Investing in real estate is one of the best ways to increase your net worth, build generational wealth, and even passive income, depending on the strategy you use.
Learning how to invest can be one of the most exciting things you ever do.
But, with so much information at your fingertips, it can be hard to figure out exactly where to start.
In our Ultimate Guide to Real Estate Investing For Beginners, we’re going to break down some of the most popular investing models, show you the simplest steps you can take today, and help lay out a plan that will get you to your goals in the least amount of time possible.
Here’s a step-by-step blueprint for getting started investing in real estate today.
Step 1. Outline Your Goals
One of the first things you need to do before you start investing is set realistic and measurable goals.
The goals you set will be based on how tolerant you are to risk, how quickly you’re looking to grow your portfolio, your current financial stability, and what both your short-term and long-term needs are.
Knowing your goals before you start learning how to invest will help you focus your energy on the specific strategies or models that will help you hit those goals the fastest — and with the least risk.
The first step in figuring that out is understanding “why” you want to invest in the first place.
Are you looking for cash flow? Passive income?
Protection against inflation? Control and being your own boss?
Maybe you’re looking to diversify your portfolio and tap into the returns and tax advantages that investing in real estate can give you.
The good news is that real estate investing can give you all of those benefits. Some models, though, will give you more of some than the others, which is why you want to prioritize your goals before you start investing.
For instance, some of the models we’re going to show you may be better at helping you build long-term wealth at the expense of short-term cash flow. They will have you buying and holding properties, collecting the cash flow, letting the equity build up and becoming collateral for future investments.
While others will help you generate more cash flow now but will have you selling the assets so you’re sacrificing long-term wealth for those short-term gains. These models may have you finding properties for sale and quickly flipping them to another investor for a fast payday.
The key here is understanding why you want to invest and the desired outcomes you’re looking to achieve. Then, looking at how much capital you have to invest right now will tell you which models are going to work the best for you to help hit the goals that you’ve set.
That will determine HOW you hit those goals & the best investing strategy to use.
Step 2. Understand The Different Business Models
Now, when it comes time to actually start finding properties and investing your money, there’s quite a few different business models you can use.
Based on the goals you set for yourself in step 1, choose one of the investing strategies below and focus your energy on learning everything you can about it, specifically, to keep from spreading yourself too thin.
We’ve laid them out from the easiest to the most involved.
If you’re looking for the gains and wealth that real estate investing can give you, but you don’t want to find sellers, buyers, or deal with the properties themselves, passive investing may be the best strategy you can use to hit your goals.
With passive real estate investing, you’ll put your money into trusts known as REITs or real estate investing trusts.
REITs are similar to a mutual fund where you pool your money together with other investors but, instead of owning stocks and bonds, the fund purchases multiple properties — typically commercial and income-producing residential properties.
Then, you’ll be paid dividends from the shares you own in the trust and can sell those shares at a higher price if the value of the trust increases.
Unlike other strategies you’ll see on this list, investing in REITs is truly passive.
Once you put your money into the trust, you can monitor the trust’s performance just like you would a mutual fund.
If you’re already investing in stocks and want a similar experience, investing in REITs is a great way to get started in real estate. Keep in mind, though, that the returns on REITs are lower than other strategies we’ll mention and limit the amount of control you have over your portfolio.
Another passive investing strategy is becoming a private lender for investors you know and trust. By lending them money for projects, you can expect an 8% to 12% return on your money without having to be actively involved in the projects.
The key to becoming a private lender is only working with investors you trust, though, and ensuring they have a track record of successfully investing in real estate.
If you want to take a more active approach but your goals have you focused on generating short-term cash flow, wholesaling is one of the best strategies you can use.
With this strategy, you’ll be acting as a middleman between sellers and buyers who want to make a profit on the property.
You will locate distressed or discounted properties, put them under contract, and then flip that contract to an investor while you pocket the difference in the transaction.
To give you an example, let’s say you find a property for sale for $100,000 but the properties around it are selling for $200,000.
When you put the property under contract for $100,000, you can flip that contract to an investor for, say, $110,000 and keep the $10,000 difference between what you contracted it for and what you flipped it for.
Then, the investor you sold the property to can perform the needed repairs and list the property for the same $200,000 that properties around it are selling for.
The “spread” on these deals (or how much you stand to make by flipping the contracts) are typically 5% to 10% of the transaction value. The upside, though, is that you don’t have to perform the repairs yourself or even have any upfront capital in the deal, other than your marketing costs to find the deal in the first place.
With this model, you’ll want to make sure you focus on learning how to negotiate so you’re able to get the properties for the lowest price possible while also flipping the contracts to your investors for the highest price possible — all while making sure your investors stand to make a nice profit, too.
The reverse wholesaling strategy works similarly to the wholesaling strategy we just showed you, except instead of finding a seller first you will focus your efforts on finding a buyer first.
Then, once you have a buyer/investor located, you can begin looking for the types of properties that they’re most interested in purchasing.
When you get started, if you find that it’s easier to locate properties for sale than it is to find cash buyers for those properties, the reverse wholesaling strategy might be better for you.
Or, if you already have a network of investors with deep pockets, you may find that it’s easier to build relationships with them before you start looking for properties to buy.
Using this strategy will ensure that when you’re able to locate properties for sale you’re also able to get those properties flipped as quickly as possible.
To make it work, though, you’ll need to understand exactly what your buyers are looking for. Things like the areas they’ll buy in, property condition, price range, age of the home, and any red flags that they want to avoid that would keep them from purchasing the contract from you.
Once you understand that, you can locate multiple properties and present them all to your buyers which can significantly increase how quickly you’re able to get deals done — and how many deals you can get closed while keeping your buyers happy.
If you want to take a more hands-on approach but you don’t have a ton of cash, collateral, or credentials in the real estate industry right now, the “house hacking” strategy may be a great fit for you & your goals.
This is especially true if you are a first-time home buyer looking to get into investing in real estate.
With the house hacking strategy, you can use a first-time homebuyer loan to purchase a single-family or multi-family residential property and then live in the property while you’re performing repairs on it.
For a single-family residence, this means you can find a home that is undervalued and needs work, purchase the home, begin to live in it for at least a year, and build significant equity in it before using it to help you tap into more advanced investing strategies down the road.
For a multi-family residence, though, the benefits are even bigger.
When you purchase a multi-family property, like a triplex, duplex, or even an apartment building, you’re able to move into one unit while renting out the remaining units.
That means the tenants you rent to will be covering your mortgage and helping you build equity in the property while you’re living rent-free.
Then, after living in the property for a year, you can use the equity you’ve built up as collateral for your next investment and begin renting your unit to another tenant — increasing your cash flow and letting you upgrade your residence, or begin house hacking your next multi-family property.
Since, as a first-time home buyer, you can usually tap into FHA loans and the 3% to 5% down payments they require (compared to 20% down for more traditional loans), the house hacking strategy is a great way to not only buy your first property, but also lay the foundation for your investing career.
The BRRRR strategy, or “buy, rehab, rent, refinance, repeat” is a great transition from the house hacking strategy, and an excellent strategy to use as a beginner to real estate investing.
Just like the name implies, the BRRRR method lets you buy a property, perform the needed renovations, begin renting the property to tenants, refinance the property at the higher appraised value after the repairs have been performed, and then use that higher value as collateral on your next investment.
Repeating the process from the beginning.
To give you an example of how it works, let’s say you purchase a property for $100,000 while comparable properties around it are selling for $200,000. Let’s assume, for example’s sake, that the mortgage on the property and all other expenses cost you $1,000 per month.
Let’s say you put $50,000 into renovating it and bringing it up to the same condition as the properties around it that are selling for $200,000.
With $150,000 into the property, between your original loan and the repairs you performed, you can have the property re-appraised at the same value as the properties surrounding it — or $200,000 — meaning you’ve effectively unlocked $50,000 in equity.
Once you get to that point, you can refinance your original mortgage to the higher property value and use the $50,000 in equity you’ve gained as collateral on your next investment.
Then, you rent the property out so your tenants are covering the cost of the new mortgage plus your yearly expenses while you continue to benefit from the equity the property builds over time.
And you start looking for your next property to use the strategy again, and again. This is how you quickly grow a real estate portfolio if you’re starting out at ground zero right now.
Learn More: How To BRRRR Your Way To Financial Freedom
The fix-and-flip strategy is more hands-on than wholesaling or house hacking but is a better starting point if you’re already financially established, have your own home, and aren’t interested in living in the properties that you’re investing in.
With this strategy, you’ll locate properties that are either distressed or undervalued, secure the property at a price that lets you resell it at a higher price, perform the needed repairs, and then sell the properties at their new, higher value.
Think about all those house flipping shows you see on channels like HGTV and the DIY Network. The hosts on those shows are using the fix-and-flip strategy.
If you’re going to fix-and-flip, you want to make sure you can negotiate the property’s purchase price down while understanding the true cost of repairs and expenses involved in owning the property to ensure you’re able to mitigate some of that risk and turn a profit once you flip it.
There is inherently more risk with this strategy compared to others we’ve mentioned so far, but with higher risk typically comes higher rewards.
When using this strategy, you need to understand the ARV (after-repair-value) of the property so you’re able to purchase it using the “70% Rule” — or 70% of the ARV minus repair costs — in order to give yourself the highest chance at making a profit when it comes time to sell.
To give you an example, if the home you’re considering is worth $100,000 after repairs, and it needs $20,000 in repairs, 70% ARV would be $70,000. Subtract the $20,000 in repairs from that value, and you’re left with $50,000.
If you are able to secure the property for $50,000, it leaves you room to perform the repairs, pay for expenses while you own the property, and still have room to turn a profit when you sell.
Flipping Mobile Homes
Flipping mobile homes is a great, low competition way to get your real estate investing career started.
Most investors look at mobile homes like there’s no money to be made, that buyers aren’t available, that banks won’t loan on them, or that the strategy is too hard to work with.
The strategy works just like investing in single-family residences. You’re looking to negotiate a great price on a mobile home that leaves enough room for you to make a profit after you perform repairs.
Then, you can either flip the property or hold onto it and place tenants in it to help cover the mortgage, maintenance and expenses.
While getting funding for mobile homes can be more difficult than getting a loan on a single-family home, there are ways to get funding for them and loopholes you can use.
The buy-and-hold investing strategy is slightly more advanced than the house hacking or BRRRR strategies we mentioned but places more emphasis on building long-term wealth over flipping the properties for a quick profit.
With this strategy, you’ll purchase distressed or undervalued properties and then hold those properties for long-term income generation using them for short-term rentals like AirBnB or placing tenants in them for long-term rentals.
This model allows you to build equity in the properties by having your tenants cover the mortgage and expenses on the home so your long-term wealth grows at the expense of short-term profits.
Like the house hacking and BRRRR strategies, when you buy-and-hold a property, you’re looking to secure a good deal on it, perform renovations, have the property re-appraised at the higher value, and then use the equity you’ve unlocked as collateral for your next investment.
Instead of selling the property at this point, though, you hold onto it, allowing renters to build the new equity in the property for you over time while you continue building your real estate portfolio.
To make this strategy work, you’ll need to understand the numbers that you’re working with and look at them over the long-term to make sure they outperform other investing strategies, like stocks and bonds.
Since this strategy is so involved, you want to learn the in’s and out’s of being a property manager/landlord, investor, rehabber, and how to properly manage your finances to weather the bad years so you can reap the benefits during the good years.
“Jack of all Trades”
What you’re going to find, as you’re advancing in your career, is that many investors tend to be a “jack of all trades” in their business and the strategies they use.
Since the markets are always evolving, you may find yourself fixing and flipping one property, and then coming across another property that would make buying and holding a smarter decision.
Likewise, if you’re just getting started out and buying your first home, you may house hack your way into a multi-family unit, only to realize that you prefer living in a single-family residence — but want to continue investing into multi-family properties to build your wealth.
That means you’re going to want to learn each of the strategies we’ve mentioned and become familiar with them so you know when to use one over the other, especially as your goals change over time.
There’s absolutely nothing wrong with finding your niche and focusing on a single investing strategy.
In fact, a lot of people prefer that over trying to be a jack of all trades. But if your focus is on growing your wealth, you want to keep an open mind to the possibility that’s in the deals you’re coming across.
Step 3. Secure Financing
Now that you’ve seen the different strategies you can use to start investing in real estate, the next step you need to take is securing financing to begin investing.
This needs to happen before you start looking for properties or marketing for sellers. Since deals can move fast, you’ll want to know where the money is going to come from to purchase the property when you locate one that you’re interested in.
As a new investor, you have a few options available to you.
The first is your own cash or credit. If you’ve made good financial decisions and can fund the deals yourself, you stand to generate a higher return by avoiding interest rates on loans you’ll take to purchase the property.
The second is through a bank. If you have good credit or collateral but you don’t have the cash, you can secure a mortgage through the bank. Bank loans tend to have stricter borrowing requirements and take longer to get approved, but the money you save on interest payments over private money can be significant.
The third is what’s called “private money” where you’re borrowing from other investors. The interest rates on these loans are typically going to be higher than a loan from a bank but the borrowing standards are often lower for private money, so the loans are easier to secure.
Depending on your current financial situation and the investing strategy you’re wanting to pursue, one option may be better for you than another.
Or, you can take a look at some of the more creative financing options investors use to help get deals funded. This article breaks down 10 of the most popular creative financing options you have at your disposal.
The key here, though, is making sure you have funding secured before you start looking for properties so you’re able to jump on a deal when you uncover one — without waiting on the money to show up.
Step 4. Understand What a Great Deal Looks Like
Before you can start looking for great deals you also need to understand what a great deal looks like. Knowing how to crunch the numbers before you start looking for properties will help you develop a good sense of what may be a good deal — and what deals need to be passed on.
To figure out whether a deal is good, or not, you want to first start looking at comparable properties around the one you’re considering to determine what they are selling for.
This is going to help you determine the “after repair value” or ARV. Once you understand the ARV, you can apply the 70% Rule to figure out the maximum you can offer on the property after you subtract the cost of repairs and your assignment fee.
Let’s take our example from above and say comparable properties are selling for $100,000.
70% of that would be $70,000. Then, let’s assume that it will need a new roof, paint, and carpet, which will cost an additional $15,000 in repairs and you want to reassign the contract for $5,000.
That means the maximum you can offer on the property while still earning your assignment fee for flipping the contract to an investor and leaving enough profit in the deal to make it attractive to your investor would be $50,000.
$100,000 * 70% = $70,000 – $15,000 – $5,000 = $50,000.
If you’re able to get the property under contract for $50,000, then it looks like a good deal that will let both you, and your investor turn a profit on it if you’re wholesaling it.
If you’re using a strategy like fix-and-flip or buy-and-hold, you can eliminate the extra assignment fee and set your maximum offer at $55,000.
You can use this formula to help you quickly spot whether a deal may have potential in it and whether or not you should dig a bit deeper into it. If the numbers don’t check out, don’t be afraid to walk away from it.
There are more deals to be found and there’s too much risk involved in the property if the numbers don’t make sense.
You’re still going to want to walk the property and have it inspected before you actually get it under contract but using this formula will help you spot good deals (and bad deals) before you sink too much time and energy into them if they just don’t make sense.
Step 5. Find Great Deals
Once you understand what a great deal looks like, the next step is actually finding those deals.
As a beginner, if you have more time than money, driving for dollars and looking for properties that appear to be distressed or undervalued is a great way to get started.
You can pull records through your local Clerk of Courts to find the owner of the property and basic contact information so you can reach out to them and begin the conversation.
With investing being a numbers game, though, you really want to use more scalable methods for marketing to sellers so you can look at more properties in a shorter period of time.
One of the best ways to do that is building lists of properties that meet certain criteria, like absentee owners of a vacant property, properties with high equity and absentee owners, owners that are tax delinquent and in bankruptcy, or owners who are going through a divorce and filing bankruptcy.
These criteria will help you find people who are motivated to sell so you’re able to start a conversation with them knowing that they’re more inclined to listen to offers you send over.
When you build the lists, you can use direct mail messaging to get in front of the sellers so you’re not having to cold call each and every one.
While most investors expect to get around 2 to 5 responses from every 1,000 pieces of mail they send, our mailers have been proven to generate between 10 to 20 responses.
That means you’re going to have more opportunities to find good deals when you’re sending direct mail marketing messages than most other investors.
Which leads us to our next point: you’re also going to want to use a CRM, like REsimpli.
It will help you stay organized and keep track of who you’ve contacted, who has responded back, who you’ve made offers to, which deals are moving forward, etc.
As your business grows and scales, staying organized will be critical for helping you make more money while maintaining your sanity as you do it.
And as you’re sending effective direct mail campaigns, getting more opportunities to find good deals, you’ll want to stay on top of being organized, responding to the messages you get back, and putting offers in on the properties you uncover.
Step 6. Include These Clauses in Your Contract
When the conversations you’re having with sellers begin moving forward, and you make the decision to begin negotiating on the property, you will want to have a rock-solid contract in place.
Not only will your contract protect you from any unexpected surprises, but it will also protect your seller so they’re more inclined to do business with you.
The investing strategy you pursue will dictate which clauses you need to have in your contract. For instance, if you’re renting multi-family units, you’ll want to lay out exactly how pests and parasites will be handled if they’re found on the property.
Keeping yourself protected can save you 10’s of thousands of dollars and keep you from having to deal with frustrating experiences that could have probably been avoided altogether.
Step 7. Close!
So you’ve found a property, started a conversation with the seller, the numbers all checked out, and you’re ready to move forward.
Now it’s time to close on the deal and get your contract signed so you can begin moving forward with the strategy you’ve chosen.
The process you use to close on the property will depend on whether you’re wholesaling it and reassigning your contract to a cash buyer or if you intend to hold onto the property, whether that’s to fix and flip it or fix it and hold onto it to place tenants into it.
It’s worth having an attorney that is familiar with your investing strategy draft the contract you take to closing to ensure both you and your seller are protected in the deal.
Then, once the contract is signed, you can transfer funds and take ownership of the property — or begin letting your cash buyers know that you have a contract ready to be reassigned if you’re wholesaling.
Step 8. Scale Your Business to 5+ Deals Per Month
When you’ve closed on your first deal, it’s time to speed up — not slow down.
Take advantage of the momentum you’re building by turning what you’ve done into repeatable systems that you can use to find your next property and begin scaling your business.
The best systems you can use are automations around bringing in new seller leads so you have a consistent supply of potential deals to look at — and move forward on, if they check out.
You also want to make sure you are actively building a list of cash buyers if you’re going to be reassigning contracts or flipping properties as part of your strategy.
The marketing and automations you use will help you build a consistent flow of deals so you’re able to minimize the downtime between each deal you do — which makes you more money.
With automations comes one other problem, though: organization.
Like we mentioned earlier, as you begin to grow and scale your investing business, you will need to stay organized in order to keep from dropping the ball on deals or leaving money on the table.
Using a CRM like REsimpli can help you track incoming seller leads, your list of buyers, where each deal is at right now, and the marketing that you’re doing so you know where to spend more time and money and where to dial back on campaigns that may not be performing like they should be.
With the right education and mindset, learning how to invest in real estate as a beginner can be an incredibly exciting time for you.
To get started, make sure you understand your goals and the business model or investing strategy that can help you hit those goals, and then spend time understanding exactly what makes a good deal a good deal — without being afraid to walk away from one if it doesn’t make sense.
If you stay conservative, especially in the learning stage, getting started investing in real estate is easier and simpler than most people realize.