How to start investing in real estate: What you need to know

A real estate investment portfolio can potentially help you create a passive income stream and build wealth at the same time. But before putting your hard-earned dollars into a real estate investment, it’s critical to understand the basics of real estate investing.

If you want to dive into the world of real estate investing, getting started is often the hardest part. Before you get your feet wet, make sure you learn more about your investment options, get clear on your investment goals, and be honest with yourself about the commitment you can make.

1. Understand real estate investing basics

Anyone considering investing in real estate should consider building up their knowledge of how real estate works before diving in. It’s very helpful to understand the basics of how the industry works.

Start by building a foundation that includes a good understanding of real estate basics such as profitability, cash flow and financing. Learning the vocabulary and understanding key concepts will then help you when you approach bigger topics like how to make money in real estate and building a real estate portfolio.

One option is to take an educational course offered by a real estate trade group like the Institute of Real Estate Management or the National Apartment Association. Both groups offer webinars, courses and even certifications you can receive. You can also find many free real estate resources to help you beef up your knowledge.

2. Determine your risk tolerance

As with all forms of investing, real estate investing comes with some level of risk. But the amount of risk you take on in real estate investing varies based on the type of investment you choose.

As an investor, you’ll have to determine your level of risk tolerance so you can decide which investments meet your financial goals.

Your risk tolerance will largely depend on your personal and financial situation. For example, if you have a family to support, a mortgage payment and a lot of other monthly expenses, you may want to choose less-volatile investments.

Notably, one of the best ways to mitigate risk is by building a diversified portfolio. With multiple types of assets tied to different risk levels, your robust portfolio can likely stay afloat even if one asset underperforms your expectations. In addition, building a strong portfolio lays the foundation for understanding your unique overall approach to real estate investment and portfolios of property.

3. Choose a real estate market

The right location can make all the difference to the value of a property. But beyond the individual location, you’ll need to decide which real estate market to work in. The location plays a huge role in determining what’s a good investment real estate market.

Certain areas are highly sought after on the hot real estate markets, making them competitive but promising. They’re typically fast-growing locales with opportunities and entertainment available. So, you may need to research what the best places to invest in looks like to you.

To find a good location, you’ll start by figuring out how much money you’re able to invest and looking for properties that fit within your budget. You’ll also want to look at the local economy and job market in that area to determine whether it’s growing. It’s also important to consider the population growth and what the renter population is like.

Also, you’ll need to consider your preferences. Some investors choose to self-manage their properties, which tends to be easier if you live nearby. But it’s not impossible to invest in markets outside of your local radius.

4. Decide what type of investment you’re making

Real estate investing can be incredibly hands-on or entirely hands-off. You’ll need to decide where on the scale you want to fall.

Owning rental properties usually requires more work than investing in other types of real estate. It also comes with significant costs, like paying for property taxes and routine maintenance. And you only make money on a rental property if you have a paying tenant. You’ll need to figure out the vacancy costs as well.

If you’re looking for a more hands-off approach with fewer expenses, you’ll probably want to consider more passive forms of real estate investing. For example, a REIT is a more passive form of real estate investing.

5. Start searching for properties

With a clear idea of where you want to invest and how you want to invest, it’s time to start looking for a property.

When you find potential investment properties, you’ll need to do some research into the particular home and the area it’s in. If the property is in poor condition or located in an undesirable area, it becomes less valuable. You can identify the profitability and volatility of an individual property through analytic software and reporting services.

6. Figure out financing

Once you find the right investment property, you’ll need to find financing for the deal. In general, financing an investment property is more challenging than buying a primary residence.

You may be able to qualify for a traditional mortgage through a bank or credit union. However, these mortgages are riskier, so you’ll need to have a strong financial history and a good credit score to qualify.

Other options to consider include:

• Freddie Mac’s Investing Property program: This is designed to help borrowers get the financing they need for investment properties of one to four units.
• Real estate crowdfunding: Crowdfunding involves asking the public to help fund the venture. You’ll ask other investors to help you fund your real estate investment and share the risk with them.
• Holding multiple mortgages: You may be able to take out more than one mortgage to help finance your real estate investments. However, this can be a risky strategy and some banks aren’t willing to let you hold multiple mortgages at once.
• Loans for flipping houses: You may be able to obtain a loan from a private lender to specifically fund house-flipping ventures. A hard money loan, home equity loans or cash-out refinance may be a better way to fund house flipping ventures than a traditional mortgage.
• Opportunity zones: Opportunity zones involve investing in a disadvantaged community, which provides tax benefits under the Tax Cuts and Jobs Act of 2017. This is a good option for anyone looking to improve economically disadvantaged areas.

7. Monitor your gains and losses

While each investor may have slightly different goals, the general objective is to build an income stream and grow wealth. It’s important to assess your progress toward these general goals along the way.

There are several different ratios and calculations you can use to help you understand your progress. Some work better for certain properties, like residential versus commercial, so it’s important to do your homework before using one. Examples of metrics you may need include net operating income (NOI), internal rate of return (IRR) and operating expense ratio (OER).

Like all kinds of financial decisions, real estate investing comes with advantages and disadvantages. Below is a look at some of the pros and cons to consider.

Being a real estate investor is very possible for many. While it requires some research and commitment, this type of investing could help you grow wealth for the future.

If you are ready to start buying property, apply for a mortgage today.