When done right, real estate is a great investment. It’s an excellent hedge against inflation. Your money is secured in a tangible asset. It can appreciate in value. Rental properties create a steady income stream, with relatively passive work. There are phenomenal tax benefits. In good economic times and in bad ones, people will always need a place to live.
But like any investment type, in order to be a successful real estate investor you need the knowledge and the resources to do it right. Let’s look at the starting point: real estate investing advice for beginners.
Start With the Basics
Before jumping in, start by learning the basics. Familiarize yourself with the lingo. Read a book or two on the subject, or take a real estate investing course. Beware of gurus and get-rich-quick seminars and their unrealistic promises. These schemes often lead to other, more expensive seminars with unlikely results and are designed to make the guru money, not you.
Speak To a Local Expert or Two
You need to start somewhere. Get the ball rolling by speaking to someone who is knowledgeable in real estate investing. This person could be a property manager, a successful landlord or a real estate agent who specializes in income properties.
Offer to buy them a cup of coffee and take advantage of their experience. Ask for tips for a beginner real estate investor. Most people will be happy to share their insight and tell you what they did to become successful, and of course property managers and real estate agents have a vested interest in your successful acquisition of new rental properties.
Learn the Laws
Not exactly the fun part of becoming a landlord, but having basic understanding of local landlord-tenant laws is still important. Learn about landlord rights, tenant rights and how to manage your real estate investments legally.
Be Curious and Explore
Spend time on the MLS (or Zillow or Trulia) to familiarize yourself with your target market. Walk the neighborhoods that interest you, both in daylight and at night. Pose as a renter and walk through local properties listed for rent to get a sense of the local rental market. The more curious you are about different types of real estate investments, the better decision you will make.
Budget and Financing
What’s your budget look like? How much do you have saved for a down payment? Do you qualify for financing from a traditional lender like a bank? Sit down and work out the details. Make sure to set aside enough money for closing costs, carrying costs and any maintenance that may need to be done.
Location, Location, Location
This classic real estate rule is still true today. Location is one of the most important factors to successful real estate investing. If your area doesn’t offer good opportunities, look elsewhere.
Cash Flow Is King
When it comes to real estate investing for beginners, remember that positive cash flow is key. Only buy properties that generate positive cash flow in today’s market; don’t assume appreciation or rising rents when making your calculations. Costs include more than just your mortgage payments: from expected vacancy rates (5-20%), property management fees (8-10%, and even if you will manage it yourself still calculate this as the cost of your time), expected maintenance and repairs ($500-2,000 annually), property taxes, insurance and more. To build a large real estate portfolio, properties need to pay for themselves plus substantial monthly profits, or else you will quickly collapse under the expenses of a large repair bill or vacancy.
Flesh-Out Your Strategy
Do you want to start with a single family home? A duplex? An apartment building? What area has the potential for good return on investment? What formulas will you use to decide if the investment is a good one? Once you build a strategy, you’ll have a great tool for evaluating potential income properties. Good deals are out there, but they don’t come along ever day, so if you haven’t looked at dozens of properties in a neighborhood, be extra skeptical that a deal is as good as it looks.
Create a Plan
In real estate investing, a plan can keep you on the right track. Your real estate plan doesn’t have to be complicated. Jot down a few basic guidelines, and follow them. Decide how much you are willing to spend and which type of investment you will buy. Decide on the minimum return on investment you are willing to accept. Also try to set a goal, such as one property this year, and a second within three years.
Along with the good, also jot down which investments are not for you, at least for time being. For example, you may decide to stay away from development deals, high-risk areas or properties further than a half hour away. Once you start building your real estate portfolio, you can revisit your plan and see where it can be improved.
A good plan will keep you from buying a property for the wrong reasons or chasing deals that just aren’t sound investments.
Keep it Simple and Go for It
For beginners, real estate investing can feel overwhelming. The learning curve may seem a little steep, but you’ll get up to speed pretty quickly. Don’t get stuck at the planning stage, or analysis paralysis. Keep it simple, and go for it. Focus on finding one property and see where it leads. With a little time, patience and motivation, you can become the proud owner of your first rental property.