How To Get Started In Real Estate Investing: 7 Easy Steps

Real estate has been one of the greatest tools to build wealth for generations. Andrew Carnegie famously once said that 90% of all millionaires become so through owning real estate, and that still proved to be the case today. Some reasons why real estate investing is so popular are:

• Price appreciation – Real estate prices have mostly kept pace with inflation over the long term (Source: Compound Advisors)
• Demand – As land is limited while the population continues to grow, demand for real estate should continue to increase.
• Diversification – Real estate is an asset class with a low correlation with the stock market.
• Tax benefits – From mortgage interest deductions to deferral of capital gains, wealthy people love real estate for its tax benefits.
• Income
• Power of leverage to enhance returns
• Inflation

If you are looking to get started in real estate investing, this article will address 7 steps to help you get in the game.

1. Assess Your Financial Situation

The first thing to do when you want to get started in real estate investing is to assess your financial situation. This is vital as real estate investing typically involves a huge amount of capital commitment and can financially ruin you if you do not have a solid foundation. The key aspects to assess are:

• Budget – Do you have a good understanding of what your household budget looks like? Can you weather extra mortgage payments and potential operating expenses?
• Savings – It is important to be saving for your other goals as well. Be sure to have at least an emergency fund for 3-6 months of living expenses.
• Debt – How is your debt situation? Try to pay off all high-interest bad debt like credit card debt, payday loans, etc. before investing. Aim to have a debt-to-income ratio of less than 36%.
• Credit – A big part of qualifying for a good, low-interest mortgage is having good credit. Read more on how to increase your credit score here.
• Protection – Before you commit too much of your budget to real estate investing, make sure you have sufficient life insurance so that you, your family, and your investments are protected.

Having a solid understanding of where you are can inform you on the next steps you can take to better position yourself in real estate investing.

Note: Read more about assessing your financial situation here.

2. Identify Your Real Estate Investment Goals

Your investment goals will greatly impact how you invest in real estate and will largely depend on 3 factors:

• Risk tolerance: If you have a higher risk tolerance, you may be able to deploy a more aggressive real estate strategy and perhaps focus on riskier real estate investments and strategies for potentially higher rewards.
• Time horizon: If you have a longer time horizon, how you invest in real estate would be different as well as you will probably be looking for more stable buy-and-hold strategies than flipping for a quick buck.
  • Capability: Your capability will impact your investment goals in terms of:
  • Financial – How much do you have to invest? If you only have $10,000 available to invest, your investment goals may be more conservative
  • Time – How much time do you want to commit to real estate investing. If you do not have much time, your investment goals may be a more hands-off approach to real estate investing like REITs.

3. Choose Your Real Estate Investing Strategy

Once you’ve identified your real estate investment goals, it is time to identify the real estate investment strategy that can help you achieve your goal.

Here are some of the most popular real estate strategies for beginners:

a) House Hacking

Best for: Beginners starting out in real estate building out their foundations.

House hacking is essentially renting out space in your home while you’re living in it. For example, if your home has an extra room, basement, or even guest house that is vacant, you can rent out that space for income which lowers your housing costs. If what you collect in rent or income exceeds your mortgage, you are essentially living in the house for free, hence “house hacking”.

While you’re saving up money and collecting rent, you will also *hopefully* learn how to be a landlord which will be beneficial to your real estate investing business long-term. Some popular house hacking ideas are:

• Getting housemates for your single-family home
• Multifamily homes like duplex, triplex, and quadplex
• Short-term rentals like Airbnb and Vrbo
• Renting out space for storage

b) Buy-and-Hold Rentals

Best for: New real estate investors with sufficient capital who want to generate income and build their real estate portfolio.

One of the most common and proven real estate strategies is to buy a property and rent it out while holding on to it for a long time. This strategy is great as investors can receive rental income consistently and participate in wealth building as the property grows in value over time.

If you are looking to buy a rental property, be sure to consider the following:

• Location – Is the property easily accessible and in a location with high demand?
• Neighborhood – What is the median home value, income, percent employed, percent of owner-occupied homes, and average school rating? (Source: Roofstock)
• Rental income trends – How many renters are in that area? Are rental prices trending up?
• Budget – After accounting for operating and financing costs, will you make a profit or loss?

Residential homes are great for buy-and-hold rentals due to their simplicity but commercial properties like office spaces are also a great option if you have more capital or would like a tougher challenge.

c) Short-Term Rentals

Best for: Those wanting to generate income on real estate without a long-term lease commitment.

With the rise of Airbnb and even Vrbo, short-term rentals have become pretty popular in recent years. Short-term rentals are popular for vacation homes but can also be for renters who need accommodations for less than 12 months.

Short-term rentals can generate a lot of income when there is high demand but can be unpredictable during times of economic duress (ie. the pandemic). However, if you do have a vacation home that is vacant for most of the year, renting it out and generating some income is not a bad idea.

d) House Flipping

Best for: Value hunting investors that like to take on a transformation project for potential short-term profits.

If you love HGTV shows like Fixer Upper and have a knack for home renovations, house flipping is a great way to generate big profits in a short period of time. House flipping is essentially buying a property at a low price, fixing up the property, then selling it at a higher price – all in a short period of time (ideally 6 months or less)

While this concept sounds simple for a quick buck, the execution of it can be challenging for beginners as the process of finding undervalued properties that are actually profitable after accounting for time and renovations is not easy. Make sure to do your due diligence and know what you’re getting into.

e) Real Estate Wholesaling

Best for: New investors that do not have a lot of capital but have a good network of investors and marketing skills.

Real estate wholesaling in 5 steps:

1. Identify undervalued properties that need work done but can be bought for cheap and resold at a higher price.
2. Get the house under contract with the owner to buy the property at a set amount
3. Find a buyer for the property (ideally you’ll have a buyer’s list that you can market to quickly)
4. Assign the contract to the buyer at a higher price than with the seller
5. The real estate wholesaler pockets the difference, while the buyer can fix and flip the property for a profit as well

As you can see from the steps above, real estate wholesaling requires little to no capital to get started and can generate a lot of profit if you’re able to reassign contracts consistently. However, be sure to do your due diligence properly before getting into a contract as there is always a risk of not being able to find a buyer.

f) BRRRR

Best for: Real estate investors who want to build equity fast while adopting a long-term strategy to generate income.

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. How it works:

1. Buy an undervalued, distressed property.
2. Rehab and renovate the property to increase its value.
3. Rent the newly renovated property to tenants to collect rental income.
4. As the newly renovated home’s value has likely increased, you can do a cash-out refinance to take out a bigger mortgage on the new home value. The bigger mortgage is used to pay off the older, smaller mortgage and you can pocket the difference.
5. Repeat the whole process with the funds you received from the cash-out refinance for a downpayment.

BRRRR is a popular strategy as it combines a few real estate strategies that will help maximize investors’ return on investment and generate income for the long-term as well. It also is a repeatable process as you are able to access a property’s equity and use the cash as a downpayment to buy the next one.

Bigger Pockets has a really comprehensive BRRRR guide if you want to learn more.

g) Real Estate Investment Trust (REIT)

Best for: Those who want a more hands-off approach to real estate investing by investing in a company that will manage the investments.

REITs, or real estate investment trusts are companies that own and operate income-producing real estate or similar assets. Similar to how a mutual fund works, investors can buy a share of a REIT to gain exposure to properties owned by the REIT.

REITs are a popular way to get started in real estate investing as they are relatively liquid, pay good dividends, and do not require a large amount of capital to purchase. If you have a brokerage account like Robinhood or Webull, you will have access to more than 200 REITs that are publicly traded. There are also a growing number of online platforms like Fundrise and Diversifyfund that allows investors to invest in non-publicly traded REITs.

h) Crowdfunding

Best for: Beginners who want more autonomy in their real estate investments with professional management.

Crowdfunding sounds like what it is – people pooling together funds to buy something. In real estate, crowdfunding is where investors pool their money together to purchase an investment. This can lower everyone’s initial capital which will open more opportunities to diversify their real estate portfolio.

Real estate crowdfunding differs from REITs as REIT investments are picked and managed entirely by the company, and investors are buying a piece of that company and not the real estate investments it owns.

In the past, real estate crowdfunding was exclusive for accredited investors (wealthy folks) but online platforms like Fundrise and DiversyFund now allow non-accredited investors to invest with low-fees and low minimum capital requirements.

4. Structure Your Real Estate Business

If you are serious about getting into real estate investing, you need to treat it like a business. As your real estate portfolio and investments grow, having the right legal and operational structure for your business at the start will set a good foundation to scale and for tax and liability purposes.

One of the best business structures for beginners is a Limited Liability Corporation (LLC). LLCs are great because they:

• Separate your business and personal assets to protect your personal assets. eg. if your business goes bankrupt, your personal assets are not touched.
• Pass-through profits and losses to business owners to avoid double taxation
• Can have multiple members if you want to bring on partners
• Can have multiple LLCs for different properties to spread out risk
• Easy to set up separate business accounts for bank accounts, credit cards, and mailing addresses.

Setting up an LLC is easy and inexpensive. There are even online options like IncFile where you can set up an LLC in a matter of minutes.

5. Assemble Your Dream Team

If you’re starting out in real estate investing, you’ll need a team of professionals who knows what they’re doing to help you be successful. Building strong relationships with your professional team will help ease the investing process in operations and financing. Your team should include:

• Real estate agent to help you find good deals and be your advocate
• Lenders that can provide financing with favorable terms
• An accountant that can help prepare your taxes and ensure that you are maximizing any tax benefits legally
• Real estate attorney to help structure your business and deals
• Insurance agent
• Property manager
• Contractor
• Maintenance and repair professionals
• Mentors

It is important to screen your team thoroughly before deciding to work with them. Read reviews, ask their former clients, research their website, and speak to them and see if they align with your expectations and goals. Having a team that you can trust in real estate investing is crucial to being successful as:

• Your network can increase exposure to potential opportunities.
• They have the knowledge and resources to help you with real estate investing decisions.
• They have your best interests in mind.

6. Figure Out Financing

Before you purchase a property, you need to know how are you going to pay for it. This is typically done in a combination of one or more of the following ways:

• Cash from your own savings
• Cash from investors
• Debt through private lenders like banks or hard money lenders
• Seller financing
• Home Equity Line of Credit (HELOC)

The traditional way of buying a property is by putting a 20% downpayment and financing the rest with a mortgage. However, how you choose to finance your property really depends on your current capital capacity, financing availability, and your goals and objectives. For example, if you’re buying a residential property, you may want to get pre-approved by a lender for a mortgage; if you’re looking to buy something more extravagant like an apartment building, you may want to get investors to help fund the deal.

To learn more about financing your first property, read this guide on BiggerPockets.

7. Start Looking For Deals!

Once you know the investment strategy to embark on and have your financing lined up, it is time to start looking for deals that’ll fit your investment criteria. Your investment criteria for real estate investing should include:

• Budget – How much you can afford?
• Strategy – Find properties that align with your goals and real estate investing strategy
• Location – Where do you want to invest in? It is recommended to start investing in your local area first as you already know the market.
• Profitability – Run the numbers through an investment property calculator and see whether it achieves your target. Some metrics that investors use to evaluate real estate investments are:
  • Net operating income (NOI) – How much you are making after accounting for operating expenses (excluding mortgage).
  • Cap rate – NOI divided by asset value. This shows you the rate of return on a property based on its operating income.
  • Internal rate of return – The expected compounded rate of return of a property based on its cash flow.
  • Cash-on-cash return – How much you’re making on your cash investment.

So how does one find these deals? Here are a few ways:

• MLS with the help of your real estate agent
• Finding deals at the courthouse, eg. foreclosures, and probates
• Sending direct mail to leads
• Driving around your area of interest to see if there are any vacant or distressed properties.
• Wholesalers
• Facebook groups
• Ask property owners who recently served eviction notices
• Craiglist
• Telling your friends and family
• Ads on newspapers, radio, social media, etc.

Conclusion

If you made it this far, you should have some idea of how to get started in real estate investing. Your next step would be to plan and execute! Try not to spend too much time finding the perfect deal as they don’t often exist. Taking action and actually being in the process would be the best way to learn. Take advantage of real estate forums like BiggerPockets if you want to learn more and ask questions!