A Guide to Becoming a Real Estate Investor
In 2021 alone, Americans plunked down their hard-earned cash to buy over 6 million existing homes. The majority of those people bought a house that they planned on living in. For a small percentage of the buyers, though, they were investing in real estate.
While a relatively common strategy among the wealthy, buying real estate has gained ground as an investing strategy for the middle class in recent years. Wondering how one goes about becoming a real estate investor? You can learn more about what you must do in our guide.
Understand the Main Investing Strategies
People toss around the phrase “real estate investing” like it only means one thing. In reality, there are around five primary investing strategies for real estate. Let’s dig into them.
Of all the investing strategies, this is probably the most recognizable one. In this approach, you buy a house or a multi-family unit. Then, you rent the house or units out to tenants.
It’s a popular strategy because it generates cash flow for you every month, assuming you keep the property occupied by a tenant.
Over time, most property appreciates or grows in value. The buy-and-hold strategy depends on that value increase.
The investor picks up a property with the intention of keeping it and letting it appreciate in value. Then, when the property accumulates enough value, the owner sells.
Some investors pair this approach with the rental property approach. For example, they buy a rental property, make improvements over a 10-year period, and then cash out when the market pushes the prices up.
Many investors mix this approach with the rental approach. They get active cash flow while the property appreciates.
In a place like Chicago, for example, someone might look for 2 flats for sale to use this strategy.
The fix-and-flip strategy is another of the more recognizable ways to invest in real estate. Buyers look for properties that need work but are basically sound. They buy the property, fix the problems, and then sell it for a profit if all goes well.
This strategy demands that you can accurately estimate all of the costs for fixing the place up beforehand. However, you can always get a fix and flip loan to make sure you have enough fund to buy and fix the place up and maximize your profit.
For those who can’t necessarily put together enough money and financing to buy a property, wholesale real estate offers a different path into real estate investing.
You find a property and sign a purchase contract for it at a set price with a window of time to complete the purchase. Then, you locate an investor who wants the property and hand the contract off to them. You get a wholesale fee, which often ranges from 5 percent to 10 percent of the purchase price.
For those with money but no interest in actually managing property, crowdfunding and REITs offer an entry into real estate investment. The crowdfunding approach gathers many small investments to purchase and manage a property. Real estate investment trusts are available through public stock exchanges.
Even if you have a sense of which investment strategy you prefer, you should still make a point of getting some real estate education. You can find many online courses that will walk you through real estate investing in general or for specific investing strategies.
This kind of education will fill in a lot of gaps in your understanding of how each strategy works. The courses may also help you understand more abstract issues, such as the financing strategies you may need.
Racking up a little education will also help you understand the risks and potential benefits of each strategy. For example, you only make a small investment with crowdfunding, so you experience reduced risk. Even if the investment fails, it’s not a catastrophic loss for you. Last but not least, you should read this guide to the 1031 exchange, which could become a crucial part of your investment strategies.
Get Up to Speed on Your Local Market
Most real estate investors do their investing in their local market. Going outside your own market for most of the investing strategies involves too many complications for most investors.
That means you need a good working knowledge of your local market. For example, you need a sense of which neighborhoods are good neighborhoods and which are less savory. That can drive prices up or down in those areas.
It also helps you understand what serves as fair market value in your area. While the median home price in America might hover around $429,000, that doesn’t mean you’ll see similar prices in your town or city.
Knowing your local pricing helps you spot good deals and avoid bad ones.
Becoming a real estate investor typically requires that you have financing of some kind in place. Even if you can come up with a 20 percent or 30 percent down payment, you still need a loan for the balance of the purchase. Plus, you need money for any repairs or upgrades you plan on doing to the property.
There are four main types of financing available for real estate investment. Those four are:
- Conventional loans
- Hard money loans
- Private lenders
- Home equity
Each financing approach provides potential benefits and pitfalls. Make sure you research your financing options carefully before you commit to one.
Brush Up on Real Estate Laws
This is of particular importance for those who plan on investing in rental properties. The federal government has fair housing laws. Plus, many states put regulationss into place about things like maximum amounts for security deposits.
You don’t want a situation where you violate either federal or state housing laws.
Becoming a Real Estate Investor
While most people focus on rental properties or fix-and-flip, there are several paths to becoming a real estate investor. You can adopt a buy-and-hold strategy, a wholesale strategy, or even go the passive investment route with crowdfunding or REITs.
Before you jump in, educate yourself about the ins and outs of real estate investing. Understand your financing options. If you go the rental route, make sure you have a solid grasp of federal and local housing regulations.
Looking for more real estate tips and information? Check out the posts in our Real Estate & Home section.