Real Estate Investing for Beginners – 9 Do’s and Don’ts When Getting Started

Real estate investing. It just sounds sexy, doesn’t it? But it’s a money move that comes with a long list of questions.

• But what does it really mean?
• How can I get started?
• If I Airbnb the guest room in my apartment, does that make me a real estate investor?

 

Real estate investing is when you buy a piece of property or real estate with the intent to profit from it.

Dang, that sounds sexy too.

The tips below cover what to do when you want to get involved with real estate investing, although there’s more than one way to get involved.

• There’s the “traditional” route: buying houses to rent for additional monthly income
• There’s also house flipping
• Buy and hold
• Buying vacant land/lots
• House hacking (which is how I made $150k off my first real estate investment!)
• Renting rooms
• REITs (Real estate investment trusts)
• Crowdfunded real estate

How do I start investing in real estate?

The first step to being a real estate investor is acquiring a piece of real estate. Even if it’s your first house/primary residence and you’re going to rent out some of the rooms. This entails many of the same steps as when you’re buying for the first time as a primary residence.

You’ll also (likely) need to shop for a mortgage loan (unless you’re paying cash.) Click here to shop rates with LendingTree.

So now that you know what real estate investing is, below are my tips – the do’s and don’ts – for making your first real estate investment a success.

DO the right research

When it comes to real estate investing, you should start out by getting an idea of what you want to invest in.

• Are you looking to buy a home for yourself?
• A rental property?
• Or maybe even a whole complex?

This is what most people think of when they are considering real estate investment: the idea is to buy a property and rent it to a tenant, whose rent will cover the cost of the mortgage and any other expenses.

Let the type of real estate investment you’d like to make dictate your strategy.

How much can you afford?

DO shop the market

Real estate is a hot market right now with the economy and all, and that means that the more you know, the more you can make and save. When looking for a property to buy, make a checklist of what you would want as a tenant.

Then, when considering a property, ask the following questions:

• Does the house or unit fit those qualifications or would you have to renovate?
• What amenities are standard in my area? What will it take financially to provide those amenities if the home is without them?
• Does the property fit the 1% rule?
• How long will the property take to pay for itself?
• 10 other questions for potential real estate investors to ask

DO your due diligence

Working with hedge fund analysts whose job it was to research and pick “hot” stocks to grow the company's fund taught me a thing or two about how to conduct research for your own investments.

This was one part of my own home buying process I did correctly: I did thorough research when it came to selecting a neighborhood: I read news clipping on developments within “in town” Atlanta, checked property records, and became very involved in following the progress of the Atlanta Beltline project.

Digging deeper into the neighborhood allowed me to get into an “up and coming” neighborhood for very cheap and maximize my profits. I wouldn’t have been able to feel as confident in my choices if I hadn’t done a little digging.

So, roll up your sleeves.  This is MONEY we’re talking about here.

DO start small

Real estate investing can require quite a bit of on-hand cash for purchasing a home or unit, buying stock in a trust, or paying property managers.

It might be a good idea to start small and then build your real estate empire from the profits you make. (House hacking, as I mentioned before is a great way to do this!)

• For example, I had a friend who bought at the bottom of the market and ended up with over $50,000 in equity in their primary home.

• They then leveraged that equity to buy two more houses and put tenants in those houses.

• Now they make $1,400 per month in real estate income.

There are tons of stories like this if you can be smart with your money. Many people, like my awesome friend Paula from Afford Anything, have been able to quit their day jobs and be investors and real estate moguls full-time.

But the one thing they all have in common? They all started small.

DON’T Immediately go for the fixer-upper

Honestly, I loved the idea of creating order from the chaos of a neglected home, to get to pick my own finishes and make chic design choices. Financially, I also knew I'd get a lot more “bang for my buck” if I picked a fixer-upper. (Read about how I used a 203k renovation loan to fund my first home purchase here.)

But that doesn’t always make the fixer uppers the best real estate buys. Sometimes, you can get into an old house that takes more to fix than you could reasonably get (referred to as a “money pit”) and that really sucks.

Sometimes the best investments are move in ready.

It all depends on your lifestyle, how much work you want to do, what’s available in your area and a host of other circumstances that are unique to each situation.

DO vet any contractors

Renovating my first home was an absolute nightmare, primarily because I didn’t vet the contractor who was doing the work on my major renovation.  

He was overcharging me and cutting corners to make as much money as possible, and because I was a first timer I let it happen.

The fix for this is simple: Ask contractors the same amount of questions you’d ask anyone else doing major work for you. Check their references.

Don’t just ask. Really check.

DO Check to see if your real estate investment qualifies for any incentives

My mortgage broker told me if I bought a foreclosure I could qualify for a downpayment assistance program through Invest Atlanta.

So, by buying a foreclosure in an “at risk” neighborhood that had been hit hard by the recession, Invest Atlanta gave me a “soft loan” of $15,000 for me to use for closing costs, my down payment, or to pay down the additional principal on the home.

Also, because I renovated a historic property (my home was built in 1941) I qualified for additional tax incentives. One is a “freeze” on my property tax for the next ten years, meaning even if my home value and the ones around me skyrocket, I'm locked in at the price I would have paid on a $65,000 dollar home (about $800 a year== SO CHEAP!)

And then another credit I applied for and received was a state income tax rebate for three years. Between 2013 and 2016, I received $2400 back at tax time from this rebate.

All I had to do was apply. So I did.  It took me an entire weekend to fill out the paperwork, but we’re talking about $15k, here.

And if you’re buying a property for the purposes of having it make money, you want it to cost you as little money as possible. The less money you spend, the more money you earn in profit.

That’s called your margin and you want it to be nice and healthy.

DON’T Forget to Negotiate

As a foreclosure, the home had sat vacant for almost a year and all of the copper in the home was gone. Being that it was so old, it also needed a complete redo of the plumbing, HVAC, and electrical systems to bring the home up to code.

I didn't make note of any of that during my first ever home inspection, and as such paid the bank's asking price for the home, when I should have negotiated a lower price. The home also had slight structural damage that (as a novice buyer) I didn't notice either.

They told I couldn’t negotiate, but I told them I really wanted the house but with the new information would need to make a lower offer. Somehow, miraculously, it did and I saved $11,000 from the discount on the purchase price.

(Nonproperty) real estate investing for beginners

While rental properties are becoming more desirable, keep in mind that being a landlord will essentially become another job. You’ll need to be available for tenants to reach if they have an issue with the property, which you’ll then have to pay for and manage.

So for those who want to cash in on juicy real estate profits with less of the work and upfront capital involved, there are other options.

Real Estate Investment Groups can offer the financial benefits of owning a property without the hassle of being a landlord. Essentially you can buy one or many units in an apartment complex, for example, and the investment group will manage it and take care of advertising, filling vacancies, and maintenance.

While it may be a safer option financially, know that you’ll be paying extra for the convenience of their management. There’s that margin I mentioned earlier.

Another investment is a real estate investment trust – or REIT. These operate largely like a stock would, except that stock is buying a property and paying dividends to you. It’s a solid investment for a regular income stream but can fluctuate depending on the current housing market.

The same advice applies: vet investment groups and REITs as you would a piece of property.

Wrapping Up

I still dream of doing another real estate investment, but I feel that is years off. Especially since I’m now married and “my money” is now “our money.” I don’t get to make these decisions by myself. In the meantime, be sure to check out the resources from the following (BAD ASS) bloggers.

• Afford Anything
• Bigger Pockets (A free real estate investing ebook)
• Nerdwallet
• Millennial Money
• The Balance

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