Beginner’s Guide To Investing In Real Estate

10January, 2020

Beginner’s Guide To Investing In Real Estate

By Shirley Xu

I’m often asked about the best way for someone to get started in real estate investing. If you’ve been wanting to get into real estate investing but are sitting on the sidelines and not exactly sure how to jump in, you are not alone.

There are TONS of ways to get involved in real estate investing, which is why those who do it love it, but it’s also why those who haven’t yet taken the plunge are left feeling completely overwhelmed and intimidated.

If you’re one of those spectators on the outside looking in, rest assured that there are many ways to get involved. In this article, I will walk you through how to diagnose where you are, what you want out of investing in real estate, and the best way(s) for you to get started.

Here’s an overview of what we’ll cover:

Get a Macro View of Where You Are
Determine Your Why
Decide How Hands-on You Want to Be
Assess Your Risk Tolerance
Determine How Much You Want to Invest
Decide Which Types of Real Estate Investments to Pursue
Recap and Takeaways

Step 1: Get a Macro View of Where You Are

Before you decide on where to plunk your money down, you need to take a step back to assess where you are in life and your financial journey, and what you hope to achieve through investing in real estate.

Are you just graduating from college, mid-career, retired, or somewhere in between? How much money do you have to invest? What are you hoping to get out of investing? Are you looking for a one-time payoff or smaller ongoing payoffs? How much would it take for you to become financially free?

Getting a good high-level picture of where you are will help you assess how much risk you’re willing to take on, how aggressive your real estate investing strategy should be, how much money you can comfortably invest, the types of returns you’re looking for, and the timeframe you’re aiming for.

All of these elements will come in handy as you decide how and when to get started in real estate investing.

Step 2: Determine Your Why

Because there are so many different opportunities in real estate, from investing in notes to corporate housing, from house hacking to investing in syndications, and everything in between, it’s very easy to fall prey to shiny object syndrome. One day you’re set on buying a fancy downtown condo for Airbnb, the next day you look into mobile home parks.

Trust me, I’ve been there.

In pretty much every real estate investment opportunity, there’s a good chance you’ll make some money. That’s why it’s hard to say no when you come across an opportunity. Someone will tell you a jaw-dropping story about how they are making boatloads of money investing in X, and suddenly, you think, hey, I could do that too!

Then, hopefully before you get too far down the path, you realize that it would take too long, or it’s not long enough, or it’s too hands-on, or it’s too passive, or it’s just not the type of investment that’s right for you.

This is why it’s so important to determine your why.

What’s the reason you want to invest in real estate? Why did you seek out this article? Are you hoping to create passive streams of income so you can quit your job and spend more time with your family? Are you hoping to go into house flipping full time? Are you in it for the tax benefits? Perhaps you’ve heard about house hacking and want to give it a go?

Whatever your reasoning, make sure to take some time to step back and gain clarity around what you hope to get out of real estate investing that you’re not getting out of your current financial vehicles (stocks, bonds, CDs, savings accounts, etc.).

This will better prepare you to resist the temptation when shiny object syndrome strikes.

Step 3: Decide How Hands-on You Want to Be

I’m sure you’ve seen all those house flipping shows on HGTV,

where they do the whole shabam, from dilapidated junker through gorgeous showstopper, complete with a champagne-laden open house.They go into the house with sledgehammers, masks, and protective eye gear. They crawl through moldy spaces. They come across unexpected critters. Sometimes there’s yelling, sometimes there’s drama. But in the end, they get that incredible sense of achievement from having turned an eyesore into a work of art.

If the previous paragraph excites you, fantastic! Then perhaps you want to be more of an active, hands-on real estate investor. More power to you. I’ve been there, and I know it to be incredibly gratifying, yet often very difficult work.

If that description made you cringe and almost close this article, don’t fret! The world of real estate investing has options aplenty for you too. Perhaps you want to be more of a passive, hands-off investor.

You put in the money, leverage other people’s expertise and sweat equity, and reap the rewards. Of course, they will take a piece of your returns, for all their work, but it’s a small price to pay not to have to deal with cockroaches and dirty toilets, don’t you think?

The decision of whether to be more of an active or passive investor is an important one, so take some time to step back and feel out where on the spectrum you’d like to be, given your current life situation and goals.

Step 4: Assess Your Risk Tolerance

Every real estate investment, just like every stock, every mutual fund, every dental procedure, heck, even walking out your front door, comes with a level of risk.

As with any investment, in real estate, there’s a correlation between risk and reward. The greater the risk, the greater the potential reward. The lower the risk, the lower the reward.

For example, a ground-up development in a transitioning neighborhood might come with a higher level of risk, whereas an existing apartment building, whose current as-is rents would cover the mortgage and expenses, might come with lower risk.

In real estate, because there are physical assets and paying tenants, there are often ways to mitigate risk. However, there’s always that teeny tiny chance that you could lose it all.

If the thought of losing money makes you fidget in your seat and your palms start to sweat, take that as a sign to start off slowly and with smaller amounts of money. This will help you learn the ropes on a smaller scale. Your cash returns might not be as big, but your educational returns will more than make up for it.

Step 5: Determine How Much You Want to Invest

Now that you’ve got a pretty clear picture of where you are, why you’re investing, how hands-on you want to be, and how much risk/reward you’re willing to take on, it’s time to think about the size of your investment.

Obviously, you don’t want to put your entire life savings into real estate, and especially not into a single investment. If you’re starting out, choose a modest amount you would be comfortable losing, or at least living without for a few years.

Unless you’re doing a short-term project, you should be prepared to have your money invested in the asset for a few to several years, so make sure you’re not investing so much that you don’t have enough to pay for your groceries next month.

When choosing an investment, make sure to take exit strategies into account as well, just in case you need to get your money out sooner than you’d expected.

Step 6: Decide Which Types of Real Estate Investments to Pursue

Now comes the fun part. You’ve taken time to reflect on where you are, where you want to be, and how real estate investing can get you there. With that information in mind, you can begin to narrow down the types of real estate investments into those that best fit your situation and goals.

The Lots of Money / Little Time / Hands-off Investor

Let’s start with those of you who may have some money saved up. Perhaps you’ve invested in the stock market, perhaps you have a decent amount in your savings account. You’ve heard about the many benefits of real estate investing, the tax breaks, the passive income, and the impact your money can have on families and communities.

But, given that you’re a very busy person, you simply have no time to put in all the research it takes to feel comfortable investing in something, and you definitely don’t have the time to actively renovate or manage a property.

Just thinking about it makes you exhausted.

Recommendation: Become a Passive Investor

If you’re in this camp, one of the best options for you to get started in real estate investing is through passive real estate investments, such as properties through commercial real estate syndications.

What is a syndication, you ask? Quite simply, a real estate syndication pools together money from different investors.

Let’s say I’m a syndicator. I’ve spent tons of time researching markets, analyzing properties, and meeting up with brokers, contractors, and property managers. I find an apartment building that I think would be a homerun investment.

This apartment building costs $4 million, which requires a $1 million down payment. I have $100,000 to put in, which leaves me with a $900,000 deficit. I need to find investors to fill in the rest.

As an investor in my syndication, you rely on my time and expertise. I take care of all the day-to-day operations, renovations, accounting, etc. You just put in your money, and every quarter, I send you a check with your percentage of the returns. You would also get a portion of the profits when the apartment building is sold.

The Little Money / Lots of Time / Hands-on Investor

If you’ve been bitten by the real estate bug and want to start investing but don’t have a lot of capital at the ready, yet you are not afraid to roll up your sleeves and get dirty, you might fall into this category.

Even though you might not have saved up as much as you would have liked, you are interested in learning more about real estate investing and are willing to put in some time and effort (aka, sweat equity).

In my opinion, this is perhaps one of the most fun positions to be in. Count yourself fortunate that you actually have a passion for real estate, as many people get headaches just thinking about the analyses, paperwork, and potential rehab nightmares.

There are many ways to get into real estate investing with little or no money, as long as you’re willing to hustle and be creative.

Your Strengths, Interests, and Goals

Take stock of which aspects of real estate investing interest you the most. Is it the thrill of the hunt for those great deals? Planning and executing renovations? Running the numbers? Analyzing neighborhood trends and markets?

Figuring out what you’re most passionate about, as well as where your strengths lie, will help you hone in on how to start your real estate investing journey.

Moreover, what are you in it for? Are you looking to create short-term capital, or long-term equity? Passive income, or a quick buck?

Recommended Real Estate Investment Strategies

Fix and Flips

As seen on HGTV, this is where you buy a fixer upper and then put in the sweat equity to renovate and sell it. If you have no money to put down, you can look into short-term private loans, which will give you several months to a year to complete the renovations. Once you sell, you can pay off your loans and take the profits.

The BRRRR Strategy

The BRRRR strategy is similar to fix and flips, except that you hold onto the asset long term, rather than selling. BRRRR stands for buy, renovate, rent out, refinance, and repeat.

Similar to the little/no money down option mentioned above, where you take out a private loan to cover the down payment, except you pay off that loan upon refinance.

If you buy and underwrite correctly, the after-repair value (ARV) will be significantly higher than the purchase price, allowing you to do a cash-out refinance and pay off any private loans you might have taken out for the down payment.

Wholesaling

Those of you who love to network and find off-market deals might love this one.

Wholesaling is when you find a deal and get it under contract for a low price. Then, while the asset is under contract (i.e., you haven’t completed the purchase yet), you wholesale it to another buyer for a higher price.

Who pockets the difference? That’s right, you do.

Here’s a quick recap.

We started out by getting a macro view of where you are in life, your investing goals, how involved you want to be, your risk tolerance, and how much money you want to invest.

Given your current profile, we then explored a few different scenarios, with some real estate investment recommendations for each.

The Lots of Money / Little Time / Hands-off Investor

Consider investing passively in commercial real estate syndications

The Little Money / Lots of Time / Hands-on Investor

Lots of options: Fix and flip, BRRRR method, wholesaling, house hacking, crowdfunding, and more

No matter where you are in life, how much money you want to invest, and how much time and interest you have, there are ways for you to get started in real estate investing.