How To Invest In Real Estate (For Beginners): My 3 Favourite Strategies!
One of the best wealth vehicles used by the rich is real estate.
There’s no doubt that real estate has created more millionaires over the past decades – since more people are becoming more knowledgeable about this wealth generation vehicle.
Thus, real estate is definitely something to consider even if you have other income sources.
But the question is;
‘How can a complete newbie get started with real estate investing?
There are various ways in which anyone can get started with real estate.
But my favourite ones are;
If you're confused about what the hack these methods are, then don't worry – because l will briefly explain each of them in just a minute.
1. House Hacking
This method is used by most real estate investors who starts from nothing – but goes on to build a massive portfolio of properties.
In this method, you buy a cheap property that you can afford.
Once you buy it, you live in some units – then you rent-out the others.
This allows you to live for free – whilst collecting some rental income from your tenants.
And if you save the income that you'll be getting, you might gather some cash that you can use to invest in your next property.
In the future, you might sell that property – and buy a better one i.e. using the savings from your rental income & property sale.
And if you repeat the process for multiple properties, you might end up getting a nice-bigger property which you wouldn't have managed to afford in the first place.
For example, let's say that you buy a 7 roomed house at first, you can live in 2 rooms – then rent-out the other 5.
Once you're getting some rental income, you can save it – so that you can use some of it to invest in your next property.
Once you have some significant savings, you can then sell that initial property – then buy maybe a 12 roomed one i.e. using the money that you got from selling that property – as well as the savings from your previous property.
This is a great strategy for beginners who want to get their feet in the water but has limited funds to invest.
2. Fix & Flip
Another great strategy is fix & flip.
In this method, you look for a property that needs some renovations – then you add value to it in order to sell it for a higher price.
For example, you can find a property that is a bit dilapidated – which is going for cheap due to its condition.
Once you buy it, you hire some contractors to do some renovation work like painting, replacing broken pipes, fixing damaged tiles, etc. – or you can do some of the tasks by yourself i.e. if you have some relevant skills.
Once renovated, the property will attract a higher value – which allows you to sell the property for more than its initial value – hence, allowing you to pocket the difference.
However, I have to mention this real quick;
You must ensure that the dilapidated property is not being overpriced – because if it's overpriced, you'll find hard time selling it i.e. after you renovate it.
Thus, it's important to do proper valuation of the property – then add some estimated costs of renovations – so that you can see if the property is worth your investments or not.
3. Buy & Rent
Last but not least, we have the common buy & rent strategy.
In this method, you buy properties sorely for the purpose of renting them.
This allows you to get some cash flow – whilst building some equity in the property.
The beauty part about this method is that, it allows you to pay for the property using your tenants’ money.
For example, let's say you have a property that brings-in $1200 per month, and your mortgage is $900, you can literally pay for the mortgage using the income generated from the property – whilst at the same time, pocketing $300.
Thus, you can literally build equity in the property using income generated from the property itself
However, in order to get started, you need some money for down payment – and in most cases, it's usually 20%.
For example, if you want to buy a $100k property, you might need to pay $20k in down payment – then the bank will give you a mortgage for the remaining $80k.
Still on the same note, you must have a good credit score in order to qualify for mortgages – because banks likes to lend their money to people who're capable of paying back.
Thus, you might need to work on your credit if it's horrible – so that you wont struggle to get a mortgage.
👉You can read this article to learn more about building your credit.
How Do People Make Money In Real Estate?
In most cases, people makes money through the following methods;
(i) Cash flow
This is the most common way of making money with real estate – especially if you have a rental property.
For example, if you have a property that generates $500 every month (after expenses), it means that you have 500 bucks in cash flow.
And if you have 6 or 7 of these properties, you can replace your full time income (based on the average US income) – thus, you wont necessarily need to go to your job again.
The only down side of cash flow is that, at times, your property might get vacant for some few months – thus, you wont be getting any cash flow from that property during those dry months.
(ii) Appreciation
Another way in which people make money in real estate is through property appreciation.
Most properties yields around 2% - 3% appreciation per annum – thus, increasing the overall value of the property.
For example, let's say that you buy a property for $100k – and the property yields an average of 2% per annum in appreciation, the property will be worth $102k after 1 year, $104 040 by end of year 2, and the value might keep going up with time.
And if you decide to sell the property after 10+ years, you'll get a huge profit for it.
However, it's important to mention that, properties sometimes depreciate in value due to a number of reasons like;
• Economic Crashes e.g. the 2008 crush
• Change In Government Policies
• Migration
• Change In Weather Patterns
*The list goes on.......
Thus, it's important to also evaluate chances of depreciation as well – rather than just focusing on appreciation.
(iii) Tax Benefits
Another way in which people make money is through tax benefits.
In most nations, people are given some tax benefits i.e. when they invest in real estate – thus, they'll pay less taxes.
If a person makes $100k from a job, he/she will pay high taxes – thus, he/she'll only get a fraction of that money.
But if you get that same amount from real estate investments, you'll get most of that money – since you'll pay less taxes that person A.
Wrapping Up
I hope that you’ve gained some value from this post.
Real estate is definitely one of the best wealth vehicles used by the rich – and it's more passive too!
Thus, if you have a job or a business that brings-in significant income, then you might need to look into real estate – so as to store & grow your wealth.
You can also check out these books for more information:
• Rich Dad Poor Dad
• The Millionaire Real Estate Investor
• The Book On Rental Property Investing
Disclaimer: I’m not by any means a financial/real estate expert. All information shared in this article is based on my personal opinions & experiences. Thus, you might need to consult a qualified expert for professional advice.
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