You have probably heard from friends or family members about a great rental property investment they’ve made that’s sending them on their next vacation or helping them pay off their mortgage fast. This gets you thinking, “How do I start investing in real estate?” so you too can enjoy a great vacation and some extra income.
It is true. Real estate investing is one of the most prominent ways to build wealth. However, there are several different ways to invest in real estate, so where do you start?
To answer this, you need to know the type of real estate investor you would like to become. In other words, you must begin your real estate investing journey with the end result/goal in mind.
One of the first questions to ask yourself is how much you want to be involved in your real estate investments. Do you prefer more of a hands-on investment property where you are deeply involved with daily management of the real estate or are you dreaming of an investment property where someone else handles the day-to-day operations?
Your next consideration is the amount of money you have to invest upfront. Do you have enough capital to invest as the sole owner of a single-family home, a duplex, a multi-family unit, or even a commercial building? Or maybe you’re interested in a group investment or partnership so you don’t have to carry that burden?
Here’s the good news: If you’re ancy to begin your real estate investing journey, but feeling a little short on cash – maybe you don’t feel confident purchasing an entire piece of large residential or small commercial real estate your own, there are other ways to invest in real estate too!
To help you answer the above questions and identify your preferred level of involvement throughout your real estate investing journey, keep reading. In this article, you’ll learn about some common real estate investing strategies and various types of real estate investment opportunities that are available.
Real Estate 101 for New Real Estate Investors
Instead of getting bogged down in the nitty-gritty of real estate zoning laws or property taxes (booorrrrring!), let’s explore the big-picture overview of what you want as a result of your real estate investing endeavors and some paths that might lead to fulfilling those investment goals.
Most real estate investors want to grow wealth safely and consistently. Some want hands-on experience, while others want minimal involvement, but both are interested in making a sound investment on repeat and enjoying the returns.
Using Investment Property to Generate Cash Flow
There is no one right way to invest in real estate. Single family homes might seem like the most accessible option at first, but that’s only because the process of buying, repairing, and managing residential real estate is familiar.
As you read through these options, keep an open mind – your options are only limited by your imagination.
This is probably one of the first types of real estate investing that comes to mind, simply because of the popularity flips have gained from those oh-so-addictive HGTV shows.
While flipping residential real estate seems quite trendy now, it’s been around for decades. To complete a “Flip,” real estate investors use their own money to buy a fixer-upper, improve the property, and then sell the house for profit.
This approach usually involves a significant amount of time and money upfront to cover the down payment, title and loan fees, all contractor and renovation costs, plus the mortgage payments for as long as the home is in your name. This style of investing in real estate requires you to complete all renovations and then list and sell the home in the shortest time-frame possible because with each passing month, your profits are reduced by the value of the mortgage payment.
If you go the house-flipping route, you still need your own separate place to live since the house being flipped is under construction and unsafe. That means you must plan to cover your own housing and living costs in addition to the property and construction costs of the home you choose to flip.
This type of real estate investment has several risk factors to consider, such as the original purchase price, renovation cost (DIY vs contractor rates), and length of time you anticipate owning the property before it is sold. As you run the numbers, anticipate change orders from contractors in addition to delays for materials and manpower. If you don’t already have a real estate agent to help you with the purchase and sale of the property, this will also add extra costs.
Flipping residential real estate looks exciting, fun, and even profitable on television, but can be disastrous if you have not properly done the research, don’t have the proper connections or construction knowledge, and aren’t aware of all the minute details required for success in this type of real estate investing strategy.
Residential Rental Real Estate
Owning rental property has always been one of the most popular real estate investment opportunities. This is because when you invest in rental properties, you purchase the real estate and then rely on rental income paid by tenants to cover the cost of the investment plus, ideally, to cover the mortgage payments on your primary residence.
If you like being heavily involved in your investment properties, you can choose to be a hands-on landlord in charge of maintenance, management, and dealing with tenants. You have the option to hire a property manager to keep an eye on your investment properties, but you’ll still need to make the big decisions about maintenance and new tenants.
Owning rental properties is a long-term play for cash flow and appreciation because, at first, tenants’ rent may cover the mortgage on the rental and provide just a few hundred dollars in rental income beyond that. Over time, however, as you pay down the mortgage and acquire more rental properties, the cash flow multiplies with each additional income property.
If you’re interested in building a small business owning and managing rental properties, this is a great strategy in which you can produce steadily increasing, regular income from investing in real estate.
Real Estate Investment Trusts (REITs)
If you’re interested in a much more hands-off approach to real estate, Real Estate Investment Trusts (REITs) might be a good fit. Rather than dumping all your cash into your first rental property and pinching pennies everywhere else, you can buy into a variety of REITs through any online brokerage.
There are REIT options per asset class and at very low minimum investment values. REIT shares are widely available on the stock market (they might even be an option inside your 401K and IRA) and can be a great starting point for real estate investors who want to avoid managing properties.
My caution to investors going this route is that when you invest in a real estate investment trust, you’re investing in the company that owns the real estate properties. The value of your REIT shares can and will likely fluctuate with the stock market. Your investment’s success fully relies on the management company’s business model, their decisions to purchase, rent, and sell properties, and the timing of those decisions in relation to the real estate market cycles.
Real Estate Syndications
Last, but not least, you can invest in large commercial properties like apartment complexes, office buildings, and storage facilities as part of a real estate investment group. When you pool your money together with other investors as part of a syndication, you get to skip all property management responsibilities and simply enjoy the benefits of being a completely passive real estate investor.
As with all real estate investments, syndications aren’t for those looking to make a quick buck or trying to time the real estate market. Syndications are group investments that require an initial investment of $50,000-$100,000 and come with a hold period of about 5 years on average.
It’s likely you’ve never heard of investing in real estate syndications before, and that’s okay. They aren’t a new fad. They’ve actually been around for a very long time, although they were exclusive to only the wealthiest family offices until law changes in 2012 made them more broadly available.
With that being said, yes, there’s specific lingo and a unique investment process involved in nvesting in your first real estate syndication. But don’t let that scare you away as these can be some of the most passive and yet the most profitable real estate investments available.
I encourage you to learn about the potential returns profiles and deal structures available. Feel free to explore the various asset classes and commercial real estate markets that have been lucrative for others. For example, here at Goodegg, we love multifamily properties.
When I Was A New Investor…
My family and I started investing in real estate years ago when, with the purchase of our first duplex, we accidentally became house-hackers. In time, we moved to a new duplex and rented out both units of our first property, growing our cash flow and our real estate portfolio with each move. Eventually, as we were looking for an even more hands-off option, we discovered the power of real estate syndications.
Honestly, it was a little scary at first. While I knew that there were plenty of other investors investing in the project alongside me, plus the syndicators who’d be managing the project the whole time, but it still felt like I was walking the path alone, and there were many fears and unknowns along that path.
One of my biggest fears was that, unlike investing in stocks with my online brokerage account, once I wired my money into the syndication, I wouldn’t be able to log in anywhere and “see” it.
However, instead of getting lost in the risks and unknowns, my determination to passively invest in real estate led me toward expanding my network and my knowledge. This way, I’d have a larger number of higher-quality connections who could also provide resources and advice when needed. I did a ton of research and began getting to know other syndication investors.
I wish I had a list of real estate investment tips like this back then.
5 Strategies To Start Your Real Estate Investing Journey On The Right Foot
If you’re in that same boat of considering investing in your first syndication, or any investment property, I’d like to share a few recommendations for getting through those initial fears and uncertainties:
Do Your Research
Connect with Other Investors
Review Previous Deals
Take Your Time
#1 – Do Your Research
Education is the best way to fight back against the fear of the unknown. Investing $50,000 or more can be daunting, and you don’t want to spend the next several months or years with sleepless nights worrying about your real estate investment.
The best way to build your investing confidence is to do your research. Dive into real estate investing content with an open mind. Listen to podcasts, read books, and search through online articles and forums to gain different perspectives so that you can build a 360-degree view of the whole process.
Here are a few great places to start:
Rich Dad, Poor Dad – one of the best books ever written on financial freedom, the investing mindset, and the power of real estate investments
Bigger Pockets – a massive online community of real estate investors doing all-the-things. #rabbithole
Real Wealth Network – a great source for every real estate investor about some growing markets around the country
BiggerPockets Podcast (this is the podcast that originally got me hooked on real estate investing)
Best Real Estate Investing Advice Ever with Joe Fairless
The Real Wealth Show with Kathy Fettke
Lifetime Cash Flow Through Real Estate with Rod Khleif
Apartment Building Investing with Michael Blank
The Goodegg Blog
In particular, these posts are a great place to start:
10 Critical Factors in Deciding Whether to be an Active or Passive Real Estate Investor
#2 – Ask Questions
This one requires you to get out from behind your screen and actually talk to people, but trust me, it’s completely worth it, and it can save you tons of time in the long run.
When you’re just starting to invest in real estate, there’s so much to learn, that just getting to the point where you know what questions to ask is an accomplishment in and of itself. Most people who venture into the world of real estate investing get overwhelmed quickly and never even get to the point of asking questions.
This is where forums like BiggerPockets can be extremely helpful because you can see the questions that others are asking, which may be questions you didn’t even know to ask.
When you’re preparing to invest in your first syndication, there are no dumb questions. This is a big investment and could make a significant difference in your family’s future, so be sure to leave no stone unturned.
We always love when our investors ask us questions, because it tells us that they’re thinking critically about the situation, taking it seriously, and doing their own due diligence. Those are exactly the types of investors we want to partner with, and those are the investors who will invest confidently and remain confident throughout the project’s life.
#3 – Connect with Other Investors
A syndication, by its mere definition, is a group investment. That means there are others like you who are in your same shoes or have walked in them before you.
When you’re just starting out, it can be tremendously helpful to find and connect with others who are new to real estate investing, as well as more experienced investors.
Those who are new to investing will share many of your same anxieties, questions, confusions, and excitement. Those who have invested in syndications before can provide invaluable firsthand accounts of their experience with various investment projects and sponsors.
You can find other investors through online forums like BiggerPockets, local networking events, or by asking sponsors if they’ll put you in touch with some of their current investors.
If you haven’t already, start by checking out Shannon’s story. Shannon was in your shoes not long ago, and she and her husband did a TON of research before deciding to invest in their first syndication.
By connecting with a fellow real estate investor like Shannon, you’ll start to build a community of investors around you that will help you, not only in getting through your fears, but also in connecting you with great investment opportunities.
#4 – Review Previous Deals
This is one that we highly, highly recommend to all our investors.
When you’re shopping for a new couch, it’s unlikely you’ll buy the first one you come across. The more couches you look at, measure, and sit on, the more you’ll know exactly what you want and don’t want.
The same goes for real estate syndications. The first time you look through an investment summary, you might be completely overwhelmed by all the financial projections, data, and lingo.
However, the more investment summaries you review, the more you’ll start to understand the flow of the deal packages, how each sponsor communicates, and exactly what strikes your fancy.
#5 – Take Your Time
When we open up a new investment opportunity, it typically fills up within a few days. This leads new investors to panic, thinking that they’re missing the boat and that they should hurry up and learn everything so they can get a spot in a deal.
I’m here to tell you, there’s no need to rush. There will always be more great deals.
What’s important is that you take the time you need to truly feel comfortable with your investment. It likely took you a long time to save up that money you’re about to invest, so don’t sink it into the first deal you come across.
Allow yourself the time to do the research, talk to people, and consider alternatives, so that if and when you finally do invest in that first syndication, you are confident and excited about every step of the process.
Begin Your Journey with a Solid Real Estate Investment
If you take away nothing else from this article, I hope you’ll remember this. Investing in a real estate syndication is a big deal. And it’s completely normal to feel scared, confused, skeptical, anxious, and maybe a bit timid.
Every successful investor started out in your shoes.
What separates those who successfully invest and build passive income, from those who give up and return to their old ways is action. Plain and simple. In the face of uncertainty, those who take action will find success.
In preparing to invest in your first syndication or any other method of real estate investing, I highly recommend that you do the following:
Do Your Research
Connect with Other Investors
Review Previous Deals
Take Your Time
And if anyone tries to rush you or pressure you to invest, you tell ’em to come talk to me.
Investing in your first real estate investment is a huge milestone in your investing journey, and, even though your head might be spinning now, this is a time to savor.
Enjoy the learning process. Enjoy being a newbie. Enjoy the adventure ahead.