Real Estate Investment Tips for New Investors

Looking to make some extra cash? Real estate investing can be an exciting way to supplement your income. Some even become serious investors,  turning real estate investing into their full-time business. Getting started in the real estate investment world is not always easy. People need to have money for a down payment, a well-crafted investment plan, potential investment partners, and an excellent real estate professional to help with the buying process. These real estate investing tips will start your path toward becoming a successful real estate investor.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Why Invest in Real Estate?

Real estate is a popular investment choice for many reasons, with one of the biggest being the potential for passive income. Unlike stocks or bonds, real estate offers the opportunity for rental income that can provide a steady stream of cash flow, even while you sleep. Of course, market fluctuations can impact the value of your investment, but carefully researching and investing in hot markets can mitigate those risks. Owning real property is a unique asset class promising a variety of opportunities for investors, including fix-and-flips, commercial properties, and more. Ultimately, investing in real estate allows for the potential for long-term wealth-building and financial security. It can be your pathway to financial freedom.

Types of Real Estate Investment

Investors can purchase many types of investments. Broadly speaking, real estate investment properties fall into two categories: commercial and residential. Knowing the differences between these types of real estate can help investors decide the right initial investment strategy for them. 

Residential real estate investment is further divided into three sub-categories: rental houses, multi-family homes, and fix-and-flip properties.

Residential Real Estate

Buying a rental property is a preferred form of real estate investment for beginners because buying rental homes is similar to buying a primary residence. They’re usually easier to maintain as the tenant can be responsible for the day-to-day upkeep. Since you’re typically dealing with a single tenant, learning the ropes of being a landlord is easier. The rental income creates a steady cash flow with a low operating income.

Multi-family homes require a more significant up-front financial investment. Their monthly expenses are higher. It also means ownership can be more lucrative because of the extra income stream and appreciation gains. They can be as simple as a duplex or can have three, five, or more housing units.

Finally, fix-and-flip properties can be lucrative for someone with the right home improvement skills and patience to find distressed properties with potential.

Commercial Real Estate

On the commercial side of the market, there is a great variety in the types of investments. Investors can specialize in office buildings, retail space, and industrial property (like warehouses and factories). When deciding what kind of property to invest in, it’s essential to consider cost versus potential return, demand for the type of space being purchased, and the local and national economy. The commercial market can be more sensitive to changes in market trends, which is why some segments have a higher risk. However, with high risk comes the potential for a high return on investment if your strategy works.

Commercial real estate investment usually requires more money upfront because buildings are more costly than residential properties. Pricing requires factoring in the property’s potential revenue and operating expenses. It also means a higher vacancy risk, requiring the owner to float ongoing expenses like utilities and mortgage payments while marketing to attract tenants.

When trying to decide what type of real estate to invest in, potential investors should ask:

• What kind of real estate is in the greatest demand where they want to buy?
• What kind of real estate investment matches their skills and goals?
• What is the economy like where they would like to purchase?

Real Estate Investment Trusts

You may have heard of REITs, or real estate investment trusts, as an investment option. These companies own, operate, or finance income-producing properties across various types of real estate. REITs can be a way of dipping a toe into the real estate industry and gaining exposure to real estate without the complexities involved in direct property ownership. Most REITs are publicly traded on major stock exchanges, making them highly liquid compared to traditional real estate investments that can take time to buy or sell. Historically, REITs have delivered attractive total returns, driven by a combination of consistent dividend income and potential long-term capital appreciation. However, they are more sensitive to stock market fluctuations.

Align With an Agent

Before diving into real estate investing, find a knowledgeable real estate agent. Real estate agents can be your partner in finding the right investment opportunity. Think about what these individuals already know: where buyers are looking, where properties are affordably priced, where homes are appreciating. A good real estate professional can give new real estate investors tips on evaluating properties, conducting due diligence, negotiating a good price, and navigating the real estate purchase process.

To choose the right real estate professional, start by interviewing agents. It helps to ask questions such as:

• How long have you been in the business?
• Do you have an area of expertise?
• Do you have references?
• How long have you been facilitating real estate purchases in this area?
• Have you worked with real estate investors before?

Make a Solid Plan

Before purchasing the first property, new real estate investors need a business plan. This document answers questions such as:

• How much of my own money will I invest in real estate?
• Will I use financing to purchase investment properties?
• Do I need to partner with other investors?
• What kind of property will I buy?
• Is the goal to sell the property for a profit or make a profit off ownership of the property through rental income?
• How will I fix up or maintain the property?

Research the Real Estate Market

Start educating yourself on what’s happening in the market niches you have identified for your real estate investing. Now that this is a business, you need to know what’s happening in the local real estate market so you can identify the right prospective properties to add to your investment portfolio. It can also tell you if you need to adjust your strategy.

If you’re choosing residential real estate, learn about the local rules around tenancy. For instance, regulation changes may mean you can’t have short-term rental property in a specific part of town. You’ll need to change to long-term rentals. Condominium HOAs may also have rules about their use as a rental property.

Real estate investing can become a successful business with knowledge, hard work, and experience.

Hiring Your Team

Being a real estate investor isn’t an island. Working with a mentor or partnering with a real estate professional is helpful because they’ll have answers to your starting questions. They may know the area where you’re hoping to buy a commercial space or rental property and can give pointers as you begin.

If you’re buying into commercial real estate or have plans to grow an investment portfolio, hiring a property manager may be on your horizon. They aim to handle more operations for you, from marketing vacancies to sending handymen to fix issues. Hiring a property management company is an additional cost, but their benefit is saving you time while lending their expertise in building tenant relationships.

Successful investors benefit from strong relationships with loan officers, tax professionals, and certified public accountants. In fact, having a tax professional and CPA you trust in advising your real estate investment strategies is essential. The IRS has specific rules and write-offs concerning income-earning properties that can affect your return on investment. It’s wise to get their expert advice before making any purchase.

Starting As A First-Time Real Estate Investor

Owning real property has a track record of higher returns over time, but like all investments, it comes with a risk. Remember these real estate investing tips. As always, have a set plan with your goals and contributions outlined. Have an end goal that drives all your strategic planning and purchases. Don’t underestimate the power of building a real estate investing team around you, including hiring the right real estate agent.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

Updated July 2024