How to Start Investing in Real Estate

According to a recent survey, real estate is currently America’s favorite long-term investment strategy. With the volatility of the stock market, it makes sense that people are finding more stability and potential upsides in buying property.

But while becoming a shareholder is now as easy as downloading an investment app, such as Robinhood, Fidelity, or Ameritrade, investing in real estate still requires some serious legwork. To help you get started, Maleno, a boutique real estate and home-building company, mapped out a few best practices.

A Quick Note: While REITs and online real estate investing platforms are certainly excellent options for getting started, this post is about positioning yourself to purchase physical properties that you can flip or rent. Further, this content is for educational purposes only and is not intended to be a source of professional financial advice.

1. Position Yourself Financially

With the rise of personal finance influencers on Instagram and TikTok, there has been a lot of buzz about alternative ways to finance investment properties. From hard money loans and private money loans (often one and the same) to seller financing and crowdfunding, there are a lot of different ways people can get involved in real estate investing without a significant upfront investment.

Although these alternative financing methods have merit, they also come with increased risk and complexity. Therefore, it’s often a better choice to buy your first investment property in a more traditional fashion (e.g., cash or mortgage). In order to do that, you need some money in your pocket. To best position yourself financially, consider:

• Creating a New Savings Account: Put the money you're saving for an investment property into a different account than your personal checking and savings accounts.
• Depositing Consistently: Whether it's a manual or automated process, make sure you're depositing money into your savings account on a regular basis. Many people set aside 5%-15% of their gross (pre-tax) monthly take-home.
• Letting Your Money Make Money: Saving up for a down payment doesn't happen overnight. If you think it will take several years until you'll have enough saved, consider investing in various short-term CDs (certificates of deposit) while you wait.
• Speeding up the Process with a Side Hustle: More money means more savings. Work on picking up a side hustle and add that revenue to your real estate investment account. Moonlight as a freelancer, clean houses, work odd jobs, or walk dogs. Better yet, reach out to those you know who invest in real estate and see if they need help taking care of their properties. You may be surprised at how much contract work investors need. Plus, you'll learn a lot about property management.
• Creating a Budget: A penny saved is a penny earned. It's a cliche for a reason. As a starting point, follow the 50/30/20 rule. This general rule asserts that you should allocate 50 percent to monthly essentials, 30 percent to your wants, and 20 percent to savings. Once implemented, you can adjust it as you see fit.
• Paying Down High-Interest Debt (Critical Step): As of June 2023, the average credit card interest rate is 24.53%. If you have credit card debt burning a hole in your pocket, pay it off as fast as possible. In fact, you may want to pay it off before you start saving. This step is also crucial because lenders will look at your debt-to-income ratio during the mortgage approval process.

2. Research Different Funding Options

Cash is the quickest way to get things done in the world of real estate, but there aren't many new investors who have the capital to buy a house outright. In some cases, it’s not always the best way to get started, either.

When rates are reasonable, leveraging debt can be a powerful strategy when you do it responsibly. Before purchasing a property, research different funding options such as:

• Conventional loans and mortgages
• Government programs
• Home equity loans or lines of credit
• Personal loans and lines of credit
• Seller/owner financing

You may see a variety of "hard money loans" as you begin your research. Be extremely cautious as a new investor (and even as a seasoned investor) because these high-interest rates can be dangerous.

On the other hand, 0% intro annual percentage rate (APR) credit cards can be an excellent way to fund repairs (not the purchase of the property). The key is to set up automatic payments that cover the total cost of your project within the 0% interest window.

For instance: You get approved for an 18-month 0% APR credit card. You spend $10,000 on fixing your property. Divide $10,000 by 18 (months of zero interest) and set up monthly payments of $556. By doing so, you can pay for your repairs over a year and a half interest-free.

3. Decide Whether to Do it Alone or with Partners

Buying an investment property comes with a lot of challenges. As we’ve covered here, one of the biggest ones is saving enough money to buy a property in the first place.

For this reason, many investors have partners. From repairs and renovations to tenant issues and unexpected expenses, there is a myriad of responsibilities, and having a partner can help make it all possible. Of course, investing solo and investing with others both come with their own unique challenges. To figure out what option is best for you, consider these pros and cons:

Investing Solo

Investing with Partners

Consider your individual circumstances to help guide your decision. More specifically, consider your time and money. Whether you want to flip fixer-uppers, start an Airbnb, or find long-term tenants, it all takes a lot of time. If you have it, then investing alone can be lucrative. If not, it can become a major time-suck that becomes financially burdensome.

Additionally, if you have the financial position to invest alone, you make more money. But if you don't have the upfront capital, a little profit is better than none at all.

4. Consider Your Strategy

There are five main ways new investors typically make money with real estate:

1. Flip: When you flip a property, the goal is to hold the property for a short time (often six months to a year), fix it up, and sell it. Flipping a fixer-upper can be a way to make a significant amount of money quickly. However, it requires a lot of time and knowledge to work through necessary repairs.
2. BRRRR: Buy, Rehab, Rent, Refinance, Repeat. It’s the process of buying undervalued property, fixing it, renting it out, and then refinancing it based on its increased market value. The money from the refinance is then used as a down payment on another home. Then the pattern is repeated. Leveraging debt can be an excellent way to expedite the process of buying multiple properties. But know that it also comes with an increased risk.
3. Short-term Rental: Short-term rentals are typically considered residential properties that are rented for 30 days or less. Common examples include Airbnbs, VRBOs, and week-to-week vacation rentals. The most significant benefit of short-term rentals is higher nightly or weekly rates. However, many cities and counties aren't zoned for short-term rentals. Plus, it requires a significant amount of turn-over time (cleaning) and communication with guests.
4. Long-term Rental: Long-term rentals are what many new investors envision when they think of passive income. By and large, leases are year-long, which means less cleaning and communication with tenants. However, that also means your revenue is lower than it would be with a short-term rental.
5. Traditional House Hacking: This strategy involves buying a multi-family home, living in one unit, and renting out the other(s). The goal is to use the tenant’s rent to help pay your mortgage. House hacking allows you to build equity and reduce living expenses.

Ultimately, the goal should be to diversify your portfolio of investments (i.e., a mix of all the above). Not only does it protect you from major shifts in the market, but it'll also help ensure you don't overextend yourself financially.

It's important to note, too, that many people mix and match the above strategies with a single property. For instance, someone might repair a property, find a long-term tenant for a year or two, transition it to an Airbnb, and flip it five years later when the market is hot.

5. Find the Right Property

Jumping into a multiple listing service (MLS) can help you see what’s out there, but it doesn’t help you find what you should be looking for. It’s one of the many reasons why it can be beneficial to work with a seasoned real estate agent.

By telling them your price range, goals with the property, and your ideal location, they'll narrow your search and help you find properties with high potential upside. Plus, you'll have someone on your side, negotiating on your behalf for the best price possible, coordinating tours, and walking you through the closing process.

Start Your Investment Journey

There is a reason buying real estate is America's favorite long-term investment strategy. It's personally fulfilling, less volatile than the stock market, and an excellent additional source of income. But if you're new to the process, linking up with a real estate professional can be helpful. If you're interested in taking the first step in your investment journey, reach out to Maleno today to speak with one of our agents.