Real estate 101: 5 ways beginners can invest

This guide outlines 5 popular real estate investing strategies for beginners and whether real estate is a good fit for you. First, let’s think about your financial picture.

1. Financial readiness: Do you have funds available to invest? It’s also a good idea to tackle high-interest debt before investing in real estate. The high-interest debt you carry won’t be offset by any investment that you make. 

2. Investment goals: Are you seeking long-term wealth accumulation, passive income, or short-term gains? Your real estate investing strategy should complement your goals. For example, a home you purchase to rent out provides passive income rather than short-term gains.

3. Risk tolerance: Real estate investments can be stable but involve risk, especially if you put money into a single property. Can you withstand it if you don't hit your desired resale or rental needs? What if your investment takes longer to sell? Do you have the ability to handle if things go wrong?

Next, weigh how real estate pros and cons might impact you. 

Pros:

• Appreciation: Real estate values tend to rise and outpace inflation over time, potentially increasing your investment's value.

• Steady income: Rental properties can provide a consistent passive income stream, meaning you don’t have to be there every day to earn income.

• Tax benefits: Real estate investors can benefit from various tax advantages, such as deductions and depreciation.

• Portfolio diversification: If your investments were eggs, spreading them out in different baskets (e.g., stocks, bonds, and real estate) can provide stability to your portfolio in case one of those markets experiences big losses.

Cons:

• High initial costs: Some real estate investments require substantial upfront capital. 

• Maintenance and management: Rental properties require ongoing maintenance and management.

• Market fluctuations: The real estate market can be unpredictable, leading to potential losses. 

• Illiquidity: Real estate investments are not easily converted into cash.

If you’ve determined you’re ready, here are 5 popular strategies to consider:

Real estate investment trusts (REITs) own and manage income-producing real estate. You invest in REITs by purchasing their shares on a stock exchange. After receiving rents from properties, REITs send at least 90% of their earnings to shareholders as dividends. This setup can provide a source of passive income with the possibility of property values increasing in the fund.

REITs can specialize in the type of real estate they own, including industrial, multi-family (apartments), senior housing, and malls. Alternatively, if you want broad exposure to the real estate market, REIT funds invest in many REITs to offer a diverse mix of investments.

As a beginner, I invested in public REITs instead of private, non-traded ones. Besides knowing how to invest in stocks, I liked that public REITs require very little initial investment. Plus, I could sell my REIT stocks on a stock exchange if needed.

Online real estate investing platforms, such as crowdfunding sites, give everyday investors access to private real estate developer deals by pooling investor funds together. Minimum investments can range from $10 at sites such as Fundrise to $5,000-plus at Crowdstreet.

These investments can carry a high level of risk, so be sure to do your diligence with 7 steps to take before investing in a crowdfund deal. Also, customer service can be spotty. These online platforms act as intermediaries and take a fee from setting up your investment. They may be of little help after this point. Finally, expect your funds to be tied up until there is a sale of real estate — which can take years.

If you like the idea of becoming a landlord, this real estate investment might be right for you. Here, you buy a property, either alone or with partners in a syndication group, to rent out to tenants.

Expect some time and money commitment for setting up this real estate investment. When I purchased my first rental, I narrowed down a single-family home that fit my budget using house hunting apps and a trusted real estate agent. 

Next, I shopped around for mortgage lenders, asking questions and getting preapprovals to choose the best mortgage lender for my financing needs. As my mortgage was closing, I lucked out finding renters. The existing renters agreed to my rent, which covered expenses and provided some leftover profit. This saved me from hiring a property manager to find tenants and manage the property.

If you choose this path, you’ll need money for a down payment, closing costs, and any property costs incurred prior to getting tenants to pay rent. Be sure to do your homework on the local area and any professionals you choose to hire to assist you through the process. Reviews can help with the latter.

As seen on HGTV, flipping involves purchasing a property, improving it through renovation, and then selling it at, hopefully, a higher price. While this can be a profitable venture, it also carries a higher level of risk and requires a good understanding of the real estate market and construction.

In the current market, with more fluctuating construction material costs and higher mortgage rates than even a year ago, you’ll need to be extra precise with your budget. Many house flippers forgo the mortgage process and buy homes with cash now to improve their costs. This strategy requires a good amount of capital investment upfront.

Yes, this is a thing. House hacking is a real estate investment strategy in which you own a multi-unit property and live in one of the units while renting out the others. It's a popular real estate investing strategy for individuals, especially beginners, to reduce their housing expenses or even live for free while building equity and generating rental income. Homeowners should check that their mortgage agreement allows this before setting it up.

House hacking can also be done by renting out a room. Rental platforms like Roomies.com can assist you in finding renters. Or you can use hosting sites such as Airbnb and Vrbo if you just want occasional renters.

House hacking can provide a nice source of rental income, while also subsidizing part of your mortgage. Real estate investors must be comfortable interacting with their tenants daily and being there for property management.

Regardless of how you invest in real estate, safety should always be a priority, especially for a beginner. Conduct thorough research, work with reputable professionals, and know the red flags of investing scams. Read Trustpilot reviews on real estate platforms and professionals before you engage their services.

Otherwise, if real estate investing doesn’t feel right for you, check out our beginner’s guide to smart investing for other ways to put your money to work.

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