that it will end up costing you money.
That’s where we come in.
In this article, we will outline how to get into real estate investing, plus how to do it with limited funds. Here is everything you need to know about investing in real estate.
Not only does real estate investing diversify your portfolio, breaking your way into the market may be easier than you once thought. Prospective investors have numerous ways to enter real estate investing. And the different options include more than simply becoming a landlord—although that remains an option to consider.
Here are four ways to begin real estate investing:
- Purchase your own property
- Buy a rental property/become a landlord
- Flip houses
- Take advantage of online platforms
Here is a closer look at ways to get into real estate investing.
1. Purchase your own property
Buying your own home is one of the best ways to enter into real estate investing. Firstly, you build equity in your home through your monthly payments, as opposed to paying rent. In other words, a portion of your monthly mortgage payments returns to your wallet, in a way. If you want to live in your home long term, it can make sense to buy it, especially if your mortgage payments are similar to the rent you would be paying anyway.
Lenders treat owner-occupied homes more favorably. Typically, banks will give this type of borrower a lower mortgage rate and require a lower down payment. You might also be able to deduct interest expenses come tax season.
2. Buy a rental property/become a landlord
If you want to increase your real estate investment, you can get into a residential rental property, like a duplex or a single-family house. One major benefit is you know the standards of the marketplace.
The market may also be easier to gauge, unlike commercial properties like a shopping center, for example. Another major benefit is that it usually takes a lower investment to get started.
You may have to make a down payment of 30% of the purchase price. If that is too high, you can get around that issue by purchasing a rental property you also live in. One downside to consider is that you must manage the property. And if your tenant leaves while owing rent, you must come up with the monthly payments. Otherwise, you risk defaulting on the loan.
3. Flip houses
Flipping houses has become a popular avenue for real estate investing. However, it requires a good eye for value, as well as operational expertise, compared to becoming a long-term landlord. If you do it properly, flipping houses might help you realize a quicker profit than being a landlord.
While you can make money more quickly, you also need to have more expertise. Usually, someone who successfully flips houses finds undervalued homes that require cleaning or complete renovations. After making the changes required, house-flippers then charge market value for the properties.
It is important to know, however, what can be fixed at a reasonable price—and what is unfixable. It also requires knowledge of what the property can later be sold for. Any miscalculation can see profits dry up—or worse, end in outright loss.
4. Take advantage of online platforms
Online real estate platforms like Crowdstreet or Fundrise can help you start real estate investing on larger commercial deals. Going this route, you can usually avoid dropping hundreds of thousands of dollars—or even millions—on a real estate deal. Online real estate platforms connect investors with developers.
One major advantage: you may get a cut of a highly lucrative deal that you might not have had access to otherwise. Depending on the specific terms of the deal, an investor might be able to partake in equity investments or debt investments.
Keep in mind, however, that online platforms can also come with disadvantages. For instance, some platforms only accept accredited investors, like investors with a net worth of at least $1 million. In other words, unless you already have money, you may not be able to use it.
Yes. $5,000 is enough for real estate investing. However, it is important to take the right approach. First, you should educate yourself. Next, you will want to explore alternative investment options, leverage partnerships, and adopt creative strategies such as wholesaling and crowdfunding.
Let’s look at how to kickstart your real estate investing.
Crowdfunding platforms have changed the game of real estate investing. These platforms have enabled prospective buyers to gather their resources and invest in real estate projects as a collective.
That said, $5,000 is enough to participate in a crowdfunding campaign. Your investments can even be spread across different development projects or properties. This is a great way to diversify your investments, benefit from potential high-yield opportunities, and mitigate risk.
Real estate investment trusts (REITs)
Real estate investment trusts are also called REITs. This is a great way to start real estate investing with limited funds.
REITs are companies that finance, operate, or own real estate that generates income. If you invest in REITs, you are indirectly investing in a diversified portfolio of properties—minus the headache of property management.
Most brokerage firms offer access to REITs with low-investment minimums. This makes REITs appealing for investors that are working with limited budgets.
Learn how to invest in real estate investment trusts (REITs) in this article.
Another great way to make limited funds go a long way is to partner with experienced investors. This may provide you with access to properties that may have been otherwise out of your financial reach. One way to find a good partnership is through real estate investment clubs. Another is through online communities where you connect with potential partners.
Wholesaling real estate involves seeking distressed properties for significant discounts. Next, you negotiate a contract and assign that contract to another real estate investor—for a fee. To successfully wholesale some properties, you need to be good at identifying undervalued properties. You should also be skilled in negotiating deals.
Learn the top 10 real estate investing strategies in this article.
Yes. If done properly, real estate investing can offer predictable cash-flow, equity building, tax breaks, competitive risk-adjusted returns, and hedge against inflation. By lowering volatility through diversification, real estate investing can also enhance your portfolio. This is true whether you invest in REITs or in physical properties.
Real estate investing can offer many benefits, which includes generating predictable cash-flow.
In real estate investing, the 50% rule is a guideline used by investors to estimate the profitability of a given rental unit. The 50% rule states that half of the gross income generated by rental property should be allocated to operating expenses. This rule is designed to help investors avoid any mistakes like overestimating profits or underestimating expenses.
To determine a property’s monthly operating expenses using the 50% rule, you simply multiply the property’s gross rental income by 50%.
Real estate investing can be highly lucrative. It can also be difficult to break into, and if done wrong, may actually end up costing you money. It is therefore important that you conduct your own research to ensure it is done successfully. Remember: the more knowledge you have, the better off you will be.
If you're truly interested in real estate investing or want to learn more about where best to invest from someone in the industry, learn the best real estate investing courses and take the time to look at the mortgage professionals we highlight in our Best of Mortgage section. Here you will find the top performing mortgage professionals, including mortgage brokers, across the USA.
Did you find these tips on how to start real estate investing useful? Have you recently begun your own journey into real estate investing? Let us know in the comment section below.