In the past, you needed hundreds of thousands of dollars to break into property investing. Today, that’s no longer the case.
Anyone with the right insights and some extra cash-on-hand can become a real estate investor. While you might not know everything about finances or real estate to start, there are so many resources out there that can help you get started in this lucrative and growing field.
It doesn’t matter if you’re a millennial or a baby boomer — anyone can become an investor. In fact,, the younger recent data shows that millennials are 52% more likely to invest in real estate than Gen X-ers and baby boomers. Here’s how to get started.
Evaluate Your Finances
Beyond your primary home (and possibly a vacation home), real estate investment is just one more way to grow your money. It can be a method to save for retirement, grow your income, and eventually become financially independent. Do you live paycheck-to-paycheck? Real estate investing may not be for you.
The first step is to start managing all your finances properly. Make sure you’re paying all your bills on time and have as little debt as possibly.
If you have a car loan, it can be helpful to pay it off before you start on this journey. Carrying credit card balances and paying interest month-to-month also isn’t a sound financial strategy. Once your finances are in order, you get can get started saving.
Save whatever you can after paying your usual expenses, whether that’s 10 percent, 20 percent, or even 40 percent of your paycheck.
Now that you’ve got some money in savings and ready for an emergency, you can start thinking about your first real estate purchase.
Decide on Your First Property
What should your first property be? One of the best ways to break into investing is to kill two birds with one stone: buy a primary residence that doubles as a rental property.
You can purchase a duplex, multi-family, or even an apartment building and live in it yourself. There are countless options depending on how much debt you’re willing to take on, your credit profile, and your initial down payment.
You should have at least 5 percent to put down, but 20 percent is preferred for your first home. Putting down a larger down payment will often enable you to get a better interest rate and skip paying private mortgage insurance (PMI).
Line Up Financing
When you first begin investing in real estate, you likely won’t have the cash reserves to purchase properties without using a bank or other lender.
These loans are insured by the federal government and you must meet certain requirements in order to qualify, like being a veteran for a VA loan, while USDA loans are only applicable in certain rural areas.
If you’re not utilizing the government, private lenders range from banks offering conventional mortgages to portfolio loans, which have shorter terms but lower interest rates.
In some cases, investors utilize hard money loans, which use a collateral (i.e. the home) and aren’t regulated in the same way other loans are. That said, this approach can be quite costly and is usually only used for short-term investment plays, like a quick flip.
Rental Properties or House Flipping
There are two main avenues for real estate investing: rental properties and flipping houses. The former is a long-term strategy, whereas the latter can provide gains quickly, but usually carries more risk.
For rental properties, it can be difficult to assess how much value a single-family home or an apartment can bring in the long term.
There are several models to determine the potential rent value of a property, like the Gross Rent Multiplier, which determines potential income, or the Capital Asset Pricing Model, which evaluates the rental potential against other investments.
If you decide to go with rental properties as a strategy, the initial process is similar to buying any home.
After you’ve inspected the property and closed, it’s time to make improvements to ensure you can rent it for top of market value.
Once you’ve found tenants, you can start collecting rent money. From there, it’s a fairly passive process, especially if you utilize a property management company.
Flipping a home inherently carries more risk than investing in rental properties. This is particularly true if you’re planning to make major changes to the property, like knocking down walls, updating electrical and plumbing systems, etc. .
However, the reward can also be great. If you purchase a home for $200,000 and invest $70,000 in renovations and then turn around and sell it for $300,000, you just made a cool $80,000, less interest and agent commission fees.
This ideal situation doesn’t always occur, however. There are often larger problems under the surface of homes, cost overruns, and you can price yourself out of the market if the house is over-improved. Follow these tips to ensure you flip houses right.
You can start real estate investing using one or both of these techniques. While some investors stick to one method, others diversify their portfolio by purchasing rental properties and flipping homes.
Get Started With Real Estate Investing
At the end of the day, there’s no right way to get started in real estate investments. What’s important is keeping your finances in tracks and your debt load low.
As you grow your portfolio, you’ll generate more cash flow, which will make it easier to borrow money — and things will just snowball from there
Start slow and grow your investments over time while you learn the market and you’ll be set for success and financial independence.