Updated March 7, 2022
If you're looking for a sustainable way to diversify your investment portfolio, real estate investing could be a great place to start. Not sure how to get your start in this industry? You've come to the right place. Even if you've already started learning about real estate investment through some of the best real estate investing books, today we'll review the basics you need to know if you want to learn how to start investing in real estate. Let's get started.
What Is Real Estate Investing?
Before we get into some more technical tips, it's important to understand the absolute basics of investing in real estate. In layman's terms, real estate investing is the purchase, ownership, lease, or sale of land and any structures on it for the purpose of earning money. For most people, residential real estate is a great place to start. Residential real estate consists of single-family homes, multi-family homes, townhouses, and condominiums.
In terms of revenue, there are three main ways to make money on your real estate investments: interest from loans, appreciation, and rent. While renting out properties is a popular option to collect dividends, it's not the only one. Appreciation and interest are excellent ways to make money and build wealth with real estate investments. Whether you operate rental properties or invest in fix-and-flip properties, buying and selling properties is an active form of real estate investing and requires time, dedication, and involvement. Make sure you keep this in mind as you begin your real estate investment journey.
Most investors buy a property with the goal of producing positive cash flow—earning more income each month than they spend on expenses. Here's what you need to know to find your ideal real estate investing strategy and get started!
Investors Can Benefit From Different Types of Real Estate Investments
As with any type of investment, it's key to understand the diverse ways in which you can earn income. Real estate investment strategies fall into two groups: active and passive investments. However, more than that, there are different ways to get into real estate investing. So what are your options to build a real estate portfolio?
House flipping (or fix-and-flip investing) is a fairly common form of real estate investing. Flipping houses involves purchasing property ideally for below market price, spending money to renovate it, and then selling it to another buyer. In most cases, you'll want to find a property that's looking a little bit worse for wear. This is called distressed property, and it's typically a home that has been abandoned or neglected for a number of years. For example, it might have been foreclosed upon a few years ago and has sat vacant ever since. Regardless, these properties often require substantial repairs before they're ready to be resold.
That's where you come in as a real estate investor. Investors make money from this type of investment by understanding the true value of a property once all of the necessary repairs have been completed. Your profit will be the new selling price minus purchase and repair costs.
Buy and Hold (or Rental Property Investing)
The buy and hold method (or rental property investing) is perhaps the most popular method of real estate investment. With this strategy, an investor will buy a property, renovate it, and then rent it out for an extended period of time. In terms of simplicity, real estate investment doesn't get much simpler than this.
One of the biggest advantages of buy and hold is that as you rent the property out, you'll be able to pay down the mortgage every month. This decreases your principal balance and increases your equity as time goes on. Some investors choose to sell once they've created enough income with their current property to purchase a new one. Others may keep renting their property for years to come as a form of income.
Finally, we have wholesaling. Wholesaling involves an investor working as a middleman between someone who wants to sell a property and someone who wants to buy property. This is different than what real estate agents do because an investor will technically own the property they're seeking to sell.
There are three types of property that typically work well in a wholesaling strategy: rural land, residential properties, and commercial properties. In most cases, an investor will approach a seller and enter into a contract to purchase their property. Once a contract has been obtained, the investor will resell the property to a buyer for a higher price.
Finding Your First Property As a Real Estate Investor
When you're ready to find your first property, it's a good idea to explore a few different strategies. Fortunately, there are plenty of ways to find an investment property. First, you'll need to decide what kind of property you're looking for.
Types of Investment Properties for Real Estate Investors
There are three basic real estate investment properties types: turnkey, fixer, and value-add. Turnkey properties have already been renovated and are ready to rent out. While these properties can be less profitable, they are excellent opportunities to establish a steady cash flow.
Fixer properties are in less-than-ideal shape and typically in need of improvements. These properties are great to seek out if you're ready to get into flipping and reselling properties. Finally, a value-add property is a fixer property with even more opportunities to add value. This value might take the form of converting an existing space to add square footage or functionality.
Now, it's time to decide how you'll find your first property.
Real Estate Agents
The first and most obvious way to find an investment property, especially if you're interested in residential properties, is by working with a real estate agent. Working with a real estate agent comes with the added benefit of access to their knowledge of your area and their multiple listing service (MLS), which lists properties for sale in the area. This is a tool that only licensed realtors have access to, which means you won't find this kind of insider information anywhere else—unless you take advantage of a resource like Privy or partner with real estate agents in each market where you invest!
Auctions are another great way to find potential deals on investment properties. Tax lien auctions, government auctions, and foreclosure auctions are all excellent places to start. That said, it's essential to make sure you have the ability to pay for a winning bid shortly after the auction is over. Also, if you're relying on financing options for your initial purchase, an auction might not be the best place to search for your first property.
Sometimes, other investors will be the best source for you to purchase your first investment property. Wholesalers, as we covered earlier, are looking for prospective buyers for all kinds of properties. If you share what type of property you're looking for, they may be able to either point you in the direction of another wholesaler or show you one of their properties to build your real estate investing portfolio.
Don't Wait to Diversify Your Real Estate Investing Portfolio
Real estate investment may seem overwhelming at first. However, with a good handle on the basics of how to get into real estate investing and a great tool to find the best real estate deals, real estate investors can get their start in no time. For more insights into finding your ideal investment properties, reach out to our team and learn more about the Privy Advantage!
Learn more about real estate investing when downloading our free resource, “How to Invest In Real Estate: A Guide!”