How to Invest in Real Estate for Beginners

Real estate investing for beginners might seem daunting, but it’s the best way to gain assets for your future. Real estate is an asset class that’s valued in the trillions of dollars and is only getting bigger. As of 2021, the global professionally managed real estate market was worth $11.4 trillion, up from $10.5 trillion the year before.

Meanwhile, the real estate market expanded at an average rate of 4.2% annually in the five years leading up to 2022. Growth is taking place against a backdrop of some pandemic-fueled headwinds in commercial real estate when hybrid work models took hold. Nevertheless, the long-term catalysts for real estate investing remain intact.

Given the robust demand for real estate around the globe, beginner investors won’t want to miss out on their share of the pie. In this article, we’ll explore the importance of real estate as an asset class and provide insight for novices on how to invest in this exciting market.

Understanding Real Estate Investing for Beginners

Real estate is not a one-size-fits-all market. There are many ways to gain exposure to this category, whether it’s through a private fund that invests in hotels, a publicly traded Real-Estate Investment Trust (REIT), or buying and flipping, to name a few. With a REIT, you gain exposure to multiple properties and can trade them similarly to equities.

The right opportunity for beginners depends on various factors. For example, you may be an accredited investor with a net worth of over $1 million and are looking to protect and build your wealth. In this case, a private fund that invests in commercial real estate on your behalf could work.

Or perhaps you have not reached that status yet. You may want to gain exposure to publicly traded REITs, liquid investments that you can buy and sell as you, please. REIT investing can be either long-term or short-term in nature, and you can invest at your own pace.

Fund investing is not the only way. If you are a long-term investor interested in buying and holding, you might invest in a property like an apartment building or multi-family housing and collect rental income from it or Proptech. For this, you might want to consider bringing in a partner, given the likely size of the investment. In this case, you either manage the property yourself or hire an outside property management firm for the job.

If you’ve got a short-term time horizon, you might want to consider flipping, a popular method that has been thrust into the spotlight by reality television. With this approach, you purchase a property, remodel it and then put it back on the market with the goal of selling it for a profit.

Whatever your status, there’s no shortage of opportunities in the real estate market. Depending on the type you choose, real estate will position you for regular income payments and potential returns in the double-digit percentage area or higher over the long haul.

However, it’s also important to consider the risks as a beginner investor in real estate. Chief among them is tenant default, particularly if the asset is not secured and there is no recourse to sell the property and get your money back. Another risk is uncertainty in the economy, where changing market cycles affect things like interest rates and demand, a scenario that’s been playing out since after the health crisis.

Setting Investment Goals

Real estate is not considered a liquid asset class where you will see returns overnight. Instead, it’s one that requires patience, planning, and strategizing to get the most bang for your buck. Before you choose which direction to pursue, one of the first things to do is determine your financial objectives.

Whether you’re saving for retirement, a child’s education, or simply to grow your wealth, this will affect the types of assets that will deliver the returns you need. Also, as with any investment, assessing your risk/reward profile is important, which will influence decisions like the region where you invest.

Ultimately, the higher the risk you inherit, the greater your potential returns should be as a reward for taking on that risk. If you happen to be risk-averse, you may want to focus on protecting your capital as the primary goal.?Private real estate funds can do the trick here.

And finally, decide your timeline for the real estate investment, which will determine whether you are looking to hold for the long term or short term. This will influence whether you choose to invest in real estate stocks or REITs or whether you’re willing to have your capital tied up for longer periods of time in funds, at least five years.

Researching the Real Estate Market

For beginners, you want to be sure and perform your due diligence when it comes to real estate investing. By putting on your analyst hat, you can weigh the pros and cons of an asset or investment product yourself, building your confidence about investing in the process.

• Identify Potential Investment Locations: As the saying goes, real estate is all about location, location, location. Consider trends like population growth, jobs, and demographics (are young people moving into the area, and what’s drawing them?)
• Analyze Market Trends & Demand: Learn whether the local economy is growing and what is fueling demand for real estate in the area. This means looking at the area from both a macro (broader economy) and micro (local economy) perspective. Ask questions such as, Is it a buyer’s market where there’s more inventory than there is demand? Or is it a seller’s market, where demand outpaces supply? What’s a residential property’s average rental income, occupancy rates, or price?

Building a Real Estate Investment Strategy

The next step is to come up with a real estate investing for beginners strategy. This means deciding what type of asset you want to focus on: rental properties for income, flipping for profits, REITs for steady income and liquidity, or private funds to protect and grow your wealth.

No matter the amount of money you have available to invest, you’ll want to establish a budget. If you purchase a property outright, this will help you determine whether you’ll need financing or it will be an all-cash transaction.

The ROI represents the return that you’ll generate from the real estate investment after all expenses are paid. The time when you realize the ROI will vary depending on the type of asset you choose to invest in.

Flipping: Subtract the cost of the property by the investment gain. Take that result and divide it by the cost of investment to get your ROI.

Rentals: Here, you should consider the annual income you’ll earn from tenant payments. Once you determine the expected income, you should calculate your expenses tied to the property, including any HOA fees or maintenance costs. Then use this formula: annual operating expenses minus your annual rental income. Divide the result by the balance on the mortgage, and you get your ROI.

REITs: Your REIT returns will use a similar model to dividend stocks. Purchase shares and watch the dividend checks come in either annually, quarterly, or monthly. The dividend yield reflects how much you are earning in dividends in relation to the size of your investment. The formula is the dividend per share divided by price per share equals the dividend yield.

Financing Options

If you are investing in a property, whether to flip it or generate rental income, the next step is to explore your financing options. Keep in mind you’ll have to make a down payment, which you can expect to be in the range of 15%-25% of the purchase price. Additionally, you’ll want to earmark funds to cover the home inspection and other closing costs.

Here’s where you might want to consider bringing in a partner to share the cost and combine your expertise. Keep in mind that if you choose to go this route, you’ll also have to share the profits and the risks. If something goes wrong at your partner’s hand, say they fail to tend to issues that need repair, it could put both of you in the position of liability.

If you are working with a local realtor, you might also want to speak with them about property taxes. The amount you pay there will be commensurate with the value of the property you are investing in. It could make sense to engage a tax professional, at least for your first deal, considering that you are new to real estate investing for beginners.

After you’ve identified the property to invest in, including weighing the pros and cons, you are ready to make a deal. The seller is prepared to negotiate, and so should you. The better you know the market in your area, the more leverage you’ll have when it comes time to make a deal.

Your realtor should be able to provide comps data so you know what similar properties are selling for in your neck of the woods. If the deal appears to be falling apart for one reason or another, don’t be afraid to stand your ground and walk away. By talking to other investors in this market, you can learn some of the trade tricks they may have picked up through the school of hard knocks.

Conclusion

We have only scratched the surface of all there is to real estate investing for beginners. The truth is that no two deals are exactly alike, and the more deals you do, the more you will learn. The important thing is to be patient and understand that some aspects of the process will be outside of your control. Fortunately, the real estate industry has no shortage of professionals across service areas who can provide support along the way.

One solid resource to help you get started is a book by successful real estate investor Robert Kiyosaki entitled, “The Real Book of Real Estate: Real Experts. Real Stories. Real Life.” Among the points he makes is that the real estate market will always stand the test of time in a civilized world where people need a roof over their heads. Another good resource is real estate investor Barbara Corcoran, who is known to frequent the media circuit.

Consider also looking into the emerging field of Proptech. Stay ahead of the curb while you can!