Getting Started in Real Estate Investing: A Beginner’s Guide
Summary: If done right, real estate investing has the potential to generate sizeable returns for you. Read on to gather real estate investing tips for beginners, right from securing financing to real estate investment opportunities to get the ball rolling quickly.
Despite global crises and economic downturns, real estate has retained its sheen as a popular investment vehicle for people looking to build wealth.
The global real estate market is estimated to be worth over $637 trillion and remains the top asset class in the world, even outstripping stocks and equities. And in the US, the house price index that tracks the value of homes
continues to increase.
With a growing number of investors poised to enter the real estate market, it’s normal for beginners to take a cautious approach to investing in real estate. If you’ve decided to take the plunge into real estate investing, you may wonder how to get started or probably feel overwhelmed by the many investment options available.
But don’t worry. We’ve put together a primer of real estate investing tips that will help you navigate your way through the property market.
How to secure financing for your real estate investment
Real estate investment demands substantial capital, often running into thousands of dollars, if not more. This shouldn’t necessarily deter you from embarking on a potentially life-changing opportunity; but it should serve as a reminder that that if you’re planning to dip your toes into real estate investing, there will likely be size-able funds involved.
Here are some smart steps to ensure you have a plan in place for funding your first real estate investment.
1. Embrace good old savings
Making a down payment is a big concern in real estate investment, especially if you are investing in rental or commercial properties. How do you raise the funds you need? Start by saving all you can from your regular income.
Cut down on unnecessary expenses and set up a separate savings account dedicated to your real estate investment goals. A good rule of thumb is to save 20% of income. So, you can start by first using those savings to build up a solid emergency fund if you don’t have one, and then start saving for your real estate investment goals. You can even split your 20% savings allocation between the two financial goals. To ensure consistency, consider automating your savings.
Remember that you need to adopt a balanced approach to adding real estate into your investment portfolio, as you would with any other asset class. If you have questions about how to go about it, consider working with a financial professional to determine what works best for you.
2. Consider partnerships
If you’re still struggling to raise the necessary funds, it might make sense to partner with other investors or real estate professionals who can provide both capital and expertise.
Joint ventures, partnerships or real estate investment clubs can be effective ways to pool resources and share risks and rewards with other like-minded investors. But it’s best to proceed with caution. Before investing, take your time to do your due diligence and be sure that the property investment group or the property managers you intend to partner have proven track records.
3. Start small and scale up
Remember, Rome wasn’t built in a day, and neither will your real estate empire. Start small with your first investment property, whether it’s a single-family home, a duplex or a small commercial property.
Then, as you build more capital and gain experience, you can gradually scale up your investments and take on larger and more complex projects.
6 Real estate investments to consider
There are various types of real estate projects that you can invest in, however, it’s important to consider consulting a real estate attorney or financial professional to understand these investments and assess the potential risks thoroughly.Here are six broad categories of real estate investments.
1. Residential rental properties
For beginners, owning a rental property can be an excellent entry point into real estate investment.
By purchasing a residential or commercial property and renting it out to tenants, you can generate a steady stream of passive income while building equity over time.
To begin your rental property investment, you have to get into the market, source a property, secure a down payment, purchase the property and then identify a rental market with a consistent demand for residential units.
Keep in mind, owning a rental property classifies you as a landlord, which comes with its own challenges, such as property maintenance and tenant management. However, the potential for long-term wealth accumulation makes it a compelling investment option for beginners willing to put in the money and effort. It’s especially rewarding if you can turn your rental property investment into retirement income.
Another advantage of residential real estate is that it’s typically more liquid than commercial real estate. The reason is that unlike commercial properties or land, residential properties tend to have a more active market with a higher turnover rate.
Nevertheless, it’s important to be cautious as you start out, as market forces can quickly change, affecting property values and rental demand.
2. Fix and flip properties
Another beginner-friendly option is fix-and-flip investing, where you purchase distressed properties, renovate them to increase their value and then sell them for a profit.
Flipping houses is mostly a short-term holding real estate investment option, but one that requires significant research and study. You need a keen eye for undervalued properties, a good understanding of renovation costs and the ability to market the property effectively.
But perhaps the trickiest part of this undertaking is getting your cost estimates right, so you can actually make a profit off your efforts.
The potential for high returns here can be enticing. But be aware that flipping houses comes with significant risks, including unexpected renovation expenses, longer holding periods and market fluctuations. There are also property taxes and mortgage to consider. You may have to keep paying those until the property is off the market.
Again, it’s best to start with smaller, less complex projects and seek guidance from experienced real estate professionals.
3. Real estate mutual funds and ETFs
For beginners that would rather prefer a different approach to traditional property investment, you can invest in real estate mutual funds and ETFs (Exchange-Traded Funds) through brokerage accounts or investment platforms.
To get started, beginners can open a brokerage account with a reputable online broker and search for real estate mutual funds or ETFs.
The next step is to review each fund’s investment objectives, portfolio holdings, performance history, and expense ratios to make an informed decision. After selecting a suitable fund, you can then purchase shares of these funds just like you would with stocks.
Real estate mutual funds and ETFs offer beginners a convenient way to access diversified exposure to the real estate market without the complexities of direct property ownership.
It’s important to note that mutual funds and ETFs are subject to the market volatility and risks associated with the underlying investments. Rising interest rates can affect the returns of real estate funds.
4. Real estate crowdfunding
Real estate crowdfunding platforms allow individual investors to pool their funds together to invest in properties or real estate projects.
This model provides access to real estate investments with lower capital requirements and greater diversification compared to traditional methods. If you’re unsure where to begin your real estate investing journey, this might be a good place for you to begin.
Real estate crowdfunding gives investors the opportunity to invest in a wide range of properties, from residential homes to commercial developments, with varying risk profiles and potential returns.
With crowdfunding, it’s advisable to diversify your investments across multiple projects, asset classes and geographic regions to spread risk and optimize returns.
As a potential investor, it’s important that you carefully evaluate crowdfunding platforms, investment opportunities and their associated risks before participating. Real estate crowdfunding platforms vary in track record, reputation, and reliability. Investing through a less reputable or poorly managed platform may expose investors to risks such as platform insolvency, fraud, or operational issues.
Crowdfunding does not afford you control over the investment as does direct ownership. Development of the property likely will be managed by a third party. Also, crowdfunding platforms and sponsors typically charge various fees, including investment management, acquisition, and disposition fees, which can reduce returns.
5. House ‘hacking’
House ‘hacking’ is a beginner-friendly, money-making approach where you continue to live in one unit of a multi-unit property while renting out the other units
This strategy allows you to offset your housing expenses by generating rental income, making homeownership more affordable.
House ‘hacking’ is particularly popular among young professionals and first-time homebuyers looking to build equity and income streams. However, anyone, including retirees, can take on house hacking.
It’s one of the best options for new entrants into the world of real estate investment. One of the most appealing things about house ‘hacking’ is that you can do it with even small home units. So whether you’re in the early stages of your career or contemplating retirement after decades as a small business owner, this methods can be a great way to begin your foray into real estate investing.
6. Creative real estate investing
In addition to traditional investment options like rental properties and fix-and-flip investing, beginners can also explore creative real estate investment strategies, such as buying a house for their children to live in while in college.
This strategy allows parents to provide housing for their children while potentially benefiting from property appreciation and rental income. With this approach, you leverage real estate as both an investment vehicle and a practical solution for your family’s housing needs.
If you invest in a property near your child’s college campus, you can potentially save money on housing expenses while simultaneously building equity in a valuable asset.
Note that you can either buy the property or gift your child the funds to pay a down payment on the property. If you gave your child the down payment for the property as a gift, there might be tax implications for it. But this depends on the amount of money involved.
In 2024, the maximum amount you can gift your child without any tax implication is $18,000. Any amount above this will require you to file a gift tax return.
Build lasting wealth with real estate investments
Getting started in real estate investing can be both exciting and daunting, but with the right knowledge and guidance, it can be rewarding too.
While there may be challenges along the way, the potential for financial growth and passive income can make real estate a valuable addition to your investment portfolio.
If you are ready to begin your real estate investment, find out the type of real estate you want to begin with and get in as early as you can. And as with any investment, be sure to consult with a financial professional who understands the real estate industry before making any financial commitment.
While on it, be sure to contact us at Mutual of Omaha for professional advice and resources that can help you navigate your finances, retirement and more.
FAQs on real estate investing
Q1. What is the minimum investment required to start in real estate?
The minimum investment in real estate varies depending on your investment strategy and market conditions. For rental properties, you may need a down payment ranging from 15% to 30% of the property’s purchase price.
Q2: How do I find profitable real estate deals?
Finding profitable real estate deals requires research, networking and market analysis. Search for distressed properties, work with real estate agents, attend auctions and leverage online platforms and databases to hunt down the best deals.
Q3: What are the tax implications of real estate investing?
Real estate investors may benefit from tax advantages such as depreciation deductions, mortgage interest deductions and capital gains tax deferral through 1031 exchanges. On the other hand, you may have to pay taxes on capital gains after the sales of your properties, as well as taxes on the rental income you earn from them. So make sure to consider all applicable taxes on your real estate investments.
Disclosures:
All investing involves risk including loss of principal.
Real estate investing can be subject to a number of risks including but not limited to general market risk, liquidity risk, credit risk, structural risk, and leverage risks. The strategies mentioned may not be suitable for everyone.
Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.
Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.
Not all Mutual of Omaha agents are registered representatives or financial advisors.