How to Invest in Real Estate: A 7-Step Beginner’s Guide

Investing in real estate may seem as simple as buying a property and collecting money, but it is far more complicated than that. Don’t stop reading, though. I said it was complicated, not impossible! This beginner’s guide will help you understand how to invest in real estate successfully, one step at a time. While The Close likes to keep our articles short, this topic needs a bit more explanation, but trust us, it will be worth your while 😉.

Key Takeaways:

Take your time to research the market before you invest.

Diversifying your real estate portfolio to lower risk is a good idea.

Keep an eye on cash flow and expenses to make sure you’re making a profit.

Build a network of reliable professionals like real estate agents, contractors, and property managers.

Stay updated on local and national real estate trends and regulations.

Understand the tax implications and maximize any available tax benefits.

Have a clear investment strategy and long-term goals before purchasing.

Step 1: Create a Strategic Investment Business Plan

The first step in determining how to invest in real estate is creating a detailed investment business plan. This plan should outline your strategy, goals, target markets, and types of investments. It should also include financial projections, expected returns, timelines, and risk management strategies. Analyzing market trends and competitive positioning is also essential. A well-structured plan will guide your decisions and attract potential partners or investors.

You want your investment plan to be as specific as possible so you can determine the best methods to reach your goals. To be exact, you need to make sure you have a strategy for your properties and outline your target goals to achieve the strategy. 

• Buy and hold: This real estate investing strategy involves keeping properties long-term.
• Fix and flip: This involves buying a property that needs improvement, repairing it, and selling for a profit. 
• Turnkey: A type of investment property that doesn’t need any work, has tenants in place, and sometimes includes property management services.
• Real estate investment trust (REIT): REITs are paper assets that trade on the stock market. They’re an excellent way to invest in real estate without owning property needing maintenance and tenants.
• Buy, Rehab, Rent, Refinance, Repeat (BRRRR): This is when you buy a property, fix it, rent it out, do a cash-out refinance, and use the money to buy the next property. It’s an excellent real estate investment strategy for portfolio growth.
• Crowdfunding: Real estate crowdfunding is when investors pool resources and invest in projects such as new developments or acquisitions. It usually doesn’t require a lot of capital, and you can cash out in two to five years on some deals.
• Wholesaling: With this strategy, you don’t actually own the property. You find a property you can buy below market value, put it under contract, and sell it to an investor for a profit. The key here is finding deals where the seller, wholesaler (you), and investor all win.
• Fractional ownership: Similar to a timeshare, fractional ownership is when investors each own shares of a property and its benefits and responsibilities. 

Are you not sure what strategy is best for your business? Check out our article 8 Types of Real Estate Investment. 

Step 2: Start a Holding Company

Next up, you’ll have to set up a holding company. This parent company can own and manage other businesses or assets. It’s a good idea to look into the legal stuff you need to do to create a holding company in the area you’re interested in. You’ll have to decide on a business structure, like an LLC or a corporation, and then get all the necessary paperwork filed.

Next, draft an operating agreement that outlines your company’s purpose, structure, and governance. Consider how your holding company will manage its subsidiaries with financial oversight and strategic direction. Consult legal and financial advisors to ensure compliance and maximize tax benefits. Once established, your holding company can provide advantages like organizational flexibility, better asset protection, and increased financial leverage for future ventures.

Step 3: Find Investment Properties

Inventory has hit an all-time low since the pandemic, so finding real estate investment properties is not always easy. However, there are several ways to scout out some good deals. It may take more work, but once you start building a portfolio of cash-flowing properties that appreciate, you’ll agree it’s worth it. Here are some strategies on how to find investment properties:

• Cold-calling: Find names of rental property owners by looking for tax records. Once you know who owns the property, you’ll have to do some sleuthing to find phone numbers. If the property is under a business entity, like an LLC, you can check with the Secretary of State corporate division for their filing information. You can also do a Google search or ask a tenant for their contact info.
• Joint venture partnerships: Most investors have already looked through all of the online listings and are now searching for off-market properties to find good deals. Expand your reach by partnering with real estate agents and passive investors by having them locate off-market properties. If you flip the property, you can pay them from the proceeds. If you hold the real estate in a portfolio, pay them a finder’s fee.
• Tax liens and auctions: Search for tax lien sales and foreclosure auctions. Do your due diligence on the property, and show up ready to bid.
• Postcards and direct mail: Canvas a neighborhood or owners of specific properties by mailing postcards or a letter indicating your interest in buying their property.
• Listing websites: Sites like Zillow, MLS, Realtor.com, and LoopNet list properties for sale. They also allow you to search recently sold properties to get a sense of property values.
• Real estate agents: Let real estate agents know you’re in the market for investment properties and tell them what types of properties you want to buy, how much you can afford, and building criteria.
• Partner with other investors: Attend investor groups and look for investors who wish to partner with someone. Thoroughly vet a potential partner to ensure they have some experience and resources and create a detailed partnership agreement that specifies roles, responsibilities, and exit strategies.

Zillow is a go-to site for people searching for homes in the US, attracting a whopping 231 million unique visitors each month. You can easily filter listings by location, price range, lot size, home type, and status. When checking out the listings, you’ll find info like how long the home’s been on the market, its purchase history, taxes, and what type of property it is.

Step 4: Evaluate Potential Properties

Once you’ve spotted potential real estate investment properties, you must dig into the details before moving (aka due diligence). Gather the property’s history and recent sale prices in the area to understand market trends. It’s also good to look into going rents, check the property’s condition, and know local zoning rules and building code requirements. 

Cash Flow Projections

As part of your business planning, you want to create a cash flow forecast based on the property’s income, expenses, and current vacancy rates. You also want to add overhead expenses like filing your business entity, advertising costs, real estate commissions and finder’s fees, taxes, and mortgage principal and interest. Deduct these from the rental income on a long-term investment or gross selling price on a fix and flip to see if the property has a positive or negative cash flow. Also, consider the consequences if you sell. Here are two real scenarios that new investors don’t often consider:

 Example 1: If I’m planning to fix and flip a property, I’m subject to short-term capital gains and can’t do a 1031 exchange, reinvesting profits into a new property to avoid the tax burden. Example 2: If I buy and hold a property, take the depreciation on my taxes, and sell before 27.5 years on a residential investment or 39 years on commercial property, I’m subject to paying the depreciation recapture.

Pro Tip: Understand and use metrics like cap rate, gross rent multiplier, and cash-on-cash return when evaluating potential profits.

Step 5: Fund Your Investing Project

If you’re getting into real estate investing, the next thing to consider is how much do you need to invest in real estate and how to gather enough money. Depending on the type of investing, the properties you have your eye on, and your financial situation, you might have access to various funding sources.

• Personal savings: Using your money can be the cheapest way to finance real estate deals. Cash on hand lets you move quickly without worrying about loan or mortgage interest charges.
• Conventional loans: These can be obtained from a credit union or a bank. Credit unions, being nonprofit, offer lower interest rates and fees and have more flexible loan approval processes as they serve specific communities.
• Government loans: These include loans from the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the US Department of Agriculture (USDA).
• Home equity line of credit (HELOC): If you already own a property with significant equity, you can use a line of credit against that equity to fund your real estate investments.
• Private money lenders: These are individuals or private companies that provide loans for real estate investments. They may offer more flexible terms than traditional banks but often charge higher interest rates and cater to experienced investors.
• Hard money loan: These loans typically have a short-term period of 18 months or less (but some hard money loans can be as long as three years) and involve a lender or investor giving you money directly. Hard money loans are most commonly used for fix-and-flip loans.
• Seller financing: In this scenario, the seller of the property acts as the lender and allows you to make payments directly to them instead of to a bank. They may charge a slightly higher interest rate, offer a shorter term, and offer a balloon payment.
• Self-directed individual retirement account (SDIRA): This method allows you to use funds from your IRA to invest in real estate, providing potential tax benefits.
• Partnership or joint venture: You can partner with other investors to pool resources and invest in real estate. This can help spread the risk and leverage different skill sets.
• Friends and family: Friends and family can be a great resource for investing. Structure the loan so they get a return on their investment and provide a short-term payback date, for example, 24 months. Have a solid plan on how you will repay them.

Step 6: Buy Your Investment Property

Create a shortlist of properties that meet your criteria and go look at them. If you’ve done your homework up to now, you should have a pretty solid idea of what a potential good investment looks like. If you see one that hits all your checkboxes, make an offer. Have your lawyer draft the paperwork. A few things to consider are whether to keep existing tenants or buy the building vacant and find your own. Also, this is the period where you need to verify income and expenses by getting rent rolls and seeing the landlord’s profit and loss statements and accounting records. 

Once you’ve secured a deal, it’s just a matter of informing your lender, securing funding, and getting a closing date. Hire a home inspector and get a thorough inspection report. To simplify this process, it’s better to work with a qualified real estate agent who will arrange all of these details for you. Believe me, the real estate commission is worth it. You’ll save time and money in the long run. 

Step 7: Manage Your Investment

While you can definitely do the above steps by yourself at first, as your portfolio grows, you’ll need a solid team around you to facilitate the growth of your business. Building a strong team of professionals is crucial to navigating the complexities of real estate investment and helping you find properties. By assembling a well-rounded team, you’ll be better equipped to approach investments strategically and effectively. 

Here are key individuals you should consider:

• Real estate agents
• Real estate attorneys
• Mortgage brokers and lenders
• Accountants
• Property management firms
• Contractors and inspectors
• Insurance agent
• Title company

You should also use technology to manage your properties, which you and your team can access. Regardless of whatever real estate strategy you choose, you’ll still need a way to organize finances, collect rent, track vendors, and prioritize maintenance of your properties. That’s where investing software comes in handy. 

Dedicated real estate investing software can help you crunch numbers and analyze your investments. These tools make things easier, whether managing money or determining property values. One option worth checking out is Baselane. It has features for tracking income, managing expenses, and giving you detailed insights into your properties, which can boost your investment game. Remember to look for different options to find the best software.

Different Types of Investment Properties

The world of real estate is quite diverse, with different types of properties serving various needs. You’re probably familiar with most of these property types, but let’s take a quick look at them in case you haven’t considered one of these types.

• Residential: Any property used for residential purposes, including single-family homes, condos, duplexes, townhouses, and multifamily residences.
• Commercial: Businesses, such as gas stations, grocery stores, hospitals, hotels, offices, parking facilities, restaurants, and shopping centers.
• Industrial: Properties used for manufacturing, production, storage, and distribution.
• Land: This includes undeveloped property, vacant land, and agricultural lands such as farms, orchards, and ranches.
• Special purpose: Property used by the public, like cemeteries, government buildings, parks, churches, and schools.

Real Estate Investing Pros & Cons: Should You Invest in Real Estate?

Deciding whether to invest in real estate depends on your financial goals, how much risk you’re comfortable with, and your unique investment strategy. Real estate can be a great addition to a well-rounded investment portfolio. Still, it’s essential to take the time to carefully consider the potential benefits and drawbacks before making a decision.

Frequently Asked Questions (FAQs)

How long does it take to make money in real estate investing?

How do I start investing in real estate property?

What is the biggest risk of real estate investment?

Bringing It All Together

Learning how to get started in real estate investment for beginners can be tricky, with all the different factors and complex ideas to wrap your head around. But investing in real estate can be super rewarding and worth it. It’s a great way to make money and build a successful business. Use this beginner’s guide to real estate investing as your starting point to get yourself ready and learn how to invest in real estate smartly.