Louis Glickman, real estate investor and philanthropist, famously said, “The best investment on earth is earth.” Real estate is one of the only investments that provide substantial income as it also grows in value.
But how exactly do you start investing in real estate? How do you make the leap to Real Estate Investor?
That’s what we’re going to discuss in this post. We’ll cover:
- 5 key benefits to becoming a real estate investor
- 8 different ways to invest in real estate, including the pros and cons of each investing method, and how to get started in your real estate investment of choice
- How you can save a fortune on your real estate deals by investing a little time and money in getting your real estate license
This is your Definitive Guide to Becoming a Real Estate Investor!
Why You Should Consider Investing in Real Estate
Before we look at the different ways you can become a real estate investor, let’s look at the top five benefits to investing in real estate.
1. Income potential
Investments in real estate provide relatively steady income. And who doesn’t want that?
Steady income gives you freedom! You don’t have to remain tethered to a job you hate if you have steady investment income. You’re free to pursue a career or projects you’re passionate about.
This is especially important during the economy’s inevitable slow periods. If your day job is susceptible to a down market, it’s a huge comfort to know that you’ll still have income coming in every month from your real estate investments!
2. Appreciation potential
Then there’s the fact that real estate always increases in value over time. Real estate is a finite resource; there’s only so much of it, so it will naturally grow in value. As Mark Twain once said, “Buy land; they aren’t making it anymore.”
This appreciation means you’ll always have options in the future if you buy real estate now. If you hold on to the investment long enough, you’ll be able to sell the real estate for far more than you paid for it. And with that profit, you can invest in bigger deals, support a more expensive lifestyle, or fund a passion project!
3. Tax benefits
Real estate is also one of the most tax-advantaged investments available. The US government wants people to buy real estate because it’s good for the economy as a whole. So they’ll give you tax breaks (like mortgage interest and maintenance deductions) to become a real estate investor.
4. Inexpensive debt leveraging
Debt leveraging is where real estate investing gets really exciting! You don’t have to have $200,000 in cash to invest in a $200,000 property. You can use smart debt to finance 80% of your investment (even more if you and your mortgage lender get creative!).
And you don’t have to pay a fortune to borrow that money. With good credit, you can still get a home loan at around 5% interest. This means real estate investing isn’t just for the wealthy. You can afford to become a real estate investor with this low cost of borrowing.
5. A built-in retirement plan
If you decide to buy and hold a few properties over the long-term, you’ll never need to worry about retirement. Over time, your tenants will pay down your low-interest real estate debt, so your only expenses will be taxes, insurance, and maintenance. And the rest of the ongoing rent checks go directly toward funding your retirement in perpetuity.
Even without your salary, you’ll never be without an income.
8 Different Ways to Invest in Real Estate
Let’s dig into eight different ways you can become a real estate investor.
Buy and Hold
“Buy and Hold” is the classic way to invest in real estate. You buy a property, and you hold it for the foreseeable future, renting or leasing it out to generate income.
This buy-and-hold model accounts for six out of our eight ways to invest in real estate. But each of these six gets a unique spin, as you’ll see...
1. Single Family Homes
Investing in a single-family rental property (home or condo) is a great starting point for anyone who wants to be a real estate investor. You simply buy a property and find a good tenant. Nothing to it!
The benefits of buying and holding single family homes The upfront investment may take a little saving, but it’s manageable. Income is relatively passive once your tenants get moved in. You can potentially renew one lease for years if you have good tenants. The only real work required is to handle a couple of routine maintenance calls per year.
The challenges of buying and holding single family homes If you only own one property, and your tenants move out, you don’t have any income to cover the monthly costs of ownership until you get new tenants moved in. There is always some risk that your tenants may miss payments, skip out on the lease, or damage the property. The security deposit offers some protection, and (worst case scenario) you always have the option to sue the tenant for monetary and property damages if necessary.
How to get started in single family home investing 1. Talk to a lender about your financing options so you’ll know how much money you’ll need to invest out-of-pocket. 1. When you have the money, go back to your lender to get pre-approved for a loan. This will show sellers that you’re a serious buyer and will give your offer more weight. 1. Start shopping for properties that can earn enough in rent to more-than-cover your mortgage, insurance, taxes, and maintenance. 1. Buy your investment property and find yourself some good tenants.
2. Vacation Rentals
If your investment property is in a prime travel spot, you might want to consider making it a shorter-term vacation rental. It’s like being a mini-hotelier.
Think Airbnb. You furnish the property, down to the utensils, linens, and even toiletries. You rent out the space for as little as one night at a time (but often for weeks or even a couple months). And you, or your property manager, provide your guests with a unique place to stay while they’re traveling.
The benefits of buying and holding vacation rentals You can charge a higher nightly rate on vacation rentals than on long-term rentals. You’ll be able to use the property yourself as a vacation home when it’s not rented out.
The challenges of buying and holding vacation rentals You either need to be actively involved in managing reservations and check-ins/check-outs or hire a property manager to handle it. You’ll typically see more wear-and-tear from short-stay guests than long-term tenants.
How to get started in vacation rental investing 1. Start the same way you would with a single family home. 1. Once you’ve purchased the property, furnish and decorate it to match your target market’s expectations. 1. List the rental on sites like Airbnb, who can handle reservations, payments, and reviews for you for a small commission.
3. Multi-family Residential
Multi-family residential could be a 2-unit duplex, a 400-unit luxury apartment complex, or anything in between.
It’s not much different from owning a single-family rental property. You simply have more units to manage.
The benefits of buying and holding multi-family residential You could live in one of the units yourself. This is an amazing opportunity to have the rent from the other units cover the cost of your unit. You’ll essentially be able to live rent-free for as long as you like. You’d also be able to keep an eye on the building living onsite. Multiple tenants mean instant diversification. If one tenant moves out, you still have the other units offsetting your costs until you can get a new tenant moved in.
The challenges of buying and holding multi-family residential The upfront investment is typically higher because the cost of a multi-family property is typically higher than a single-family property. More tenants mean more time spent managing them. Or you could hire a property manager to manage them for you.
How to get started in multi-family investing The process to get started is the same as with a single family home, but instead of finding one good tenant, you’ll find a good tenant for each unit.
Now we’re venturing into real estate investments most people never even consider. But you should!
Commercial real estate is a broad category covering properties like: Retail storefronts, Shopping centers, Restaurants, and Office buildings
Instead of renting to individuals (as is almost always the case with residential property), you typically rent commercial property to companies, large and small. Commercial investing is a slightly more sophisticated method of buy-and-hold investing.
The benefits of buying and holding commercial property Leases are usually long. Often a 3-year minimum, and as long as 30-years in some cases. If your commercial property has multiple units, you benefit from that instant income diversification.
The challenges of buying and holding commercial property May require a substantial initial investment. Commercial spaces can sit vacant for months, waiting for the right tenant.
How to get started in commercial investing The specifics vary greatly depending on the type of commercial property you’re looking to buy. But the basic starting structure is the same: get approved for the loan, close the deal, find tenants.
Like commercial property investing, industrial property investing covers a number of property types. Industrial property types you might consider investing in are: Warehouses, Industrial office space, Manufacturing space, or Self-storage
Industrial investments are generally low-maintenance. There is more emphasis on functionality and less emphasis on high-maintenance aesthetics.
The benefits of buying and holding industrial property The leases are generally long and the income is steady. Industrial properties typically require little maintenance.
The challenges of buying and holding industrial property May require a substantial initial investment. Most industrial spaces are single-tenant, so having the tenant vacate could leave you without investment income while you find the next tenant. And it can be even more difficult finding tenants for industrial spaces than for commercial spaces.
How to get started in industrial investing Again, the specifics vary depending on the type of property you buy. But the basic starting structure remains: get approved for the loan, close the deal, find tenants.
6. Vacant Land
Vacant land is only as valuable as what can be done with it. Purchasing acres and acres in Middle-of-Nowhere, Wyoming won’t do you much good. But purchasing some land outside of rapidly expanding metro areas like Austin, TX could pay off big in the long-term.
The tried-and-true method for making money in vacant land is to buy where you expect people to expand, and sell to developers once the expansion reaches your land.
You can potentially make money during the waiting period by erecting billboards and selling ad space if the land is located along a well-traveled road.
If the land is fertile, you could lease the land to local farmers.
The benefits of buying and holding land The initial investment may be small, and the potential return on investment is incredible when you can buy acres for pennies and sell them for thousands. In many cases, there is zero maintenance required.
The challenges of buying and holding land If there is nothing on the land, there’s nothing producing an ongoing cash flow. Land isn’t quite as interesting as some of the other real estate investment opportunities.
How to get started in land investing Find some vacant land with potential and buy it. Now you’re a real estate investor!
Buy and Flip
All the property classes we just covered as buy-and-hold options can also be bought with the intention of flipping them. You buy the property, improve it, and sell it within a matter of weeks or months.
7. Buy and flip any property type
You should give flipping some thought before you jump in. Improving the property with a two-month renovation will naturally increase the resale value, but will it increase the resale value enough for you to recoup all your costs of materials and labor plus your closing costs and your mortgage, tax, and insurance costs during the few months you own the property? And still turn a profit large enough to make the project worth the effort?
And are you sure you’ll be able to sell immediately? Having a flip sit on the market for months while you make the mortgage payments is not a position any flipper wants to be in.
The trick to flipping is timing the market. This is best done in a super-hot market where property values are increasing by the day. You want the property to grow in value during the short period in which you own the property, even without your improvements. That’s how you can be confident that you’ll be able to sell for more than the purchase price plus expenses.
The benefits of buying and flipping There’s something inherently satisfying about taking a property from nothing to something special. Flipping has the potential to make you a substantial profit in a short period of time.
The challenges of buying and flipping You’ll either be doing all the work yourself or relying on contractors to complete the work on time and on budget. Flipping is riskier than buying and holding because if you get the timing of the market wrong, you could lose money on the deal.
How to start buying and flipping 1. Do your market research. Short-term market trends are crucial to success and failure in flipping. Make sure you know exactly what your market is doing, and you are confident that values will continue to climb for the time it will take you to buy, renovate, and sell a property. 1. Do your construction research. Know where you can get supplies, how much the flip will cost, and how long it will take. 1. Factor closing costs (on both the purchase and sale of the property) into your potential profit calculations. 1. See if an experienced flipper would be willing to partner with you on a deal. In exchange for showing you the ropes, they get a share in the profit.
A common excuse for not investing in real estate is the initial down payment required to purchase a property. That down payment is a sound investment, but it’s also a lot of money to most people.
Well, you can’t use that as an excuse any longer. Because we live in the age of crowdfunding!
Crowdfunding allows you to pool your initial investment with other investors. Everyone puts their money into the deal and becomes a part-owner in the real estate project. This could be a buy-and-hold property, a flip, or even a fancy development project.
This isn’t a new idea. “Real Estate Investment Groups” have been around forever as a way to help investors with little capital get started in real estate investing. But today’s crowdfunding systems make the process easier than ever.
Today’s systems allow people from all over the world to pool small amounts of money to invest in a property together. And you don’t have to be an accredited investor to participate as you did in the traditional real estate investment groups. Crowdfunding is normal people, like you, sharing in the risk and the reward of real estate investing.
The benefits of crowdfunding You can become a real estate investor today, with as little as $500. You don’t have to deal with any maintenance or tenant issues.
The challenges of crowdfunding You don’t have as much control as you do when you own the property alone. If the project is a flip or a development, you have to really trust the project’s managing team since individual investors are not likely to have any say in how the project is managed.
How to start crowdfunding 1. Check out real estate crowdfunding sites like RealtyMogul, iFunding, or Fundrise. 1. Get familiar with the types of deals available to investors and read the fine print to make sure you understand the terms of your investment. 1. Create your account, pick your project, and send in your money. 1. Congratulate yourself on becoming a real estate investor, and wait for your payday!
Do I Need My Real Estate License to Become a Real Estate Investor
Having your real estate license isn’t legally required for real estate investors. But it will save you a whole lot of time and a whole lot of hassle! Here’s why:
You’ll have the knowledge of a licensed real estate pro
As a licensed real estate agent, you’ll know what you’re doing. The education you receive in your pre-licensure coursework will be invaluable as you navigate through your real estate investment transactions. You’ll understand all the legal jargon and will know exactly what to look for in the contracts to make sure you’re getting the best deal possible.
As Armstrong Williams said, “One thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values, and the least risk.”
You’ll save a small fortune in commission fees
With your real estate license, you’ll be able to handle your own investment acquisitions, sales, and leases. So you won’t have to pay another licensed real estate agent to facilitate your transactions. Think about this for a moment.
Let’s say you’re flipping a house in Austin, TX. You can buy the house at $300,000, renovate, and sell at $400,000 (to use some nice, round numbers). You’ll be your own agent for the purchase, so the seller will pay you 3% of the $300,000 purchase price as the buyers’ agent. That’s basically $9,000 you can add to your renovation budget or put toward closing costs (minus any broker fee split you have in place). Then when you sell at $400,000, you’re your own qualified agent again, so you don’t have to pay someone the 3% listing agent commission. That’s $12,000 saved on this end of the deal.
So on one flip, you can come out $21,000 ahead by having your real estate license. That makes the $500 licensure classes (plus the small license application and processing fees) seem like nothing!
You’ll have access to all the resources of the pros
You’ll also be getting top-notch service on your self-service real estate deals because you’ll have access to all the resources of the licensed real estate pros. Access to tenant screening programs so you can find the best possible renters, all the forms you need to craft a solid leasing agreement, and all the market data you can find to make sure you’re making wise investments. Your real estate license gets you to access all of it.
You’ll be part of a network that will further your success
But possibly the biggest benefit of getting your real estate license as a real estate investor is the network you’ll gain access to. Your real estate license will allow you to join professional organizations where you can network with other industry insiders. And your new network of connections can alert you to potential deals before they even hit the market!
Plus, as you complete more of your own investment deals, you’ll gain a reputation as the local investor/real estate agent. This reputation could bring you, like-minded investors, who are willing to pay you to help them navigate an investment deal, or who are looking to partner with you on a deal
Even if you decide crowdfunding is the best option for you to become a real estate investor, you can still put your license to use. The crowdfunded project will need someone to facilitate the transaction. Why not have them hire you to do it?
If you’re serious about making money as a real estate investor, strongly consider getting your real estate license. It’s a relatively small investment that will pay off for decades to come!