Checking out this property investment for beginners is an exciting first step in your real estate journey! Of course, real estate investment is a tried-and-true method millions of investors use worldwide, but it can feel a little overwhelming— especially for beginners.
In this guide, we’ll cover the different types of property investment, advantages and disadvantages, steps to get started, and common mistakes you’ll want to avoid along the way.
Key Insights
- Determine your ideal property investment strategy, along with its pros and cons.
- Understand the time and money commitment you have the capacity for now and in the future.
- Conduct a personal financial assessment, perform market research, find and finance a property, and then determine the best steps for property management.
Understanding Property Investment
There are many different forms of real estate investing for beginners, and the one that works best for you depends on your risk tolerance and personality. Property investment shouldn’t be considered a get-rich-quick plan but rather a long-term investment in financial security and freedom.
Below are the most common strategies and property investment tips for beginners.
Buy and Hold
The buy-and-hold strategy is by far the most common form of property investment for beginners. The concept is to buy a property in a steady or up-and-coming market and then rent it out. When the value of the home increases, you can sell it for a profit. With this strategy, you make a steady income each month and at the end of the sale.
For your first properties, turn-key is key! A turn-key property is ready to rent with little to no renovations. These properties are easiest because you have much fewer upfront costs or unexpected expenses inherent with renovations. Plus, they are ready for tenants almost immediately, so you can list them right away.
Flipping
We’ve all seen HGTV shows centered on buying fixer-uppers; this investment strategy has become popular recently for good reason! Flipping is when you buy a cheap house that needs extensive renovations. After remodeling, you sell the property for a profit and start again with the next cheap house.
Flipping can be a great investment strategy if you’re very handy or know a good contractor to work with. However, it’s certainly not a way to make passive income because you’re basically taking on a full-time job for the length of the renovations, but it can be lucrative if done well.
Consider the home’s after-repair value (ARV) and how much it will cost to repair it to a sellable state. Many investors follow the 70% rule, which we explain here.
REIT
REIT is short for a real estate investment trust and is most equatable to a mutual fund. They’re both publicly traded, more liquidable, and you own shares. The difference is REITs are run by companies that own, operate, and invest in real estate.
They tend to invest in larger real estate, such as skyscrapers and apartment complexes. People who invest in REITs get the dividends of real estate without the headache or hassle of buying or managing properties, making them suitable investment avenues for beginners.
Advantages and Disadvantages of Property Investment
Property investment has many advantages and disadvantages, especially considering there won’t ever be an absolute perfect deal. However, understanding what both sides can look like can help you determine if investment properties are the right next step for you.
- Advantages
- Cash flow: This is a bit of an overused term among beginner’s guides to real estate investing, but it is a helpful concept worth repeating. Cash flow assesses incoming and outgoing funds during a set period. REI Hub-specific reports like the operating cash flow are designed to help investors know what is left over at the end of each month. Long-term rentals provide steady income year-round, which can accumulate over time.Plus, buying an investment property and renting it out to tenants can create positive cash flow each month. This builds equity in the property, helping create a healthy margin over time to reinvest in other properties.
- Property appreciation: Appreciation isn’t only when someone says kind things about your new investment properties! Property appreciation is the increase in value of a real estate asset over time. You might have seen this in time-traveling movies or TV shows when the person from the future advises the person from the past to invest in real estate; appreciation can be a significant advantage and solid property investment strategy.
- Diversified investment portfolio: The real estate market generally features low volatility and stays stable without any rapid or unpredictable changes. Real estate is often up when other investment strategies, like the stock market, are down. It can balance out an investment portfolio and provide healthy diversification.
- Disadvantages
- Not easily liquidable: Liquidity in investing means you can turn your investment into cash quickly and without affecting its value. Selling an investment property can take time, especially depending on the season and market conditions in which you’re selling.
- Time and money commitment: Depending on your property investment strategies, property investment for beginners can involve higher levels of time and money commitments. Loans for property investment often require 20-30% down payments, and many experts recommend that time is the best variable to leverage.
- Risk of subpar tenants: Using landlord software can help with many aspects of property management, such as rent collection, insight into tenant histories via tenant screening, and lawyer-approved state-specific leases.
Steps to Start Investing in Property
Once you’ve decided to start, investing in real estate for beginners involves five simple steps. Let’s examine each category in more detail.
Step 1: Financial Assessment
They say money can’t buy happiness, but it can buy investment properties! Though not always fun, determining your financial readiness is crucial in investing in real estate. Just like building a home needs a solid foundation, a beginner’s guide to real estate investing would be remiss without emphasizing a solid base of financial preparation.
At the minimum, work to improve your credit score (most lenders like to see at least a 650 or higher) and try to manage your debt-to-income ratio for better loan terms. Make payments on time for six consecutive months, increase your credit to lower your credit utilization rate, or work with a credit repair company.
Once your credit score is in a good place, add a budget line item to save for your investment business. Between the down payment, closing costs, unexpected renovation expenses, and potential increases in escrow, saving as much as possible to plan for a cushion will help the early parts of your new business feel more achievable.
Step 2: Market Research
Market research is imperative to understand where your first investment property should be located. One of the more common property investment tips is to start locally. Invest in a property in your area so you can be available for any emergencies and minimize your business overhead. If your location isn’t the best for investment, consider places you like to vacation or areas with expanding job opportunities.
Additionally, factors like local regulations, economic conditions in the area, and what property types are most sought after should be considered. Check local ordinances to ensure there are no regulations against flipping or renting.
Step 3: Property Selection
Determine your buy box. While condos might be popular in beach towns and studio apartments in big cities, determine the property type you want to invest in. Figure out what features you want in a home, like the number of bedrooms, bathrooms, and square footage, and compare similar properties within your desired market to find the best fit for your preferences.
Use publicly available sites like Redfin to understand the average cost of homes and median rent prices in those areas. Many list or estimate monthly HOA fees, mortgage prices, and insurance options to remove the guesswork. These figures give you an idea of how much your expenses will be and how much rent you could charge.
Step 4: Financing Your Investment
Explore your financing options by checking out your local institutions and the products they provide. Nationwide institutions, community banks, and credit unions have pros and cons to consider when finding your best fit. They can give the best advice on traditional mortgages, portfolio loans, bridge banks, or lines of credit on current mortgages.
Nationwide institutions can often provide reasonable rates or a larger selection of loans, while local banks can provide faster customer service and a more personalized experience. Credit unions usually have special rates for their members that could be more competitive than other options. Chat with two or three banks about their options and see if they can make property investment for beginners attainable.
Step 5: Property Management
In the beginning, most people choose to be their own property managers. Using landlord software makes collecting rent and creating leases simple. If you scale your business or invest in a property far from your home, consider property management software to help automate your day-to-day operations.
Common Mistakes to Avoid in Property Investment
The most common mistake beginners make is miscalculating expenses. If you’re flipping a property, don’t put more into it than you can get back. If you’re renting the property, the rent you charge should cover all the expenses, including the mortgage. This builds equity in the property for free and can lead to a positive cash flow.
Another mistake is co-mingling funds. When your personal bank accounts are intertwined with your business bank accounts, you’ve got commingled funds. Not only does this cause confusion when booking revenues and expenses, but it can also create a muddy gray area that the IRS doesn’t love. To avoid any pitfalls, open dedicated business bank accounts and use rental property accounting software.
Finally, data leads to informed decisions. In real estate investing for beginners, it’s easy to see all the insufficient data that points to a bad deal. Trust the good data if you’ve gone through the work of identifying trends, gathering information, and scoping out properties.
How REI Hub Can Help in Property Investment
REI Hub is specialized rental property accounting software for real estate investors. Streamlined features like data imports, transaction matching rules, and batch-booking transactions ensure that categorizing revenues, expenses, and liabilities is easy.
Tracking these transactions throughout the year helps you understand your business’s complete financial picture and simplifies compiling information at tax time. Further, REI Hub optimizes property investment for beginners by providing helpful platform guidance and customer support.
Customizable reports like net income (P&L), operating cash flow, net operating income, and balance sheets help to assess real estate investing’s profitability. Further, reports like Schedule E and fixed assets schedules help ensure that easily missed deductions aren’t overlooked.
Referencing an accurate and complete financial picture of your business helps to provide insight into wise future real estate investment decisions.
At REI Hub, we take customer support seriously and want to ensure your questions are answered and that you feel confident using our software and empowered to be your own bookkeeper. No credit card or commitment is required when creating a free trial account to start so that you can evaluate the software and bookkeeping tools for yourself. You can also check out our publicly available demo portfolio or read through our Knowledge Base and online blog.
