Want to Start Investing in Real Estate? 10 Things You Should Know

Real estate can be a lucrative investment opportunity if you love exploring new properties and want to diversify your portfolio. There are many things to know about real estate investing if you’re new to the process. Securing a property to rent or resell can get complicated.

Here are 10 things you need to know before investing in real estate.

1. Real Estate Investing Is Passive Income 

Real estate investing provides passive income instead of your typically active income.

Active income is the money you make when you go to work and are the one fully responsible for your success. Passive income is cash flow from a source you are not actively involved in. Though you secured the property, you’re not there doing work daily.

Real estate investing is an asset class, and you can use it as part of a diversified portfolio.

2. You Need to Eliminate Most Debt to Secure a Loan

You likely need to consider an investment loan. Lenders need to see a relatively clean record before they give you money, so you want to have a manageable amount of debt on your credit report. If you owe a lot to different entities, a new lender is unlikely to trust that you will make timely payments.

Real estate is a big investment, and you must show you’re financially responsible. Working to eliminate debt is one way to avoid wasting time and money.

Student loans, medical bills and credit cards should be paid off before investing in real estate.

3. Your Down Payment Will Be More

Your primary residence’s down payment could be as low as 3%, but you can expect to pay at least 20% for your investment properties.

This increase is because you can’t get mortgage insurance for these properties, making them riskier commitments for the lender. It also leads to stricter approval requirements to secure your loan.

Another aspect of your real estate budget will go to fixing the property up. Renovations can cost thousands of dollars, and some of those repairs can’t be avoided.

Access the property before investing to ensure you have enough funding in your budget for the down payment, fees, and any necessary renovations you want to complete immediately.

4. Start With a Low-Cost Property

Even if you have millions of dollars to spend, you must start small to make the most out of your investment journey.

Let your first property be in the lower to mid-price range, especially if you want to renovate a portion of the home before reselling.

Keeping the number low is also a safe choice as you learn the ropes of owning an investment property. If you don’t get the profit you were hoping for, you won’t lose that much.

5. Remember That Location Is Everything

You’re probably tired of hearing “location, location, location,” but it really is true.

Properties that need work but have highway access, are in good school districts and neighborhoods with a low crime rate will attract more buyers and do better than nicer homes in bad locations.

Look at the desires of your market and choose properties that cater to them.

6. Wholesaling Is a Quick Way to Turn a Profit

The goal of wholesaling is to purchase a property under its market value that you can control using a purchase and sale agreement. While under contract, you find a buyer willing to pay more for the property.

The important thing to remember is that you’re just selling the contract. The doctrine of equitable conversion allows this, making the final buyer the property owner once they sign. The seller will retain the legal title under the contract.

You can also purchase a property first using a double closing. In this process, you get the property and resell it immediately without repairing it first.

7. Self-Storage Is Another Safe Option for Beginners

Self-storage is a safe investment for those starting out. There’s high demand for these units, as people need to store their excess items.

Collect rent on each unit in your facility before expanding your business by offering rentable trucks and other moving equipment.

Storage units require less maintenance than other properties since there are no utilities and high-income earners get tax breaks.

Many facilities require owners to purchase their own locks, saving you the responsibility.

8. You Don’t Have to Do It Alone

Some people enjoy having a partnership in their investment, and new investors can learn a lot by partnering with an experienced one.

There are many things to consider if you choose to partner with someone, including whether or not you can trust them to make sound business decisions and compromise with you while maintaining a positive relationship.

A real estate investment trust (REIT) includes several investors that own rental properties without taking landowning responsibilities. A REIT is a good way to go if you want to own a rental home without being a landlord. The company manages the properties you purchase and takes a percentage of the monthly rent in exchange.

For most REITs, part of the rent goes into a pool for vacancy protection. Each group is different, so pay close attention to any agreements.

9. Get Everything in Writing

No matter how friendly you are with an associate, don’t take verbal statements as commitments or facts. The agreement is null and void if you can’t prove something was established later.

Even if you’re making an agreement with a close friend or family member, make sure everything you decide is written down and signed by both of you.

It’s easy to let feelings get in the way of following standard procedures. Remember that each investment you make is a legal process and you need to treat it logically, without emotions invading your thought process.

10. Stick to One Investment at a Time at First

It’s tempting to jump in feet first and grab many properties at once, but it’s important to slow down and start small to avoid getting in over your head.

Studying how to invest is a great strategy, but you learn a lot during your first investment. Avoid risk by purchasing one property at first while you find your footing.

Handling multiple tenants and properties with different needs is stressful. The mortgage for multifamily homes will also be higher than for a single unit.

Investing Wisely in Real Estate

Real estate investment is a complex but worthy process that can generate passive income for investors. Knowing these 10 things can put you on the right path to financial success.