Real estate investing is a popular way for portfolio diversification and generating passive income. As a beginner in real estate investing, you have the potential to get into real estate, become a successful investor, and achieve your financial goals. But you would first need to start somewhere.
This in-depth beginner’s guide to real estate investing aims to teach you everything you need to know to get started in the real estate market and build the right path for you. You'd learn how to:
- Determine which type of real estate investing is right for you
- Understand the types of funding available
- Know how to pick successful properties
- Understand the valuable role of credit cards
- Is real estate investing a good idea?
- 4 types of real estate investing
- How to fund real estate investing
- How to find your first property
- 3 types of real estate investment properties
- The Wholesale Formula
- What to do when you’re ready to rent
- What to do when you’re ready to sell
- Best credit cards for real estate investing
- People you need to have in your life as a real estate investor
- Most common mistakes in real estate investing
- Bottom line
Is real estate investing a good idea?
Entering the real estate market may provide several benefits to investors. These benefits often depend on market conditions and may not always be present, however, they could be attractive enough to begin investing in real estate. Here are some of the reasons real estate investing might be a good idea:
- Rental real estate is a popular strategy to keep up with inflation because home prices and rental income tend to rise right along with inflation.
- Including real estate in your investments might give you a diversified portfolio. It might also reduce your portfolio’s volatility because home prices do not go up and down as much or as quickly as the stock market
- In some cases, prices of real estate may go up while the value of stocks goes down.
Aside from these reasons, people may prefer real estate investing due to psychological or emotional preferences such as:
- Real estate investing might provide a tangible investment that people see and feel. By comparison, getting into the stock market often means looking at charts reflecting your monthly earnings and losses. For some, this makes real estate more exciting, and this excitement helps them be more active in growing their wealth.
- Real estate investing could be a part-time or full-time endeavor. Some people may use rental properties as a side gig to their normal nine-to-five job. Some other people may invest in real estate full time by acquiring new properties, improving properties they already have, or more
- Although buying a piece of real estate might be very expensive, you could start investing in real estate with little money. Small money investment options include wholesaling, certain types of rental property opportunities, and Real estate investment trusts (REITs), which allow you to invest in real estate through companies that own and operate certain properties.
That’s why real estate investing could be easy to get into and may present a good investment idea.
RememberAll investments come with risk. This guide is not intended as investment advice — be sure to do your own research before investing.
4 types of real estate investing
Real estate investing is a broad term and there are many different types of investments to choose from. Each type of real estate investment has its own pros and cons, including the amount of time and money required to participate. So let’s take a look at some of your options so you can start to determine which real estate path you’d like to take.
Flipping houses is the art of buying a property for below market price and selling it for a higher price. In most cases, real estate investors purchase what’s known as a distressed property, spend money to fix it up, and then sell it to someone else. Distressed real estate is a property that has been neglected and is in need of repairs to bring it back to its potential value. These repairs may range from putting in fresh carpets to replacing a roof.
You could make money flipping homes by understanding the future value of a property after all the repairs have been made. The new expected value after you've completed all your renovations and upgrades is what’s known as the after-repair value or ARV.
Your profit is the new sales price minus your selling costs, purchase price, repair costs, and carrying costs such as utilities and insurance. A general rule of them when learning how to invest money is to do some math before you commit to an investment.
Learn moreWant to get more information about flipping? Take These 9 Simple Steps to Start Flipping Houses
Buy, Rehab, Rent, Refinance, Repeat (BRRRR)
The BRRRR method of real estate investing focuses on rental properties. Investors search for distressed and under-market properties that can be repaired or upgraded in order to appraise for a higher value upon completion. Under-market properties might be available at a discount compared to the properties around them. For example, while neighboring homes might be worth $150,000 to $200,000, the home you’re looking at is selling for $120,000 due to a divorce proceeding that requires a quick sale.
Once the property is ready, the investor lists it for rent. After a tenant has occupied the property, the investor could refinance the real estate based on the after-repair market value. A refinancing loan may allow the investor to start the BRRRR process all over again with another property.
Money is made with the BRRRR method in three ways:
- The price of a property often increases once it's repaired and rehabilitated. The increase in price, also known as capital appreciation, is money you could potentially make for fixing up a property.
- You might earn money from the rent collected, even after accounting for your expenses. Some of the expenses you might have include insurance, property taxes, property manager, and others.
- The property price might increase over time, but this depends on the economy and local market conditions. Home values typically go up over time in line with increasing consumer prices, but changes in the economy, such as a recession, may affect home prices. Additionally, local conditions, such as a factory shutting down or a new major employer opening up in your town, might affect your home’s value.
If you get into wholesale real estate, it means you act as the middleman between someone who wants to sell and someone who wants to buy, then make a profit from your efforts.
This is different from acting as a real estate agent because wholesalers are not required to have a license like a real estate agent because they technically own the pieces they are selling.
Real estate wholesaling often falls into one of the following categories:
- Land wholesaling: The wholesale process for undeveloped land that often has no structures built on it. It could be cheap for the investor to purchase and maintain land since their property taxes might be minimal when there are no structures.
- Residential wholesaling: This wholesale process focuses on single-family homes, condos, townhomes, or multi-family homes (up to four units). The targeted homes might be distressed or undervalued compared to other homes in the area. The wholesaler may sign a purchase contract with the seller, then locate a buyer who would buy the contract for a fee. This buyer would insert themselves into the contract with the wholesaler, meaning that residential wholesalers might not take possession of the properties. Instead, they may back out of the deal before losing their deposit if they are unable to locate a buyer.
- Commercial wholesaling: This type of wholesale involves commercial buildings, strip malls, apartment buildings (of five units or more), office buildings, and similar properties. Wholesaling a commercial property generally follows the same path as residential wholesaling, but instead of finding an undervalued house, you’re looking for buildings that have low occupancy or below-market rents. The real estate developer or company that buys from you may see these properties as an opportunity to create value.
REITs and other investment opportunities
A real estate investment trust (REIT) is a company that owns, operates, or finances real estate that produces passive income.
Many REITs specialize in certain types of properties, like healthcare facilities, commercial buildings, or apartments. The primary benefit of a REIT is that individual investors could start with a small amount of money and then add additional funds on a regular basis as their budget allows.
Investors could buy shares in publicly-traded REITs, REIT mutual funds, or real estate crowdfunding platforms. Several crowdfunding platforms have launched in recent years, including:
Each of the investment opportunities is tailored to slightly different investors. For example, you must be an accredited investor with a certain net worth to join Crowdstreet, while anyone with ten dollars or more could participate through Fundrise.
Some investing platforms allow more access to withdraw your money, while others will be more illiquid. By comparing Fundrise versus REITs, you would understand how this crowdfunding platform — and similar platforms — separate themselves from traditional REITs.
How to fund real estate investing
One of the initial steps new investors in real estate need is to build pools of available money to purchase properties. Unless you have an established business or experience in real estate, getting a bank loan to buy properties may be a challenge.
Depending on the type of investing you want to do and the properties you are targeting, different funding sources may be available to you. For example funding for flipping houses might be different than funding for other types of investment properties.
Your personal funds could be the cheapest source of financing available. Having money set aside to pay for your real estate deals allows you to act quickly with no interest charges. For example, wholesalers may only need a small pool of money to pay for the deposits to get real estate properties under contract.
Explore the best savings accounts.
Credit cards are a great way to pay for repairs, utilities, insurance, and other expenses. You can earn rewards on these purchases or have a credit card that provides a 0% APR promotional offer to give yourself more time to pay off the balance.
Learn which credit cards could be the best 0% APR cards.
Family or friend loans
Borrowing money from family and friends can be good and bad. Although some may not charge you interest, they may feel entitled to get involved in your business. And, if things go wrong, not only will you owe them money, but it can ruin a personal relationship.
Personal loans and lines of credit
Personal loans and lines of credit are unsecured financing options that are not tied to the property you are purchasing. Having this money available versus a traditional mortgage allows you to act quickly without waiting for an appraisal or underwriting approval once you find a property. Personal loans are installment loans that charge interest and require set monthly payments. With a personal line of credit, you only have to pay interest and make payments if you’ve withdrawn money from that account.
Find out the best personal loans.
Seller or owner financing is when you buy a property and make payments to the owner instead of the bank. This method is very advantageous if you are unable to get approved for bank financing. The interest rate may be higher than a traditional bank loan, and the size of the required down payment can vary, but you also won’t have to pay many of the normal fees a bank may charge.
Home equity loan or line of credit
Existing homeowners also have the option to tap into their home equity to fund their investment property purchases in the form of a home equity line of credit (HELOC) or home equity loan. It is generally more flexible and more economical to use a home equity line of credit instead of a home equity loan.
Learn the difference between HELOC versus home equity loans.
Conventional loans and government programs
When investors are starting out with rental properties, they may purchase the property and live in it while fixing it up or waiting for it to go up in value. If you will be occupying the home, conventional mortgages and government programs can be a possible source of funding.
Conventional mortgages may be available to you from either a credit union or a bank. Credit unions often have lower interest rates and fees because they are nonprofit organizations. Additionally, because credit unions are membership-based and serve specific communities, they may have easier underwriting guidelines that improve the chances of your loan being approved.
Government programs that may provide funding include the U.S. Federal Housing Administration, Veterans Affairs, and U.S. Department of Housing and Urban Development loans. Each will have its own specific criteria for eligibility. For example, FHA loans require a down payment as small as 3.5% and could be used to finance a maximum of four units.
When your mortgage balance is greater than 80% of the home value, you’re charged a mortgage insurance premium (MIP) that protects the bank in case you default on the loan. FHA loans may also require an upfront mortgage insurance premium of 1.75% and ongoing premiums of 0.45% to 1.05% each year.
Financing secured through a mortgage broker
Another option is to work with a mortgage broker. Mortgage brokers have the ability to shop your mortgage around to various lenders to find you the best deal. Online websites, like Rocket Mortgage, may also provide this service.
Find out the services it offers in our Rocket Mortgage review.
Mortgage brokerages charge a fee for their service that will need to get paid by the borrower or the lender. A typical fee ranges from 1% to 2% of the loan amount and must be disclosed in your loan documents. If you’re paying these fees, they can typically be paid upfront at closing or added to your loan balance.
Hard money lending can be more expensive than other forms of financing, but hard money lenders may also be more likely to approve you. Most hard money lenders charge two-to-four points (one point is 1% of the loan amount) to issue you your loan. Typically, they will offer interest rates of 8% to 14%, which is generally more than you’ll pay with other funding options.
Hard money loans are usually not for long-term financing and often come due in full within a year. Hard money loans are usually a last resort due to the onerous terms, rates, and fees associated with this type of loan.
How to find your first property
The age-old saying in real estate is location, location, location. Where your property is located is important, but so are other factors if you want your investments to be profitable. There are several avenues available to find your real estate investments. The most successful real estate investors use multiple sources simultaneously to find the best deals.
Real estate agents and the MLS
You could work with a real estate agent to gain access to their local knowledge and the multiple listing service (MLS). The MLS is a database of properties for sale that only licensed real estate agents have access to. Online websites such as Redfin, Zillow, and others seek to mimic the MLS, but they do not have as much data.
Auctions are another option to find potential deals. In many cases, properties might be for sale at auction because they are not in optimal condition for sale through the MLS. There are different types of auctions, including tax lien auctions, trust auctions, government auctions, and foreclosure auctions.
Auctions usually require that you put down a deposit in order to bid and you must also have the ability to pay for your winning bid shortly after the auction closes. In other words, if you need bank financing, an auction may not be the way to go.
Investors need to perform extra due diligence on an auction property to ensure that there are no hidden liens against the property. And, in many cases, you might not have access to the property before making your bids. Sales are usually final, so you cannot back out if you find problems later on. The risks are high with auction properties, but so is the potential for profit.
Wholesalers are always looking for prospective buyers so they represent a great way for you to find your investment property. When speaking with a wholesaler explain what specific types of real estate properties you are looking for so they can share opportunities that meet your criteria.
Which brings us to another critical junction in your real estate investing journey — what type of property are you looking for?
3 types of real estate investment properties
There are generally three types of properties available:
- A turn-key property has already been rehabbed and is ready to be rented out. These properties are less profitable because you are buying them for a higher price than if you did the rehab work yourself. The positive is that a reputable turn-key seller will have already located a good market and may even have a tenant in place for you. If you are looking for an easy opportunity with cash flow in place, this might be a good investment option.
- A fixer is a distressed property that needs work. You (or your contractors) can rehab the property to create equity while controlling costs. (Remember that equity is the difference between the home’s value and its mortgage.) Because you are controlling the rehab, you can customize the finishes toward the type of tenant you want to rent to as well as your budget.
- A value-add is usually a fixer with a special opportunity to add even more value. The additional value can be created by adding square footage or converting existing space to increase the resale value and monthly rents. For example, a garage can be converted into an extra bedroom or you can add a shower to a half bath.
Whatever kind of property you are after, it is important to keep networking with other investors, contractors, and related professionals. You never know where your next deal will come from.
A good place to start building your network is with your local REIA (real estate investors association). Attend meetings regularly and introduce yourself to the people there. Make friends with other investors because they are not always your competitors. If you build a relationship with them, they may even share good deals that aren’t a perfect fit for them.
The Wholesale Formula
Many real estate investors start out as wholesalers. It has the lowest barriers to entry and does not require a large amount of capital. As a wholesaler, your job is to find deals that other investors may be willing to pay you a fee to buy. There is some very important but straightforward math to understand when it comes to wholesaling.
When you've found what you believe to be an ideal property for you to wholesale, research the recent sales of comparable properties in the area. These properties are more commonly known simply as comps. If you think you can immediately find someone to take over the contract on a property without doing renovations, then find the lowest comp and offer the owner of the property you’re interested in 30% under that price. The 30% discount gives you room for negotiation, builds in a cushion to cover your fees, and increases your shot at a profit.
So, for example, if the lowest comp in the neighborhood is $100,000, a wholesaler should look to have an all-in cost of $70,000 for the property. Depending on the condition of the property and estimated repairs, your offer price may go higher or lower. If you estimate the property will need $15,000 in repairs, then the ideal purchase price would be $55,000 or less because we have to subtract the $15,000 in repairs from our $70,000 top budget limit.
Keeping your costs down can make the people you’re potentially selling to happy and excited to do business with you because they’ll potentially get a better deal from you than someone else. Additionally, a lower purchase price makes it easier to refinance the property (to get cash for another investment) or to sell and make a profit. Finally, if you’re flipping the property, keeping your costs down helps to cover your selling expenses while making you a lot of money.
RememberWhen you are evaluating deals, fall in love with the numbers, not the house.
What to do when you’re ready to rent
If you are looking to rent a property, there are a few critical steps to understand once the rehab stage is complete. Placing a sign in the front yard may eventually attract renters, but that is not all you should do to get your unit occupied.
Effectively marketing your rental property
Before posting about your property anywhere, carefully craft your listing. Write down the basics of the property, such as the number of bedrooms and bathrooms, square footage, and the size of the lot if it has one. Don't forget to mention the improvements you made, such as new carpet, fresh paint, and upgraded kitchen. Think about what sets your property apart from others and its attractive features. Take high-quality pictures of the outside, each room, and the features you want to highlight.
The first places to list your ad might be real estate-specific websites such as Zillow, Realtor, Hotpads, and local websites that focus on properties in your neighborhood. For example, WestsideRentals is popular in Southern California. Then, move on to more general websites like Facebook Marketplace and Craigslist. Finally, don't forget to mention it to friends and co-workers. They may know someone who is looking.
You could also choose to hire property management and take a more hands-off approach instead of overseeing the rental yourself. In most cases, a property manager would handle the marketing of your property. And, depending on where your property is located, you may also be able to employ a real estate agent to help you find a qualified tenant. However, be aware that most agents will charge one month's rent as a fee for finding that tenant.
Navigating the application process
Once you start getting prospective tenants, screen them to ensure they are well-qualified. At this point, you need to educate yourself on Fair Housing Laws to avoid the potential of inadvertent discrimination. This article from Nolo Press gives tips on how to avoid fair housing complaints and lawsuits.
In addition to Federal laws, states may have their own laws and guidelines relating to tenant and landlord rights. Familiarize yourself with any and all local ordinances as well. This topic is a good one to cover with your real estate attorney, real estate agent, and property manager.
During the application process, one of the most important things to determine is whether the prospective tenant can pay the rent. A good rule of thumb is that a tenant's gross monthly income should be three times the monthly rent. If rent is $800 a month, the tenant should make at least $2,400 per month.
Some tenants may not make enough to qualify on their own, but they might be approved for Section 8 housing. This is a special program where the government pays the rent on behalf of the tenant. If this interests you, and your property qualifies, you would need to apply to the program through the U.S. Housing and Urban Development.
In addition to qualifying your tenant based on income, you could also review their background and credit score for any warning signs. There are numerous services that may help you with this step, including Cozy, an online platform that advertises rentals, collects rents, and organizes your rental property records.
If a prospective tenant has a poor credit score or troublesome criminal history, you may want to request a larger security deposit or decline the application. To avoid the potential for accusations of discrimination, determine what is and isn't a deal-breaker for you and be clear about those requirements. For example, you may require a minimum credit score of 680, with no late payments in the last six months, no evictions ever, and no criminal activity in the past five years.
What to do when you’re ready to sell
If you’re planning to sell a property, you could sell it yourself or with a real estate agent.
Selling a property yourself
This is known as 'for sale by owner' and there are numerous websites that help facilitate that process, such as FSBO.
The major benefit here is that you'll save the cost of paying a seller's agent, which is usually 3% of the sales price. Although you might be saving money, you would have to put in more work to market the property, hold open houses, and pay for selling costs. These costs include adding your home to the MLS and renting a lockbox to give agents access to your property.
Selling a property through an agent
When you sell through an agent, they could take care of everything for you. Depending on your lifestyle and budget, selling your house yourself may not be the best use of your time. If you opt for an agent, you should first interview several to understand their experience and expertise and how you will work together. The agent you choose should provide comps of recently sold properties and a marketing strategy detailing how they plan to sell your home quickly for top dollar.
After you have selected an agent, your biggest job will be to ensure the property is always clean and unoccupied before showings and to promptly reply to messages from your agent.
Offering seller financing
In some markets, you may want to consider offering seller financing (sometimes called owner financing) or rent-to-own options. These options are typically offered when potential buyers may not be able to get approved for traditional bank financing.
- Seller financing is where you act as the bank and hold a lien against the property. The buyer may continue to make payments through the life of the loan or may refinance and pay you off at a later date.
- Rent-to-own is a hybrid between a sale and renting the property to the tenant. After a certain period of time, the tenant has the right to buy the property at an agreed-upon price in exchange for higher than market monthly rents or some other consideration.
By offering your own financing, you increase the number of people who could buy your property and you may be able to get a higher price for it in return for not requiring traditional financing. The downside to seller financing is that you are still involved in the property and don’t get all your money back at once. Plus, you have to collect payments, keep financial records, and file taxes. And, if the transaction falls through, you’re back to trying to find another buyer.
Best credit cards for real estate investing
Using credit cards for real estate investment could be a valuable strategy. Credit cards help you build a solid credit history that may help with future loan approvals. Credit cards may also provide valuable cash back and rewards on your expenses for rehab, utilities, insurance, and more. Finally, 0% APR promotions help with low-cost financing for your real estate deals and expenses.
Here are a few of our favorite credit cards for real estate investing:
|Credit card||Annual fee||Welcome bonus||Earning power||Intro APR|
|Ink Business Cash® Credit Card||$0||Earn $750 bonus cash back after spending $7,500 in the first 3 months||5% cash back at office supply stores and on internet, cable, or phone services (up to $25,000 combined annually); 2% cash back at gas stations and restaurants (up to $25,000 combined annually); and 1% cash back on everything else||None|
|Ink Business Preferred® Credit Card||$95||Earn 100,000 points after spending $15,000 in the first 3 months||3X points on the first $150,000 spent each year on travel, shipping, internet, cable, or phone services, and advertising purchases with social media and search engines; and 1X points per $1 on everything else||None|
|Ink Business Unlimited® Credit Card||$0||Earn $750 bonus cash back after spending $7,500 in the first 3 months||1.5% cash back||0% for 12 months on purchases, then 15.49% to 21.49% (variable)|
|The Blue Business® Plus Credit Card from American Express||$0 (See rates and fees) (terms apply)||Earn 15,000 Membership Rewards points after spending $3,000 on purchases in the first 3 months||Up to 2X points||0% for 12 months on purchases, then 16.24% to 24.24% (variable) (See rates and fees)|
|Citi® Double Cash Card - 18 month BT offer||$0||Earn $200 cash back after spending $1,500 in the first 6 months (limited time offer)||Up to 2% cash back on all purchases: 1% as you buy and 1% as you pay for those purchases||0% for 18 months on balance transfers, then 16.24% to 26.24% (variable)|
Ink Business Cash® Credit Card
New cardholders of the Ink Business Cash Credit Card can earn $750 bonus cash back after spending $7,500 in the first 3 months after account opening. This card earns 5% cash back at office supply stores and on internet, cable, or phone services (up to $25,000 combined annually); 2% cash back at gas stations and restaurants (up to $25,000 combined annually); and 1% cash back on everything else. This is a great card if you’re after cashback potential.
Ink Business Preferred® Credit Card
You'll earn 100,000 bonus points after spending $15,000 within the first 3 months of opening the Ink Business Preferred. These points are worth up to $1,250 when used to book travel through the Chase travel portal. Points can also be transferred to any of Chase’s transfer partners in the airline and hotel industries for potentially greater value. This card earns 3X points on the first $150,000 spent each year on travel, shipping, internet, cable, or phone services, and advertising purchases with social media and search engines; and 1X points per $1 on everything else. This is a great card if you want your real estate hobby to pay for your travel hobby.
Ink Business Unlimited® Credit Card
Ink Business Unlimited cardholders earn an unlimited 1.5% cash back on all spending. It also offers a sign-up bonus of 750 cash back after spending $7,500 within the first 3 months. A 0% intro APR is available for 12 months on purchases (then 15.49% to 21.49% (variable)) and that makes this a great card for real estate investors who need extra time to pay for their purchases.
The Blue Business® Plus Credit Card from American Express
This Amex Blue Business Plus Credit Card is excellent for everyday purchases because you'll earn 2X Membership Rewards points on business purchases up to $50,000 each year, and 1X points on purchases after that. It also offers a 0% APR introductory offer on purchases for 12 months after opening your credit card, then the APR increases to 16.24% to 24.24% (variable). The flexibility this card offers can come in handy as you're managing your cash flow on your projects.
Citi® Double Cash Card
While the other credit cards on this list are some of the best business credit cards, the Citi Double Cash Card is a personal credit card. Cardholders receive up to 2% cash back on every purchase with no limits on the amount of cash back you can earn. You can also transfer balances to take advantage of the 0% APR offer for 18 months (then 16.24% to 26.24% (variable)). This card could be great for you if you have real estate project expenses on another credit card that are incurring interest charges.
Success storyOur resident award travel and real estate expert Brandon Neth combined his two passions. Here’s how he used credit points to buy a multi-family investment property.
People you need to have in your life as a real estate investor
As a prospective real estate investor, it is important to have a solid team of trustworthy professionals around you. Whether you are wholesaling, house-flipping, or aiming to create a long-term investment as a buy-and-hold investor, your team can help you identify your blind spots and make the difference between your success or failure as an investor.
Real estate investors may need these people for successful transactions:
- A realtor or real estate agent is important to help locate available properties and to assist you when it comes time to sell. They could help you with local knowledge of property values and neighborhood trends.
- Mortgage brokers search for the best financing options when buying a property or refinancing it. Because a mortgage broker does not work for one bank, they have the ability to show you rates, financing options, and mortgage payments from multiple banks to help you secure your best deal.
- Escrow officers and title companies are part of the buying and selling process. The escrow officer collects information from the buyer and seller and distributes the money when the transaction is complete. Title companies search for liens on the property to ensure you don't end up owing money for a loan or tax lien once you close.
- Real estate attorneys help you structure deals and review contracts. Additionally, they would be in your corner if you have a dispute relating to a property and need legal advice.
You may also need these people to successfully maintain your real estate investments:
- An accountant helps review your records, prepare taxes and other filings, and provide guidance on how actions may affect your taxes. Make sure you work with an accountant who is experienced in real estate.
- An insurance agent or insurance broker could help you understand your risks and craft protection that will cover you, your property, and your tenants while staying within your budget. Agents typically work for one insurance company, while brokers may shop your needs to multiple insurance companies to find the best deal.
- A contractor helps manage the rehab project and ensure all the necessary repairs are made. Some real estate investors do some or all of the rehab work themselves while others have a contractor handle everything. Which is best for you will depend on your skill, budget, and time frame. Also, consider finding a handyman for small jobs that need to be done quickly as many contractors schedule availability weeks ahead of time.
- Property managers may serve as a buffer between you and the tenant. They find tenants, collect rents, coordinate repairs, and periodically inspect your property. Most property managers charge a management fee of around 10% of the rent collected. Although you don’t have to hire a property manager or property management company, many real estate investors find it to be a time-saving and cost-effective choice.
We suggest you interview several candidates for each position on your team. Discuss what their ideal client looks like, how much they charge, and their thoughts on how you can best work together. Don't always go with the lowest-cost option. As the saying goes, sometimes you get what you pay for.
Once you've found the right person, ask them for referrals for other spots on your team. They may often know good candidates you could interview. After your team is complete, don't stop networking and meeting others who might be a good fit. t may be a good idea to have a Plan B, C, and D in mind if you want to be successful in real estate investing.
Most common mistakes in real estate investing
Real estate investing has a lot of moving parts and it might be easy to make a mistake. Here are the most common mistakes beginners to real estate (and even some veterans) tend to make:
- Not doing enough research before making a move. In most cases, someone else has already made the same mistake and has written a book about it. When in doubt, turn to your team and ask for their advice. Access to their knowledge is one of the primary reasons why you're paying them.
- Spending money with gurus offering courses on how to get rich in real estate. A person offering courses may have more experience with creating and selling courses than with real estate investing.
- Not learning from your peers. Every experienced real estate investor started with their first property. Many people in the FinanceBuzz community invest in real estate and would love to talk real estate with you. The community often offers free knowledge and its members could be generous with their time.
- Falling in love with a property instead of the numbers. In many cases, you might not live at this property so you don't need to like it. Only prospective buyers and tenants need to like it. Focus on the numbers instead.
- Overleveraging yourself. It is easy to get excited and get involved with too many projects at once. This inability to focus could quickly turn a profitable property into a loser if you run out of money before the project is complete. Remember that one finished project is better than several unfinished ones.
A word of caution about Zillow
One of the most popular real estate websites is Zillow. Zillow offers similar search functionality as the MLS, such as narrowing down by property type, number of bedrooms and bathrooms, size of the home, lot size, and price.
Zillow also provides a proprietary Zestimate of the value of a property, but this estimate may vary widely in comparison to actual market values. For example, Zillow may provide a Zestimate of $300,000, yet the home is only able to sell for $250,000 based on market conditions and the prices of similar properties in the area.
If you went by the Zestimate instead of doing your own research that could really throw off your calculations on a deal. This could result in you not making a profit or even taking a loss. The takeaway is that it’s always best to do your own math and research.
Education is a good thing, but don't fall into paralysis through analysis by reading endless real estate listings. The perfect deal rarely happens, and if you wait for the perfect deal, then you may be waiting for years to make your start in real estate investing.
Here's a quick checklist to get you started on your first real estate investment:
- Decide whether you want to be a flipper, buy rentals, or do wholesale deals.
- Determine which type of properties you want to focus on. For example, you could invest in land, residential real estate, or commercial real estate.
- Figure out the location you want to invest in. Remember, you don't have to invest in the same place you live.
- Create your investment strategy and network to find potential properties.
- Set up a plan for how you fund your investments.
- Set a timeline for when you want to complete your first deal.
- Think about the outcome that would make you happy with your first real estate investment.
The best way to get started is to learn a little and execute, then learn some more and make your next move. And don't be afraid to ask for advice along the way. If you’ve got questions, come join us in our BiggerPockets Fans - Real Estate and Investors Facebook group. Your friends in the FinanceBuzz community are always here for you and happy to help you make a successful start and build wealth over time!
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