Successful real estate investing for beginners requires learning what things to do and not to do. Today’s article gives six important and practical real estate investment advice for beginners when making their first property investment.
In this article:
Real Estate Investing for Beginners: Do’s and Don’ts for Profiting from Properties
Types of Real Estate Investments
Before becoming a real estate investor, one must choose from different types of real estate investments. There are two main ways to get into property investing: directly and indirectly.
Direct property investing means buying a property, either in cash or through a mortgage, and making money from the investment. The two ways to directly invest in real estate include:
- Property rental — A rental property is a real estate investment with regular cash flow through rental income. This allows owners to keep the property while receiving passive income.
- Property flipping — Property flipping means buying a property at a low price and selling it at a higher one later on. The income earned from selling at a higher price than the original price when it was bought is called capital gains.
What is passive income? It’s a kind of income a person receives with minimal or no effort at all.
Indirectly investing in real estate involves investing in financial securities of companies that represent ownership of either a company engaged in real estate activities or of actual properties. It’s called “indirect” because investors don’t actually invest in properties but in securities that invest in them.
There are several ways to invest indirectly in real estate. These include:
- Stocks of publicly-traded companies engaged in real estate development
- Mutual funds and exchange-traded funds (ETFs) whose underlying assets are focused on real estate companies
- Real Estate Investment Trusts (REITs)
- Real estate crowdfunding sites, which usually accept accredited investors only
As with flipping properties, investors make money through any of these indirect investment methods through capital gains.
Once you’ve figured out which investment type is more suited to your needs, preferences, and risk tolerance, here are some investment planning tips to help you get started.
Tips for Real Estate Investing for Beginners
1. Don’t: Forget to Set Goals and Create a Solid Investment Plan
Without an investment goal, it’s going to be hard to make decisions.
Without a goal, there’s no standard by which investors can evaluate their investment options. Goals can help investors choose wisely from different investing strategies (direct or indirect investing) and investment properties and securities.
Here are some examples of how to consider your investment strategy and which properties or securities to invest in based on one’s investment goal:
- If an investor’s goal is to receive a consistent stream of cash flow, direct investments in rental properties like Airbnb rentals may be the way to go.
- On the other hand, if the goal is to make a quick buck and stay liquid, indirect investments in stocks, ETFs and mutual funds may be a better fit.
If an investor doesn’t clarify his or her real estate investing goals from the get-go, the risk for choosing the wrong strategies and properties is high. Beginner investors should take this to heart.
2. Do: Study the Market Before Jumping in
One of the most important things in real estate investing for beginners is knowledge. The more a person knows about the real estate market and about the specific property markets of the areas they’re interested in, the better.
Considering the amount of money involved in real estate investing, especially direct investing, not knowing much about the market can result in illiquidity, at best, or massive losses, at worst.
Successful real estate investors have studied their chosen real estate markets first before investing. They don’t enter the game blindly and ignorantly.
Some of the most important things beginner investors need to know about the real estate market include:
- Current market prices of similar properties in the area or other similar areas
- Current rental rates of rental properties in the area or similar areas
- Property taxes specific to the location of properties they’re interested in
- Rental property laws
- Capital gains tax
3. Don’t: Go Beyond Your Budget
All beginner investors want to invest profitably, whether it’s in real estate or other types of investments. Part of the reason why they need to be aware of current market prices or rental rates for similar properties in the area is to know their maximum budget for earning their minimum required rates of return.
Let’s say an investor hopes to flip a property at a minimum return of 10% on capital. If the current market price of similar properties in the area is $100,000, that means the most he or she must pay for a property, including all improvements and repairs, is $90,909.09.
If the investor buys the property for $90,909.09 and flips it at $100,000, he or she earns a 10% return on the investment. The capital gain or profit of $9,090.91 is 10% of the $90,909.09 investment.
But if the investor succumbs to emotions and spends $95,000 for the property, the chances of flipping it at a 10% profit is low. It’s because the current going price for similar properties is only $100,000 and to get a 10% profit, the investor must sell it at a premium price of $104,500.
That’s why investors must be disciplined enough to stick within their budgets. Otherwise, they may miss their profit targets or worse, they may lose money on their investment properties.
4. Do: Diversify Your Investments
Successful real estate investors, like all other successful investors, know how to manage their investment risks very well. A key investment strategy they use to reduce their risks is diversification.
What is diversification? This refers to the strategy of putting one’s investments in different baskets, such as assets. By diversifying one’s investments, any losses on one particular investment will be limited to that investment alone.
An investor can diversify by getting into commercial real estate investing and residential real estate. Each has its own sets of risks and returns and can be a good way to diversify.
Particularly with direct real estate investments, diversification can be very challenging for beginner investors with limited investment capital. Given the high capital requirements for investing in a single property, dividing one’s limited capital may keep an investor from being able to invest directly in properties.
This is where investing indirectly in real estate through real estate investment trusts (REITs) and real estate-oriented stocks, and mutual funds come in. For as low as $1,000, you can start investing in various real estate-oriented financial assets to diversify.
5. Don’t: Let Emotions Determine the Investments
Investing is a numbers game and has little or no use for emotions since they tend to cloud one’s judgment, especially when the judgment requires objectivity and numbers.
Investors who go beyond their budgets typically do so because of strong emotions, which are irrational most of the time. They also fail to sell or rent properties because of greed, such as by wanting a very high price or rent.
The best way to leave emotions out of the investing process is to hire a competent broker. Doing so can keep emotions from hijacking one’s real estate investing endeavors.
6. Do: Look for a Good Mentor or Investing Partner
When it comes to real estate for beginners, there are lots of sources for information. However, the best way to learn about real estate investing is through experience.
For beginners, their best bet is to find a successful real estate investor. They can either ask that person to mentor them directly or partner with them to learn through example.
Either way, mentoring provides a much more comprehensive way to learn real estate investing for beginners. Books, articles, and e-courses can’t answer questions and encourage, but people can.
Anybody can learn how to invest properly in real estate, generate good income, and add to their nest egg. Just remember that knowing or learning is just half the battle for successful real estate investing for beginners — the other half is proper execution.
Do you have plans of investing in real estate soon? Why or why not? Let us know in the comments section below.
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