Last Updated on October 11, 2019 by Mark Ferguson
Real estate investing has changed my life. It has given me the money and freedom that I never thought I would have when I was younger. My rentals provide a steady income whether I work or not, and my flips provide large chunks of cash I can invest in more rentals.
There are many ways to invest in real estate, including fix-and-flips, long-term rentals, vacation rentals, REITs, short-term rentals, crowdfunding, nonperforming loans, wholesaling, and your personal residence. Whether you have a lot or a little of money, you can invest in real estate. It is not easy and will take time, but it may also be one of the best financial decisions you ever make.
Why you should consider real estate investing
I was a real estate agent for many years before I bought my first rental property. I also flipped the occasional house with my father. I loved real estate, but I was not getting very far ahead financially, even though I was making decent money. In fact, I was stressed out because I thought I did not have nearly as much as I should have in savings or in assets based on how much money I was making. I researched the best ways to invest my money and looked at stocks, bonds, franchises, businesses, and as many options as I could. I tried not to be biassed towards real estate because I wanted to make the best financial decision I could. However, real estate—and specifically rental properties—kept coming up as the best way to invest.
Rental properties provide cash flow. which means they generate money every month. The rent you receive on a good rental should be more than the mortgage and all the expenses. The cool thing about cash flow is it comes in as long as you own the rental. In fact, it increases over time as rents will increase and loans are paid off.
Another advantage that real estate has over most other investments is it can be leveraged. That means you can get a loan for the investment. You can get a margin account for stocks, but that is not nearly the same thing as a 30-year mortgage. By putting less of your own money into the investment, it magnifies your returns and decreases your risk.
Buying below market value
Something else that you can do with real estate but very few other investments is buy it below market value. I can buy a house worth $150,000 for $100,000. It is not easy, and it takes many years to master the practice, but it is possible. I flipped 26 houses last year, and the premise of every flip was getting a great deal. You can do it with rentals as well.
Real estate, and rentals in particular, also offer amazing tax advantages. You can depreciate rentals, which means you can deduct part of the value on your taxes, even though you may actually be making money with the property. Almost all of the expenses are deductible or depreciated as well. When you sell a rental, you also get favorable tax treatment thanks to long-term capital gains, and you can even exchange it for another investment without paying taxes. After I learned about the advantages of rentals, they seemed like the best investment for me by a long shot!
How do you start investing in real estate with no knowledge?
One of the tough things about investing in real estate is that it is hard. It took me two years to buy my first rental property after I decided I wanted to buy rentals, and I worked in the real estate industry. It took me time to learn what I wanted to invest in, how to do it, and how to save the money needed to do it. Now that I have been an investor for many years, I have learned a lot of tricks that could have got me started much sooner. Just because it took me a long time to buy my first rental, it does not have to take everyone that long. What steps should you take to become an investor?
Real estate investing is complicated, and many people give up because it is tough to figure out. That is a good thing because it leaves more opportunity for those who are willing to put the work in. You have to learn many things to be an investor. You need to learn about your market, housing prices, rental rates, financing options, fixing up houses, managing properties, and much more. Luckily, there are many websites (like this one), YouTube channels, books, and even coaching programs to teach people how to be an investor.
Decide what you want to do
There are many ways to invest in real estate. You may not want to buy rentals right away, or your market may not be very good for rentals. Maybe you don’t have any money and want to start out wholesaling to save up cash. Whatever it is you want to do, you need to decide and focus on that technique. You want to become a master at what you do, not know a little bit about 100 things.
I am a huge proponent of setting goals. Once you decide what you are going to invest in, you need to set some goals for when you are going to do it. Be specific about how many deals you are going to do, what date you are going to do them, and what baby steps you will take to get there. Big goals do not happen on their own.
Find the money
One of the biggest challenges for most people who want to invest in real estate is finding the money to do it. Banks will require 20 percent down or more on rentals. If you are buying a $100,000 property, that is $20,000 plus closing costs, repair costs, and reserves that you will need! This turns off most people, but there are ways to invest with less money down, like buying as an owner-occupant, using the BRRRR strategy, or House Hacking. You may also want to start with a different strategy than rentals that takes less money.
Learning and planning are necessary, but you need to take action as well. Many people get stuck in the learning phase and never take action. You do not have to buy a house to take action, but there are many things you can do while you are learning. You can go look at houses in your area, talk to a lender, talk to a real estate agent, and start writing out the numbers on potential deals. Just because you are not ready to buy does not mean you get to sit at home on the couch reading without taking action.
Is it better to flip houses or invest in rental properties?
I flip houses, but I do not consider house-flipping an investment. House flipping is more of a business or a job. Every time I sell a flip, I must work to find another one to make more money. A great real estate investment provides a great return on your money without much effort. Rentals bring me money every month without much work and without having to keep buying more rentals.
I use the flipping income to buy as many rentals as I can. I still list house flipping in this article because most people consider anyone buying or selling real estate an investor. Just about anything to do with real estate except buying a house to live in is considered real estate investing: wholesaling, flipping, note buying, etc. I have no problem with people calling these techniques investing, but to me, a true investment brings money in without working.
Is the house you live in an investment?
Your personal residence is another way to invest in real estate. Some may not consider a personal residence a way to invest in real estate because you aren’t bringing in any rent or income. I think there are definitely ways to make your personal residence a great investment. You also have to pay rent if you do not own your house, so even if you are not making money, you are saving money in most cases. I bought the house I owned before my current house at the foreclosure sale in 2009.
I sold it for $130,000 more than I bought it for because I bought it below market value. The nice thing when you invest in real estate with your personal residence is you can make a tax-free profit if you live there for two years or more! It is also possible to buy a personal residence that you can turn into a rental property. This is a great way to buy a rental property with little money down. You can buy more than one property this way and build up a portfolio of rentals with small down payments.
How to purchase a property below fair-market value
No matter what kind of investing you are doing or what kind of property you are investing in, you must get a great deal on it. This is the key to almost every successful real estate investor. Getting a great deal brings so many advantages to the table and protects you from many of the risks that others talk about with real estate. It seems like a necessity to get a great deal on a house flip, and it is. However, it is almost as important to get a great deal on a rental property.
When you get a great deal, you increase cash flow, which means you make more money every month. You build instant equity, which means you can handle a downturn in the market or sell and make a profit if needed. You could also refinance the property and take out most of the money that you invested to invest again. If you are getting great deals, banks and private lenders are much more willing to lend you money on your current properties and future properties as well.
No matter how you start out investing in real estate, I think almost all investors should be aiming to buy rentals. When you buy rental properties below market value with great cash flow, there is not a better investment in my eyes. You can hire a property manager and have a mostly hands-off investment as well once you buy it and rehab it if needed. Different markets work better for different types of rental properties. I started out investing in single-family houses because I could get great deals on them, they cash flowed amazingly, and they were easy to rent out and manage.
How to find investment-property deals
Getting a great deal is vitally important to becoming a great real estate investor, but how do you get a great deal? It is not easy, but you do not have to be a full-time house flipper to do it either. Most of the houses I buy from the MLS (multiple listing service) anyone can buy.
The MLS is where real estate agents list houses for sale for other real estate agents to find for their buyers. Most houses on the MLS can also be found on Zillow and other real estate websites. A lot of people will tell you that it is impossible to get a great deal on the MLS, but that is not true. If you know what to look for, you can get deals on the MLS anywhere. Colorado has had one of the hottest markets in the country, and I get deals from the MLS all the time.
I am a real estate agent/broker, which helps immensely but is not necessary to get a great deal. You must have a great real estate agent, be willing to act fast, and have your financing lined up to get great deals on the MLS. If you are an owner-occupant, you actually have an advantage over investors on some properties because the sellers (HUD, Fannie Mae, Wells Fargo) prefer owner-occupants.
I also buy many off-market properties, which are houses that are not for sale. We send postcards and letters to owners who may be willing to sell but have not listed their home yet. I also drive around looking for houses that need work (drive for dollars). I network with as many people as I can and let them know I buy all kinds of properties in good or bad condition. It takes time to learn how to talk to off-market sellers. You also will need to have an agent or lawyer helping you with paperwork. Some of the best deals are not actually for sale.
For sale by owner
I also buy houses that are for sale by owner. That means the seller is not using a real estate agent and are trying to sell the house on their own. I find these deals on Zillow, Craigslist, Facebook, word of mouth, and by driving around town.
I also buy houses from auctions once in a while. We used to buy almost all of our flips from the foreclosure auction when I worked with my dad. However, the competition became fierce over the years, and the supply has dwindled to almost nothing. I will occasionally buy from the foreclosure auction, but it is rare. I also buy from other auction sites like auction.com, xome.com, Hubzu, and more. You must be very careful buying from auctions as you may not be guaranteed a clear title, there may be a buyer’s premium, and you may need cash that same day.
Wholesalers also are a source for great deals. Wholesalers look for houses that are below market value using the same techniques I listed above. They will find a great deal, get it under contract, and try to sell it to another investor without doing any work to the home. I buy quite a few deals from wholesalers. You must always run your own numbers and not blindly trust wholesalers and realize that many people who say they are wholesalers will never actually do deals.
Wholesaling is also another way to become a real estate investor. It can be a way to get your foot in the door with less money than buying a rental or flipping, but it takes time and hard work to make it as a wholesaler. Most wholesalers use the techniques above to find deals, get them under contract, and then sell those contracts or complete a double-close to quickly sell the property to another investor.
How can you learn about real estate investing?
It took me a long time to learn the best ways to invest, and I was in the real estate industry. I have learned a lot after buying hundreds of houses, multifamily properties, and commercial investments. I have also learned a lot from being in the industry and talking to many successful investors. If you are looking to learn more about investing in rentals or flipping houses, I can help.
I have a coaching program that goes over everything and comes with videos, a guide, email coaching, and monthly calls with me. The Complete Blueprint for Successful Real Estate Investing.
It is not easy to invest in real estate, but it is worth it if you are willing to put in time and work. I think the ultimate goal is to own rentals that will provide cash flow for the rest of your life, but there are many ways to get to that goal. Other forms of investing, like flipping or wholesaling, can help you buy more rentals.