Have you ever wondered how you can escape the rat race and retire early with real estate?
A lot of people dream about it, but few ever take action.
We're going to go over everything you need to get started investing in real estate even if you're brand new and inexperienced.
What is Real Estate Investing?
The focus of any investment is to generate long term growth and income. Whether it be stocks or real estate, the goal doesn't change.
Real Estate Investing is the allocation of money into real estate assets for the purpose of generating wealth and passive income.
What does change is the vehicle which we are using to accomplish that goal.
What We're Going to Cover
Click on any part to jump straight to that section of this guide on real estate investing.
Why Invest in Real Estate?
Real Estate is the one investment type that has more benefits than any other type of investment. There is a really popular acronym to explain this.
Real Estate is the IDEAL Investment
Many investments provide very little income each year. They may grow in value but rarely provide monthly or quarterly returns.
Even the stock market provides a tiny percentage of dividends.
Real estate as an investment provides a comparatively huge monthly or quarterly return.
This is the first, and probably the biggest benefit of real estating
Another major advantage that real estate investors have that other investors don't have is the benefit of depreciation.
All income from real estate is able to have offsetting depreciation expenses taken off the tax returns. This is a paper loss because in reality the asset is actually appreciating.
You borrow money to buy a property investment and have someone else pay down the debt for you.
Think about it this way - you can get a decent return on your real estate investment just from cash flow, but you are also building up equity in addition to that.
Can life get any better?
In addition to the cash flow and equity pay down, your real estate asset is most likely going to appreciate.
While nothing is certain and no one can predict the future, in general, real estate that is well maintained and in decent markets will tend to appreciate and sell for more than when you purchased it.
At a minimum, it tends to rise with inflation, so your equity is always maintaining it's value at the minimum.
You can get leverage for other investments, such as with stocks, but when stocks are going down and you need it the most, they call the leverage and sell your stocks right out from under you.
In real estate, it has one of the most developed debt systems in the world. Leverage is plentiful, cheap, and easy to obtain. Additionally, it has a specified term and the debt cannot be called even if market conditions or values change.
Can Real Estate Help Me Attain Financial Freedom (Early Retirement)?
The reason why most people invest in real estate is to achieve the goal of early retirement.
They don't want to be landlords.
They don't want to fix toilets and lights.
People want the income to come in, help sustain their life, and make them less reliant on their JOB.
While you can be a landlord, do the maintenance, and earn more...
You don't have to.
The key to having real estate investing help you retire early, is to create some passive income, then snowball that extra income into even more investments.
Over time, your investments will keep growing until your passive income exceeds your monthly living expenses.
Different Ways to Invest in Real Estate
When someone mentions "real estate investing" different people have different things pop into their minds.
Some immediately think of what they see on TV with some popular house flipping shows.
Others think of REITs or real estate investing funds.
Others think of their cousin who bought property and hated it so much that he sold it for a huge loss.
...and everyone is right. That's because there are so many different ways to invest in real estate!
Investing in real estate breaks down into two rough categories, active investing and passive investing. Some investments will straddle the two worlds as well and could be categorized under one or the other depending on how you're operating.
So, let's dive into it
Active Real Estate Investing
Active real estate investing means you are going to be involved at least on a weekly or semi-weekly basis with the property. There are hundreds of different ways to invest in real estate, but we're going to wrap up a few of the big, overarching themes for people who are actively involved as real estate investors.
House flipping is the most active form of real estate investing. When people hear the term "real estate investor" they most often think of house flipping before thinking of other forms of investing.
In fact, many professionals in the field don't really consider house flipping to be investing at all, but we're including it because it's so synonymous.
In a house flip, the investor purchases a property, makes changes through renovation to improve the value of the property, then they resell it at a higher price.
These are generally very short term projects because the longer they are held, the more it costs and the less profit the investor makes.
You've probably seen some of the house flipping shows where over the course of 30 minutes you see a run down and dilapidated house turned into a gorgeous home with the investor walking away with a massive profit.
Generally, that's now how it works.
House flipping requires a lot of knowledge, time, and your own hard work in order to make it work.
This is similar to house flipping, but you are flipping contracts.
House flippers buy, add value, and sell a property. Wholesalers put a property under agreement then sell that contract to someone who has the team and systems in place to do a good flip.
Wholesaling requires a lot less work than house flipping because you only need to find a deal, but don't need to do any of the repairs.
This category truly rides on the line of active and passive. That's because you can have it be very active, or very passive.
It all depends on your management.
If you spend time finding and buying property, then hand it over to a management team, you can be very hands off with your investment property.
If you buy it then manage it yourself, you will be very involved in the day-to-day operations of the business.
When deciding what kind of rental property you want to buy, there are a ton of niches. Here are a few of the most popular.
When you buy rentals near a college with the hope of renting them out to students.
The benefit is that you generally receive much higher rents on apartments rented to students. Sometimes you can even rent them by bed.
The drawback is there is higher vacancy (students abandon the property in the summer and leave it in disrepair). Also, management costs are higher, lenders charge higher rates to student rentals, and insurance companies hate insuring these properties.
If you can overcome all the obstacles, it can be very lucrative though.
Vacation rentals have always existed, but AirBnB makes it easy for people to rent apartments when they travel just about anywhere.
These are great because you get a much higher rental rate in an AirBnB than a standard apartment, but you'll suffer from significantly higher vacancy rates.
With standard rentals, you are renting your apartment or house to a normal person or family. They have jobs, cars, kids, etc.
These have the lowest rental rates of all the investment properties, but are also the most stable, have the lowest costs to operate, best terms on loans, best insurance rates, etc.
Passive Real Estate Investing
Passive real estate investing is when you are generally not involved with the day-to-day operations of the investment property. Once acquisition is complete, you hand it off to someone else to worry about.
You'll just be involved with rebalancing the portfolio, buying/selling, and other major decisions you'd be involved with regardless of what sort of investment was made.
As was already mentioned, rental property can be either a passive or an active investment in real estate. It all depends on how you do it.
If you hire a competent management company to handle all the day-to-day tasks of your investment property, then you'll basically be investing passively.
Private Equity Syndication
Syndication is a really popular way of pooling funds to buy large investment properties. Buying apartment communities that are 100+ units is really common with syndications, but you can buy just about any asset class in real estate.
Basically, the passive investors put up the money (limited partners, or LPs) and the general partners (GPs) find the deal, manage it, find financing, and do all the operations.
The LPs get the majority of the returns while the GPs get a fair portion as well for their effort.
If you want to invest totally passively, being a LP in a syndication is a great way to do it.
Crowdfunded real estate investments are a super cool and new way to invest in real estate. If you've ever been wondering how to invest in real estate even if you're a total beginner, then crowdfunding is a great way to start.
This is a really cool new thing that didn't exist until after 2012 when the JOBS act was passed. It's grown into a huge industry where major players such as Fundrise, RealtyShares, EquityMultiple and others are crowdfunding billions of dollars in real estate combined.
A REIT, or real estate investment trust are actually a lot of different types of real estate investments. That's because a REIT can invest in just about anything as long as it's real estate, distributes 95% of its earnings to shareholders, and also pass a number of other tests in order to maintain its status as a REIT.
For example, there are some exchange traded REITs where you could buy just one share. There are also REITs that require a minimum of $100k or even more to invest in them.
The great part of REITs is you can get real estate in your portfolio simply by buying it in your brokerage account. Exchange traded REITs generally don't have as good of returns as buying property yourself or through a syndication, but it does help diversify your portfolio.
There are 3 types of REITs – Private REITs, public exchange-traded REITs, and public non-traded REITs.
Public Exchange Traded REITs
Public exchange traded REITs meet all of the onerous requirements of the SEC to be listed on a public exchange. But, they are still a real estate investing trust.
The benefit to this is they are very liquid (so you can sell or buy on a whim). The negative is they tend to have high fees and lower returns because of all the overhead expenses related to compliance with the SEC.
It's lower risk because you aren't trapped in a REIT you can't sell, and therefore you should expect lower returns.
These are not listed on an exchange and won't have the liquidity of a public exchange traded REIT.
They don't need to report to the SEC and meet all the requirements, but they can theoretically have higher returns because they have less overhead and management expense.
The lack of liquidity can also make it very difficult for many investors to get their money out of a private REIT.
Public Non-Traded REIT
These real estate investments have the same requirements as the exchange traded variety, but these are private REITs.
You can be more confident in them because they meet the heavy requirements of the SEC, but they are very liquid and you cannot sell your shares very easily.
Disclaimer on REITs
FINRA has a pretty big disclaimer about private and non-traded REITs so make sure you read it and understand it.
Non-traded REITs come with significant risk because they are not liquid investments. They often have a lot of hidden fees and they can be very complex investments for average investors.
Make sure you understand what you’re getting into before buying into a REIT.
Real Estate Funds
A REIT is the actual corporation that buys real estate. a Real estate fund is a mutual fund or private placement that invests in real estate. a real estate fund can buy multiple REITs, individual properties, or other real estate assets based on it's investing criteria.
Private or Hard Money Lending
If you have plenty of money available, you could always become a private or hard money lender.
People who are actively involved in buying real estate, whether it's house flippers or people buying run down rentals, need money to do deals.
They get this money from private lenders. They pay very high interest rates on these short term loans.
So, a good way to get some quick cash is to invest as a lender.
Can I Invest in Real Estate With a Full-Time Job?
This really depends on you and your goals.
If you want to flip houses and also keep a 60 hour a week job, you might find it hard to balance the two.
But, with that same job, you could easily invest in crowdfunded deals, rental property, or other types of real estate investments.
So the answer is YES, you can invest in real estate with a full-time job. But, you may not be able to invest the way you want to.
Follow these steps to figure out what kind of real estate investor you should be
Step 1 - Determine Your Long Term Goals
This is the most important step, that why it's #1.
You need to figure out where you see yourself in 5, 10, 15 years.
Do you want to be retired on a beach or mountain somewhere? Or, do you see yourself growing a large business and eventually working full time in your business instead of in a job.
Do you want to move to a larger house in a nicer town or even a new state across the country. Or, are you comfortable where you are?
All of these questions and more are absolutely fundamental to answer.
Step 2 - Figure Out What Kind of Real Estate Supports Those Goals
If you invest the wrong way now, you may find yourself with problems in 5 or 10 years related to your portfolio and where you want to be in life.
So, spend the time to decide what kind of real estate investment fits the goals you determined in step 1.
If you want to work in a business and grow it, then house flipping or hands-on rental property are great.
If you see yourself retiring soon and want to be hands-off, then you probably don't want to get started flipping houses. Instead, you'll want to invest more passively now.
Can I Invest With No Money?
Of course you can. People do it every day.
But, you already know that.
The real question to ask is - How to start real estate investing with no money.
No matter what, somebody is paying. It may not be you, but someone has to pay for the project.
So, let's further refine the question - How do you get someone to give you money to invest in real estate with?
Once you answer that question you'll have the answer to the first question.
There's a lot of ways to do a real estate a deal, but it boils down to basically 2 ways to get someone's money. You either borrow that money, or they partner with you on the deal.
It's really hard to get a stranger to loan you 100% of the money you'll need to do the project. In general, they will loan somewhere between 70% and 90% of the overall project.
But don't worry, you'll just have to find another way to get that 10-30%.
Another source of revenue is from friends and family.But I don't want to borrow money from friends until I know it works! - Said everyone
It's hard to ask people for money. But, if you want to invest in real estate with no money, you're going to have to get used to asking for money.
If you don't have your own money to invest and you don't believe in it enough to ask friends and family to invest with you, then perhaps you should consider investing in a different way.
So, the key is to get friends and family to loan or partner with you to give you that 10-30% you need, then go to a private lender for the other 70%+.
Now, your deal is totally funded.
Partnering on Real Estate Deals
The other way to invest in real estate with little money is to partner with someone else.
But here's the thing - no experienced investor is going to partner with someone with no skills, no money, and no experience.
The key is to have a skill (or learn one) that people find valuable. Then they will be OK giving you a small piece of their deals if you are bringing that skill to the table.
This is exactly how I landed my first 200 unit deal. Read about that here to get a better understanding of partnering on deals to get started.
Do I Need a Real Estate Coach or Guru?
No one NEEDS a coach or a guru to teach them about real estate investing. But, a good coach can be helpful.
The problem in real estate is there are so many gurus that give you nothing and take a ton of money from you. They'll take the money you could have used to get started.
You'll be left with some mediocre training and no money to get started.
But, a good coach will teach you everything you need to know, help you review deals, and push you to be successful.
A good coach will help you accomplish more than you ever could have on your own.
So, consider it carefully before getting started as a real estate investor. BUT, do not get sucked into giant crowds of people waving their credit cards.
How to Invest in Real Estate - The Ultimate "How to" Guide.
You've stuck with us this far, so now it's time to get into the really good stuff!
We're going to cover all the fundamentals of how to invest in real estate. We're going to start with finding deals. Then we'll cover analyzing those deals and end with the basic management of your real estate investments.
Finding Good Real Estate Deals
There are only two ways to find an investment property - you find it, or it finds you.
Being a little silly with that phrase, but it's kind of true.
All properties are either listed on something like the MLS with a broker, OR, you can find them through marketing.
So, either the deal is out there looking for you, or you go looking for it.
Working With an Agent or Broker
How this works will depend heavily on if it's residential or commercial property. Often, commercial property doesn't have buyer agents and you're stuck using whoever the listing agent is.
Residential real estate is different and you can have your own dedicated real estate agent to help you search.
The great thing about the MLS or working with an agent is the fact that there are so many deals to look at!
But, they are often priced at the top of the market and there is very little upside potential.
Occasionally a good deal will pop up, but more often the price becomes too competitive because everyone else is going to be bidding on the same properties as you.
Marketing for Real Estate Deals
There are a million ways to find a deal. Some people walk through neighborhoods looking for run down property. Others do direct mail or even start websites.
If you're reading this, chances are you have a job currently. So, we want something that is scalable and requires the least amount of time involvement. Any remaining involvement should be super flexible to work around your work schedule.
That rules out things like door knocking and cold calling.
And, it leaves things like direct mail marketing and creating investor websites.
Here are a couple of resources to help you learn about these:
Analyzing Your Potential Investment Property
Deal analysis is the most important part of this whole process.
It's simple, but it ain't easy.
Determining Your Criteria
The first thing you need to do is figure out your criteria. You need to know what sort of returns you are looking for.
Think about it this way - if you found a deal that paid 10%, would you buy it? What about 11%, or 12%? What is the cutoff?
You need to have that set before you do any analysis at all.
Collecting the Data
To analyze any investment property, you need 4 basic pieces
With these four pieces of information you should be able to determine your total return and then decide if you want to purchase it or not.
Operating budget is one of the pieces that just about every residential investor makes a mistake with. That's because the seller has no idea what it costs and even if they did, they probably aren't managing the property well anyhow.
Rental Prices are fairly easy to figure out. Start with whatever is in place at this property, then look at all of its neighbors and see what they rent for.
Rehab Budget is easy and hard. It's hard to make an estimate on your own. But, it's easy to get a quote from a contractor.
ARV is determined by running the comps.
Now it's time to put it all together and create your first year proforma. Pro forma is simply the total income and expenses if everything runs perfectly.
Total Income - Vacancy = Net Income
Net Income - Operating Costs = Net Operating Income
NOI - Mortgage = Cash Flow
Cash Flow / Cash Invested = Cash on Cash Return.
Analyzing rental property is pretty easy, right?
If you need help, check out the free quick and dirty deal calculator.
Managing Your Real Estate Investing Portfolio
Now the fun part - property management.
Management includes everything from finding and screening tenants to doing maintenance and checklists.
There are books out there that are 300-500 pages long that just touch the surface of good property management. So, instead of getting into it here, here is a list of some great resources on this website.
Best Real Estate Investing Books For Beginners
We have a variety of book reviews on this site. Here are some of our most popular