Real Estate Investing for Beginners: The Complete Guide

Real estate investing is a powerful way to grow wealth. It always has one significant benefit over other investments tangibility!

Whether you purchase a property outright or invest through REITs, real estate is a tangible investment that can be seen and touched. Moreover, a tangible investment rarely depreciates to a value of $0. As a result, real estate investments are considered one of the safest.

However, for most people, especially beginners, the mere thought of real estate investing can be overwhelming. 

Why Real Estate Investing is a Smart Choice

Real estate investing is smart because it can deliver tax advantages, help build equity, and diversify your investment portfolio. You can calculate property taxes online to better understand potential expenses and returns on your investment. Real estate investments are also great for building and leveraging equity. Over time, real estate appreciates, organically building equity on top of any loan repayments. Investors can leverage existing equity to obtain new financing for other investments.

Real estate investing can also diversify your investment portfolio. Stocks are considered risky, but real estate has long been a stable investment and usually performs well during market shocks. When the economy grows, real estate demand usually rises, allowing real estate investors to benefit from heightened appreciation, housing demand, and other financial benefits. Real estate investing also offers long-term stability and passive income for rental owners.

With so many real estate investment options available, there is much flexibility, especially when you follow tried and true real estate investing tips for beginners.

How to Get Started with Real Estate Investing for Beginners

If you are a beginner looking to get started with real estate investing, you’ll want to take the following steps:

1. Ensure Financial Readiness: To invest in real estate, you must assess your finances. Improve your credit score and debt-to-income ratio to secure the best loan terms possible. Real estate investments are more achievable when you have enough money to cover your down payment, closing costs, and unforeseen repairs or renovations.
2. Conduct Market Research: Successful real estate investors know that market research is always necessary but is especially important when making your first real estate investment. Most experts suggest that beginners invest locally. If investing locally isn’t an option, consider places you visit regularly or areas with growth and opportunity. Consider economic conditions, local regulations related to renting or flipping, and the most sought-after property.
3. Select Your Target Property: It is important to consider the type of property you want to invest in. Your choice will vary depending on the location or region where you choose to invest. For example, a condo unit may be your best choice in a beach town, while a studio apartment may be an appropriate investment in a big city. Consider your target property's square footage and bedroom and bathroom count. Compare options within the market to find a property that suits your investment goals. Check property history online to gain insights into past ownership and value trends.
4. Finance Your Investment: Credit unions, community banks, and national lending institutions offer mortgage products designed to suit various needs. Each product and institution will have benefits and drawbacks. National lenders offer reasonable rates and a robust selection of products, while community banks are recognized for personalized service. Credit unions often offer special rates to members, which are frequently more competitive than rates from other lenders. 
5. Manage Your Investment: Beginner real estate investors often opt to manage their new investment property independently. Property management tools are available to simplify tasks like lease creation and rent collection. These tools are especially helpful when your investment property is far from your home.

What Strategies Should You Take to Start Investing in Real Estate?

There are several common real estate investing strategies for beginners. The right one will depend on your needs, goals, and risk tolerance. Thankfully, plenty of strategies are available; some even allow real estate investing for beginners with no money.

Here are some of the common real estate investing strategies for beginners:

Flip

Flipping involves purchasing a cheap house, renovating or remodeling it, and selling it for a profit. This strategy is so popular that countless popular television shows are dedicated to house flipping. Property flipping is an ideal investment strategy for investors who are handy or have a trusted contractor available. It requires hard work and can become a full-time job, at least during the renovation process, and is not an investment that delivers passive income. However, when done right, house flipping can be quite lucrative.

Buy and Hold

This strategy is the most common among real estate investors. The idea is to purchase property in a strong or growing market and then make it available for rent. Once the property value has increased, you can get a return on your investment by selling it for a profit. In the meantime, you’ll be able to bring in a steady income stream.

Real Estate Investment Trust (REIT)

REITs are like mutual funds because they are publicly traded, offer more liquidity, and offer ownership in the form of shares. REITs are run by companies that invest in, own, and operate real estate. For example, buying property in California through a REIT allows investors to benefit from the state’s booming real estate market spanning sectors like tech hubs, residential developments, and commercial spaces without the challenges of direct property management. REITs offer beginner real estate investors the opportunity to receive passive income through dividends without the hassles and headaches associated with buying and managing properties.

Financing Options for Real Estate Investing

If you want to get started on this path, you will need money. However, that doesn't mean you need a lot of cash. Investors use several financing options for real estate investing that don’t require loads of cash. Since there are so many investment and savings options available for real estate investors, it is important to consult a professional financial advisor before moving forward.

Here are some financing options:

• All cash: It is not uncommon for an investor to pay all cash for their investment property. While an all-cash purchase is ideal because it reduces unforeseen complications, many investors, including most beginner real estate investors, cannot choose this option.
• Conventional loans: While some investors love an all-cash deal, financing an investment property can deliver significantly higher returns. Investors often finance property purchases through a conventional loan with a cash down payment. Home buyers commonly look to conventional mortgages because they usually have the lowest available interest rates.
• Hard money: Hard money refers to financing from an individual or private business entity for real estate investing. Though subject to change, hard money loans are primarily based on the property's value.
• Value and feature shorter terms, higher interest rates, and more loan points. Hard money loans often deliver funding within days. Hard money lenders usually don’t require income verification and credit references and do not report to credit agencies.
• Private money: A private money partnership is like a hard money loan, but the lender is typically not a professional lender. Typically, a private money lender is an individual searching for higher investment returns. Often, a private money lender is someone you have an established partnership or relationship with.
• Leveraged money: Many investors turn to home equity loans and lines of credit, leveraging the equity within their primary home to finance the purchase of their real estate investment. Most lending institutions offer different products to fit your needs, including HELOCs (home equity lines of credit) and HEIL (home equity installment loans). This choice lets you tap into the equity you might already have and is a great way for beginners to start real estate investing with no money.

How to Minimize Risks When Investing in Real Estate

While real estate investments are considered one of the safest asset classes out there, investing in real estate is not without risk.

Here are some ways to minimize risk when investing in real estate, especially for beginners.

• Invest in stable real estate markets: Regional economic factors like community profiles, population growth statistics, and employment rates can determine the stability of a particular market. For example, buying property in Colorado involves several key steps. Start by researching cities like Denver, Boulder, or Colorado Springs, known for their strong job markets and growing populations. Rental properties in a stable market like Colorado are less risky and can produce steady income. Stable markets are often characterized by consistent appreciation.
• Invest in REITs: REITs give you access to real estate investing without buying a property directly. They pool money from many investors that is then used to purchase and manage properties that generate income, like apartment complexes, office buildings, and retail malls. Because they offer inherent diversification, most REIT investments are considered low-risk. This consistent income stream from shareholder dividends through income from the property makes them a stable and predictable option.
• Consider house hacking: House hacking refers to investing in a multi-family property and living in one unit while renting the others. This low-risk strategy generates income that can be used to help make monthly mortgage payments, thereby offsetting housing costs. House hacking is especially appealing to beginner real estate investors because it is often one of the most manageable options. Investors can benefit from the property’s appreciation and specific tax deductions.
• Consider a turn-key property: Turn-key properties are ready to rent with few or no renovations required. Turn-key properties often come with lower upfront costs or surprise expenses associated with renovating a property. Most importantly, they’re usually move-in ready, so you can immediately advertise it for rent. This makes the investment strategy relatively straightforward and low-risk. 

How to Avoid Common Mistakes as a Beginner in Real Estate Investing

While there is no clear single path to take when real estate investing for beginners, there are common mistakes that every new investor should be aware of and avoid.

• Chart your own course: Beginners are often tempted to follow others when it comes to investing in real estate. However, relying on speculation is one of the biggest mistakes that a newcomer can make. Do your own research, use hard data, and follow tried and true strategies before making investment decisions.
• Never buy real estate at market value: When you purchase real estate at market value, you leave little room for profit. The best real estate investors are successful because they wait for great deals or buy distressed properties below the market value.
• Keep your emotions at bay: It is common for first-time real estate investors to become emotionally invested in a potential first deal. For success, however, keeping a level head and taking a business-like approach to the entire process is important.
• Do your due diligence: Doing your due diligence is among the most critical real estate investing tips for beginners. Be sure to be meticulous about crunching numbers. This includes estimating repair costs, understanding market demands, and forecasting cash flow.
• Have multiple exit strategies: Real estate investors must always be prepared in case an investment does not go as planned. For example, if you’re planning a house flip and something goes wrong, make sure you have a backup plan, like a buy-and-hold strategy, in place.
• Going it alone: Although investing in real estate is deeply personal, you need to be a “people person” to succeed. Real estate investors rely on strong networks to find their next deal, create new partnerships, and obtain expert advice.