You can put your money underneath your pillow in many places, including stocks, bonds, savings, mutual funds, CDs, currencies, commodities, and real estate investments. Each investment option has positive and negative aspects, but since we’re here to learn about real estate, we’ll focus on that and that alone.
One of the most common reasons people give for investing in real estate is that they seek financial freedom, but there are others. Of course, each person will have their own personal reasons. They are typically seeking one or several of the following:
The decision to begin investing in real estate is personal, and we recommend making sure that you and your family are 100% committed.
When learning how to invest in real estate, it is not enough to know these property niches. Instead, as an investor, you will use a variety of strategies when dealing with these investment niches to produce wealth. The section below explores three of the most common strategies that you can use to make money with these vehicles.
Perhaps the most common form of investing, the buy-and-hold strategy, involves purchasing a property and renting it out for an extended period of time. It’s probably the simplest and purest form of real estate investing.
Essentially, a buy-and-hold investor seeks to create wealth by renting the property out and either collecting monthly cash flow or simply holding the property until it can be sold for a future gain. Among this strategy’s advantages is that while you hold the property and rent it out, the mortgage gets paid down every month, decreasing your principal balance and increasing your equity over time.
One of the most important things for a new buy-and-hold investor to understand is how to evaluate deals and opportunities. By far, the most common mistake we see new investors make with this strategy is buying bad deals because they simply don’t understand property evaluation. Other common problems include underestimating expenses, making bad decisions on tenant selection, and failing to manage your assets properly. However, these mistakes can be avoided if you simply learn the business. Jumping in without proper education can be extremely costly financially and sometimes legally.
Ultimately, there is much more to buy-and-hold investing than meets the eye. Still, if you can learn how to evaluate and purchase good deals, find quality tenants, and manage your assets properly, you’re going to be on your way to running a successful business.
Learn more about buy and hold rental properties
One of the most popular tactics for making money in real estate, due largely to the numerous shows on cable TV that promote it, is flipping houses. House flipping is the practice of buying a piece of real estate at a discounted price, improving it in some way, and then selling it for a profit. In reality, the flipping model is quite similar to the retail model, “buy low, sell high.”
Flipping is not a passive activity. Instead, it’s like an active day job. When an investor stops flipping, they stop making money until they begin flipping again. Many investors use flipping to fund their daily bills and provide financial support for other passive investments.
The wholesaling process involves finding great real estate deals, writing a contract to acquire the deal, and selling the contract to another buyer. Generally, a wholesaler never actually owns the piece of property they are selling; instead, a wholesaler simply finds great deals by using a variety of marketing strategies, puts them under contract, and sells that contract for what we call an assignment fee. This fee typically ranges between $500 and $5,000 (or more, depending on the size of the deal). Essentially, a wholesaler is a middleman who is paid to find deals.
Some wholesalers sell their contracts to retail buyers, but most sell their contracts to other investors (often house flippers), who are typically cash buyers. When dealing with these cash buyers, a wholesaler may get paid within days or weeks, building solid connections in the real estate community all the while.
Many investors choose to begin with wholesaling due to its reputation as an easy strategy with low start-up costs. Because the property is never actually owned by the wholesaler, there are no rehab costs, loan fees, contractors, tenants, banks, or other complications. Wholesaling is the most popular strategy taught by real estate gurus. As a result, it often receives the most attention, although it is not as easy to become as successful a wholesaler as the gurus make it sound.
Don’t worry if you don’t know exactly which one you want to pursue yet—this is simply the beginning of your education. Learning how to invest in real estate will take time.
Another avenue to explore in real estate investing is rental properties. A rental property is a real estate asset that you purchase with the intention of generating income through tenant rent payments. As the owner of a rental property, you become a landlord responsible for managing the property, finding tenants, and maintaining the premises.
The benefits of investing in rental properties are numerous. First and foremost, rental properties offer a consistent stream of passive income. By collecting monthly rent from tenants, you can generate a reliable cash flow that can help supplement your income or even become your primary source of revenue. Furthermore, rental properties have the potential for long-term appreciation. As property values increase over time, your investment can grow in value, allowing you to build equity and potentially sell the property at a profit in the future.
Learn more about rental properties and take a step towards achieving financial success in real estate.
REIT (Real Estate Investment Trust) investing is a popular avenue for individuals looking to invest in real estate without directly owning and managing properties. In the most simplistic definition, a REIT is to a real estate property as a mutual fund is to a stock. A large number of individuals pool their funds together, forming a REIT. This alliance allows the REIT to purchase large real estate investments, such as shopping malls, large apartment complexes, skyscrapers, or bulk amounts of single-family homes. The REIT then distributes profits to its individual investors.
You can buy shares in a REIT via your stock account, and they often have a relatively high dividend payment. This is one of the most hands-off approaches to investing in the real estate business, but you should not expect the returns to be as great as those produced by hands-on investing.
The following list includes the most common property types that real estate investors deal with. Each has many subsets as well, but remember, you don’t need to know about them all. This is merely a list to help you understand what options are available from a 20,000-foot view.
Raw land is nothing more than basic earth. Land, on its own, maybe improved (adding value) and may be leased or rented to create cash flow. Land can also be subdivided and sold for profit. Some investors choose to buy raw land with hopes (or plans) to sell it someday to be used in external developments like the construction of a freeway or a housing development.
Perhaps the most common investment for most first-time investors is the single-family home. Single-family homes are relatively easy to rent, sell, and finance. That said, in certain areas, the rents derived from single-family rentals (SFRs) won’t be enough to provide positive cash flow.
Small multifamily properties (two to four units) combine the financing and easy-purchasing benefits of a single-family home. Bought properly, these can produce a good amount of cash flow, and there is often less competition than you’d run across bidding on single-family homes. Best of all, these properties can serve both as a solid investment and a personal residence for the smart investor.
By buying a small multifamily property, you’ll be taking advantage of the economies of scale because only one loan is needed to secure multiple units. One of the things that makes these investments so appealing is that most banks evaluate small multifamily properties (less than five units) with the same guidelines as a single-family house, which can make it easier to qualify for the loan.
Learn more about investing in multifamily real estate
Small apartment buildings generally comprise between five and 50 units, although the line between small and large apartments is not set in stone. Properties with more than 50 units can be more difficult to finance than single-family homes or those with two to four units because they rely on commercial lending standards rather than residential ones. However, these properties often provide significant cash flow for an investor who can deal with the more management-intense nature of these properties.
Additionally, there is generally less competition for this property type because they are too small for big professional real estate investment trusts (REITs) to invest in (more on this below).
Instead of being priced based on comparable properties (often referred to as “comps”), the value of these properties is evaluated based on the income they bring in. This creates an enormous opportunity to add value by increasing rent, decreasing expenses, and managing the property effectively. These properties are a great place to utilize on-site managers who manage and perform maintenance in exchange for free or decreased rent.
This class of property refers to the large complexes across the country that often have pools, workout rooms, full-time staff, and high advertising budgets. These properties can cost millions, but they can also produce stable returns with minimal personal involvement. Many large apartments are owned by syndications—small groups of investors who pool their resources.
Commercial investments can vary dramatically in size, style, and purpose but will ultimately involve a property leased to a business. Some commercial investors rent buildings to small local businesses, while others rent large spaces to supermarkets or big-box megastores. While commercial properties often provide good cash flow through consistent payments, they may also carry much longer holding periods during vacancies; commercial properties can often sit empty for months or years. Unless you are starting from a very solid financial position, investing in commercial real estate is not recommended for beginners.
You can start investing in mobile homes with little money out of pocket. Whether it’s a home in a mobile home park or on its own land, many of the strategies used in other types of real estate investing can be applied to mobile homes.
When homeowners don’t pay their taxes, the government (local, state, or federal) may foreclose and then resell the property to investors for the amount owed. This can often mean incredibly inexpensive properties, but be sure to do your due diligence and don’t just jump into this kind of investing unprepared. Tax-lien sales are complicated transactions that require research, knowledge, and experience.
Investing in notes involves the buying and selling of paper mortgages. When a home is purchased with a loan, a “note” is created explaining the terms of the contract. For example, an apartment owner decides to sell his property for $1 million. He offers to carry the full note (thus allowing the new buyer to avoid using a bank loan), and the new buyer will make payments of 8% per year for 30 years until the full $1 million is paid off.
If the owner decides he no longer wants to be involved, he may choose to sell the mortgage to a note buyer. Like any other real estate investment, a note will often be sold at a discount when the seller is motivated. A note buyer will then begin collecting the monthly mortgage payments and can keep the note or sell it again in the future.
In Real Estate Investment Groups (REIG), members typically contribute funds to the group, which are then used to acquire and manage real estate properties. These properties can range from residential homes to commercial buildings or even large-scale developments. The group collectively makes decisions on property selection, financing, and management, with the goal of generating profits through rental income, property appreciation, or both.
One of the key advantages of REIGs is the ability to leverage the knowledge and experience of other group members. This can be particularly valuable for beginner investors who may have limited expertise in real estate. Through shared resources and collective decision-making, REIGs provide a supportive environment where investors can learn from one another, gain valuable insights, and navigate the intricacies of property investment with greater confidence.
Have you ever received a box of chocolates as a gift? There are always so many choices; sometimes, you need to take a little bite to figure out exactly what’s inside. In a way, learning how to invest in real estate is like that same box of chocolates. There are dozens (if not hundreds) of different ways to make money as a real estate investor, and it’s up to you to choose the niche you want to get into.
You may absolutely love some niches and strategies, while others may make you shudder. You don’t need to choose them all. Learning how to invest in real estate successfully is about choosing one niche and becoming a master. This section will open up that box of chocolates for you to sample, pulling back the curtain of the most common real estate niches.
Remember, once you identify the niche you want to get started with, you will be able to narrow down your focus, become an expert, network within that niche, and begin building wealth by executing a plan of action.
You won’t start your investing career by landing a big fat check; these types of checks will come after you’ve successfully implemented your investment strategies. The profits you make, however, can be made or destroyed at the time of purchase. So what does it mean to profit “when you buy?”
To make your profit when you buy, you must purchase a property at a price that will ensure your desired profits based on your ability to execute your exit strategy. In other words, you need to buy smart. If you vastly overpay for a property, no amount of wishing, hoping, or improving it is going to make your investment worthwhile.
While you can’t predict with 100% accuracy where the market may go, you can figure out where it’s at today.
Now that you understand why getting a great deal is important (to lock in your profits at the beginning), it’s time to start looking for a property. Before you do, define your selection criteria. This section will focus on criteria, why it matters, and how to define yours.
Your selection criteria is designed to keep you focused on shopping for the things you need so you don’t waste money on other good-looking things along the way. Having a clearly defined selection criterion will help you stay focused and avoid analysis paralysis—and keep you on track to buy a great investment property.
By defining your criteria, you’ll narrow down the choices in the market, thus eliminating the vast majority of deals (distractions). Instead, you’ll focus on finding only the kinds of deals that you are interested in buying.
There are a number of different items to consider adding to your criteria list. These may include:
No one can tell you exactly what your investment property criteria should or should not include. Some of it will come down to personal preference, such as, “I only want to buy in Seattle,” or “I only want houses with basements,” but most of your chosen criteria will be specific to the type of investment. For example, if you are looking to become a buy-and-hold investor of small multifamily units, your criteria will include small multifamily properties, and it will exclude old commercial buildings.
If you simply tell people, “I am looking for real estate,” the response will most likely be, “Good for you.” However, if you instead mention that you are looking to buy a small, single-family house in the Rockford neighborhood for under $150,000, you’ll enable others to think of properties that match that description, which may ultimately get you connected with a deal.
Perhaps the most important aspect of the criteria you’ll put together is the financial component. Generally speaking, a listing won’t publicize all of the important information you’ll want about a property’s financials. Yes, you can generally determine the amount of income a property makes. Still, you won’t know immediately how much monthly cash flow the property will produce, how overpriced the property actually is, or how much you should offer.
Additionally, it’s not going to make sense to get out of your spreadsheet and do a full property evaluation on every single deal you glance at. This is when rules come into play. Applying rules will help you quickly evaluate a property’s financials on the fly. As with any rule of thumb, it’s not always an exact science and should never be entirely relied upon to decide whether or not a property is a good investment.
According to the 1% rule (formerly the 2% rule—ah, how things have changed!), monthly rent should be approximately 1% of the purchase price. In other words, a $100,000 home should rent for $1,000 per month; a $50,000 home should rent for $500 per month. This is a very conservative and simplistic estimate but can help in deciding if a property warrants a deeper look.
The 50% rule is a great rule of thumb that will help to fairly accurately predict how much a property’s expenses will cost you each month. The 50% rule simply states that 50% of your income will be spent on expenses—not including the mortgage payment.
As mentioned above, most real estate listings will identify the monthly income of a property. By dividing that number in half, you can easily figure out how much you’ll have left to pay the monthly mortgage (principal and interest). Any income left over after the 50% for expenses and mortgage payment will be your cash flow.
Investors use the 70% rule to quickly determine the maximum price they can pay for a property based on the after-repair value (ARV). While this rule is most commonly used by house flippers, it can actually be used for any strategy when you want to find a good deal. The 70% rule says you should only pay 70% of the after-repair value, less the repair costs.
Remember, a rule of thumb should only be used to quickly and efficiently screen a property to determine if it’s worth further investigation. Never use a rule of thumb to decide exactly how much to pay or whether or not to invest. Don’t confuse a rule of thumb for a license to skip doing your homework.
Once your criteria are set, it’s time to start looking for your investment property. No doubt you’ve seen “For Sale” signs in front of homes, but there are many other ways to find investment properties. This section will explore the various ways to find properties. The list is not exhaustive, but a good start for new investors.
The multiple listing service (MLS) is a collection of properties for sale by different real estate brokers across the country. When you search a site like Realtor.com or Redfin, you’ll be searching the MLS. This information is widely distributed for most eyes to see.
Some homes are simply sold the old fashion way—by word of mouth. By letting everyone know that you are in the market to buy (and defining your criteria, as discussed above), you’ll place yourself in the best position to find deals via word of mouth.
Craigslist.org is a free classifieds website that millions of people use to buy, sell, trade, or give away nearly anything you can imagine—including real estate.
Outbound marketing means finding sellers and bringing them to you. You can do this by way of advertising, direct mail, or a number of other marketing techniques.
LoopNet is a marketplace for commercial properties. LoopNet is the place to search for publicly listed commercial properties for sale, from small multifamily properties to large apartment complexes, shopping malls, fast food restaurants, and beyond.
By now, you should understand the importance of a clearly defined set of shopping criteria, which should include both personal and financial requirements. This well-defined criteria list will help narrow down your choices and help weed out bad investments, allowing the best chance for a solid, profitable investment that best meets your needs.
Do you need a lot of money to invest in real estate?
The short answer is no. The longer answer is more complex. Investors use numerous strategies to invest in real estate without having a lot of cash. Some deals can be done without using any money (although, this is rare)! AFC Mortgage Group can help you determine what kind of financing makes the most sense for your specific situation!
Below you’ll find several strategies for financing your real estate deals.
Many investors choose to pay in cash for an investment property. In most cases, the buyer brings a check (usually certified funds, such as a bank cashier’s check) to the title company, which writes to the seller. Other times, the money is sent via wire transfer from the bank.
This is the easiest form of financing, as there are typically no complications. Still, for most investors (and probably the vast majority of new investors), all cash is not an option.
Financing your investment property may produce significantly better returns than paying in cash. Most investors choose to finance their investments with a cash down payment and a traditional conventional mortgage.
Conventional mortgages are the most common type of mortgage used by home buyers and generally provide the lowest interest rates.
The Federal Housing Administration (FHA) is a United States government program that insures mortgages for banks.
FHA loans are designed only for homeowners who are going to live in the property, so you cannot use an FHA-backed loan to buy a property purely as an investment. However, you can take advantage of an exception that allows an FHA-financed home to have up to four separate units. In other words, if you plan to live in one of the units, you could buy a duplex, triplex, or fourplex with an FHA loan.
The benefit of an FHA loan is the low down payment requirement, which is currently just 3.5%. This may help you get started quicker since you won’t need to save up to 20%.
A subset of the FHA loan, a 203k loan allows a buyer to purchase a house that is in need of some rehab work by building the cost of repairs or improvements into the loan itself. Like a standard FHA loan, a 203k loan still allows for a low down payment.
Banks or other giant lending institutions are not the only entities that will finance a property for you. In some cases, the owner of the property you want to buy can actually fund the purchase; in this case, you’d simply make monthly payments to the seller rather than a bank. Typically, the only time a property owner will do this for you is if they own the home free and clear, meaning they don’t have an existing mortgage on the property.
Hard money is financing that is obtained from a private business or individual for the purpose of investing in real estate. While terms and styles change often, hard money has several defining characteristics:
Hard money can be beneficial for short-term loans in certain situations, but many investors who have used hard money lenders have found themselves in tough situations when the short-term loan ran out. Use hard money with caution, ensuring you have multiple exit strategies before taking the loan.
Private money is similar to hard money in many respects, but it’s usually distinguishable due to the relationship between the lender and the borrower. Typically, with private money, the lender will not be a professional lender like a hard money lender. Instead, it will be an individual looking to achieve higher returns on their cash. Oftentimes, there is an established relationship with a private money lender, and these lenders are much less business-oriented than hard money lenders.
Many investors choose to tap into the equity in their primary home to help finance the purchase of their investment properties. Banks and other lending institutions have many different products, such as a home equity installment loan (HEIL) or a home equity line of credit (HELOC), allowing you to tap into the equity you already have.
While most of the options above focus on residential loans, the world of commercial lending may also be a viable option for your investing. In fact, if you are looking to buy a property other than a one- to four-unit residential property, a commercial loan is probably exactly what you’ll need. Commercial loans typically have slightly higher interest rates and fees, shorter terms, and different qualifying standards.
Many other investment and savings products are available for use in real estate investing. We can’t cover each of these in detail here, so be sure to speak to a qualified financial advisor about ways you can use these products in your investing career.
Starting out in real estate investing can be a daunting proposition for beginners, but the good news is that there are some common questions and answers that many people have about getting started. In this section, we’ll cover some of the most frequently asked beginner questions about real estate investing so you can feel more informed and comfortable taking on the endeavor.
Yes. The kind of real estate investing you see on television or may hear about from a guru is not the only kind of real estate investing there is. In many situations, the kind of investing you see on TV is not even investing at all but rather gambling or speculating.
The truth is, there are hundreds of ways to make money in real estate. Some of these techniques or strategies may require 40 hours a week, while others may only require 40 hours per year. The amount of time it takes to grow your real estate business largely depends on your investing strategy, personality, skills, knowledge, and timeline.
You’ve probably heard the age-old question (perhaps from your high school guidance counselor), “If you suddenly had $1 million and didn’t have to work anymore, what would you do?” The answer, some say, reveals what career field you should enter.
If your dream path is to open up a shelter for abused animals or to move to Aruba and train tourists to surf, you probably should not become a full-time real estate investor. That’s not to say that you shouldn’t invest in real estate—you just probably shouldn’t go full-time.
However, you don’t need to make it your career to build real estate wealth. If you love your job, you don’t need to quit it to invest in real estate. You can achieve the same (or better) results by investing on the side, the same as you would as a full-time real estate investor.
Keeping your day job gives you several advantages over a full-time investor. First, you do not need to live off the cash flow you make—that’s what your nine-to-five is for. By reinvesting all the profits from your investments, you can fully realize the incredible benefit of exponential growth. Additionally, it’s much easier for you to get long-term bank financing thanks to the stable income from work, which can also help increase and stabilize your wealth-building.
You can invest in real estate while keeping your day job by doing the following:
Real estate can be highly profitable, whether it’s your career or you’re just investing while working a “normal job.” However, the choice is yours as to which path you take. Don’t simply decide to quit your job and become a full-time investor because you read about other investors who have been successful in doing it that way. Having a concrete plan for how you’re going to proceed in real estate is essential; we’ll get into that a little later in the guide.
That said, life is too short to be stuck in a job you hate. Choose a career that makes you excited to wake up in the morning, energized throughout the day, and content when you fall asleep at night. If that desire leads you to full-time real estate investing, welcome to the club! Just make sure you are not simply building a career but building a future.
The simple answer is yes; it is possible to invest in real estate if you don’t have any money at all. However, money is involved in every real estate transaction. The issue, therefore, is not whether you’re investing with “no money” but instead whether you’re investing with “none of your own money.”
Investing in real estate without using any of your own money requires using Other People’s Money (OPM). Learning to strategically invest in real estate without any of your own money is one of the most complex but important tools you can develop in your real estate investing career.
The key to investing in real estate without any money of your own is simple: Bring something to the table. If you lack money, there are other things you can bring to the table in a transaction—if structured correctly—including education, time, connections, confidence, intelligence, and creativity. By reading this beginner’s guide, you are already taking steps toward building your strengths in those areas.
Many investors use little or none of their own money when investing in real estate. They’re able to achieve this by using one of several methods, including:
We will look at each of these options in more depth later in this guide, but we want you to recognize that investing in real estate without income is possible. It just may not be as easy as the gurus would have you believe.
How many late-night real estate infomercials have you seen where the real estate guru is sipping drinks on the back porch of their beachside home, beckoning you to join them in the life of luxury?
No doubt, one of the largest draws of real estate investing is the image of investors driving fancy cars, living in large homes, and ultimately being rich. And while many real estate investors do build significant wealth during their careers, real estate investing is not a get-rich-quick scheme. Yes, there are some who make a lot of money in a short time; however, these situations are generally the exception, not the rule.
Investing in real estate takes planning, patience, and persistence. Don’t expect to make millions of dollars in your first year. Instead, plan on creating a business through real estate that will steadily grow year after year, enabling you to meet your financial goals—and hopefully accomplish your dreams. No matter what you may hear, being successful in real estate requires hard work, just like any other field. It is also important to know that there are no shortcuts to success in real estate—no products or tools will do the work for you, either. You must learn the fundamentals and then apply them. Of course, our goal here is to help you with that.
Whether you decide to go full-time or just invest on the side, real estate can be the path toward a bright financial future for you and your family. In the next chapter, we are going to look at the very first step (and one of the most important ones) you should take on your journey: education.
Ready to take your real estate investing journey to the next level? Message our team at AFC Mortgage Group and we can connect you with the right team members you need to have to start building your real estate portfolio. We can help you with choosing the right type of financing and connect you with the rest!
Become homeowners. AFC Mortgage Group will help you navigate the loan process, secure financing, and purchase your dream home.
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