Do you want to build wealth with real estate investing but don’t know where to start? If so, you’re not alone, and you’re in the right place.
You see, we know from experience how challenging it can be to find approachable, helpful information about real estate investing for beginners.
There are many areas in real estate to explore, but most resources try to force new investors into a single type of investment or niche without providing a foundational real estate investing education or considering each individual’s situation and goals.
This is a problem because why should you stress about becoming an active residential real estate investor if passive real estate investing is a better option for you to get started? Alternatively, what if passing on residential real estate investing and jumping straight into commercial real estate investing is the best option for you?
You won’t know how to make the best decisions for your unique goals and dreams unless you’re aware of all the options.
Because of this, we wanted to create a truly comprehensive guide to real estate investing for beginners that explores active and passive investing opportunities in the residential and commercial real estate spaces.
We hope that by reading this guide, you’ll achieve three things:
You gain a foundational understanding of what real estate investing is and how it works.
You gain a foundational understanding of the different types of real estate opportunities that exist.
You can identify which investment opportunities are most appealing to you based on your unique circumstances, goals, and dreams so that you know where to focus your research and action next.
We strive to achieve these goals by starting at a high level and then providing a step-by-step process you can use to hone in on the particular niches and methods you want to pursue further based on your unique circumstances. Here’s the sequence of the information we cover:
Table of Contents
With the proper knowledge, strategy, and action, even total beginners can benefit from the power of real estate investing. Let’s begin!
I. Introduction to Real Estate Investing for Beginners
Real estate investing has long been a powerful way to build wealth. It can be a relatively stable source of income that is perfectly capable of helping individuals achieve financial freedom.
In this section, we explore what real estate investing is, the benefits it offers investors, and how you can start building your portfolio of properties.
First, the essential information:
What is Real Estate Investing?
Real estate investing is the process of buying property to generate income, build wealth, and increase your net worth over time.
There are various ways to approach real estate investing, from purchasing a residential rental property on your own, pooling your money with other investors to acquire a commercial property, and purchasing shares of a publicly traded real estate ETF.
Why Invest in Real Estate?
For generations, real estate has been a dependable source of wealth building.
Below are several reasons you should consider including real estate in your portfolio:
1. Real Estate Helps Diversify Your Investment Portfolio
The age-old adage, “Don’t put all your eggs in one basket,” exists for a valid reason.
Since the economy has many components and any given sector can crash while others thrive, spreading the risk by investing across multiple areas is a common investing practice.
Including real estate in your portfolio will add an industry that responds differently to the economy than other investments.
2. Real Estate Assets Are Tangible Assets that Appreciate
Investing in real estate can give you ownership or partial ownership of tangible assets that appreciate (increase in value) over time.
While investing in stocks and currencies can be fun, it can also feel abstract. Many people enjoy investing in real estate because it’s a physical asset you can feasibly visit, see, and touch.
3. Real Estate Assets Are Hedge Against Inflation
Since real estate is created with physical materials and the price of those materials increases over time with inflation, the value of real estate generally increases with inflation. The higher the inflation, the higher the value of a property will likely increase.
This phenomenon can help protect your investment portfolio from losses due to a weakening currency and allow you to earn a higher return on your investments when compared to non-tangible assets.
Another reason real estate can be a hedge against inflation is that rental rates increase with the cost of living. Therefore, rental properties can provide investors with continuous inflation-adjusted rental income.
4. Real Estate is Consistently in Demand
Companies can swing in and out of popularity based on buzz or demand, and it’s not uncommon to see a stock price shoot up only to drop over time.
But when it comes to real estate in the U.S., it’s important to note our entire human experience revolves around it. People live in apartment buildings and houses, work in office buildings, shop at grocery stores, get coffee at retail stores, have packages delivered via distribution warehouses, and seek entertainment at movie theaters or amusement parks.
All of these properties can be acquired and leveraged as income-producing assets, and while certain businesses can come and go within each property, there’s a good chance the property itself will remain in demand.
5. Real Estate Investing Provides Flexible Options for New Investors to Start and Scale
Many people view real estate investing as a slow and rigid investment. However, flexibility is one of the best benefits of real estate investing that is often overlooked.
There are many low-barrier entry points that are low-risk, easily accessible, and passive, which can be great for beginner real estate investors.
As you gain more experience and interest, you can transition to more significant investments that can potentially yield larger returns. If you wish to become an active millionaire real estate investor, you can choose from various property types and methods, from ground-up development to buy and hold.
II. Fundamentals of Real Estate Investing for Beginners
As you’ve likely heard, real estate investing can be a phenomenal tool for building long-term wealth, but it’s not something to jump into without your research and due diligence.
In this section, we explore the fundamentals of real estate investing and the essential terms, roles, and criteria of different types of investors in real estate deals. We also explore different types of physical properties you can acquire. Let’s begin!
Types of Real Estate Investors
There are four key terms you need to know when it comes to real estate investors: active investor, passive investor, accredited investor, and non-accredited investor.
Each of these terms has a distinct meaning regarding which deals an investor can invest in and how an investor participates in a deal.
Active Investor vs. Passive Investor
An active real estate investor is someone who takes an active role in purchasing, renovating, and selling real estate properties to make a profit.
A passive real estate investor is someone who uses their own money to invest in rental properties, real estate funds, or a real estate business without actively managing the assets of those investments.
For example, an active investor may raise money from passive investors through a real estate syndication (more on this later) and then use that money to acquire a large multifamily apartment complex. In this instance, the active investor makes material decisions about the property and helping execute the work.
The passive investor simply funds an investment with capital and then sits back and collects a return on their investment. Learn more about active real estate investing and passive real estate investing.
Accredited Investor vs. Non-Accredited Investor
On the passive side of the investor spectrum, there are two categories of investors that are based on the individual’s personal finance history and net worth.
Accredited Investors. According to the Securities and Exchange Commission (SEC), accredited investors are people who have a net worth of over $1 million, excluding their primary residence, OR have an income over $200,000 (individually) or $300,000 (with a spouse or partner) in each of the prior two years and expects the same for the current year.
Non-Accredited Investors. Non-Accredited Investors (also known as Sophisticated Investors or Retail Investors) are people who do not meet the criteria for being an accredited investor set out by the Securities and Exchange Commission. Being a non-accredited investor doesn’t mean the person is prohibited from investing; it simply means they must follow tighter guidelines around the investments they select and have more documentation requirements.
The SEC categorizes passive investors this way to protect individuals with less financial literacy. Effectively, the SEC believes that if you meet the criteria of being an accredited investor, you have enough financial literacy to make investments independently without needing to be protected with as much federal oversight. Alternatively, if you don’t meet the criteria of an accredited investor, the SEC believes you should have more guidelines and paperwork around your investments to help protect you.
You can learn more about the difference between the investment opportunities of accredited and non-accredited investors in this article about Rule 506(b) vs. 506(c).
Types of Real Estate Investment Property
There are two classifications of real estate property—residential and commercial—and you can invest as an active or passive investor in both classifications. Within each classification, you’ll find specific types of properties.
In this section, we explore the difference between commercial and residential classifications and the types of properties within each.
Commercial Real Estate vs. Residential Real Estate
Generally, residential real estate comprises single-family homes, condos, and two- to four-unit multifamily properties.
Commercial real estate consists of any property used for business or income-generating purposes and multifamily properties with more than five units.
The process of evaluating and investing in both categories is similar, but we’ll cover some key differences later. For now, let’s continue by exploring each type of property within each category.
Types of Residential Real Estate Investment Properties
Homeowners occupy most residential real estate as primary residences. However, when owned by an investor and leased to tenants, a residential property transforms into an investment property that can yield consistent returns.
Here are the main types of residential real estate investment properties:
Single Family Homes
Single-family home rentals are rental properties that consist of one home on a single lot or property. Single family homes often make great rental properties because many families prefer renting them over apartments to have more private space, private parking, and a yard for pets and kids.
Condos are privately owned units within a multi-unit building. They offer many of the same features as a single-family home at a smaller scale but often have extra amenities such as shared fitness centers, pools, and common spaces.
Small multifamily properties are residential properties with two to four units. This includes duplexes, triplexes, and fourplexes (or quads). Each unit in a small multifamily typically has a kitchen, living area, sleeping area (or bedrooms), and bathroom.
It’s important to note that multifamily properties are categorized as residential only when they contain four or fewer units. If the property has five or more units, it is classified as commercial.
Types of Commercial Real Estate Investment Properties
Commercial real estate investing can feel intimidating for beginner real estate investors, but it doesn’t need to be!
In this section, we cover the different types of commercial real estate properties so you’re aware of all the opportunities commercial real estate investing presents.
Multifamily Real Estate
Commercial multifamily real estate is a property that contains five or more units, such as apartment buildings and condominiums.
Multifamily real estate tends to be a favorite amongst investors because housing is essential, and at the commercial level, economies of scale can support excellent returns.
Learn more in our article: What is Multifamily Real Estate?
Office Real Estate
Office real estate refers to commercial properties that are used as office spaces. Some examples of office real estate include skyscrapers, professional buildings, and corporate headquarters.
Learn more in our article: What is Office Real Estate?
Retail Real Estate
Retail real estate refers to commercial properties used to sell goods and services, such as department stores, malls, and supermarkets. If a business occupies a space where they regularly sell physical products or provide on-the-spot services (e.g., massage or yoga studio), it’s likely considered a retail space.
Learn more in our article: What is Retail Real Estate?
Hospitality Real Estate
Hospitality real estate is a commercial property that provides short-term lodging and accommodations, such as hotels, motels, and resorts.
Hospitality properties can be fun properties to invest in, but they can require more management than other types of real estate because of the daily turnover and high level of customer engagement.
Learn more in our article: What is Hospitality Real Estate?
Special Use Real Estate
Special Use Real Estate is used for specialized or unique purposes, such as bowling alleys, amusement parks, movie theaters, and car washes. Effectively, if a building is built for a particular purpose that limits its market demand to a certain niche, it’s likely special use real estate.
Learn more in our article: What is Special Use Real Estate?
Industrial Real Estate
Industrial real estate refers to commercial properties used as warehouses, factories, cold storage facilities, manufacturing plants, and other buildings designed for industrial use.
Learn more in our article: What is Industrial Real Estate?
Raw land is often categorized and sold as commercial real estate because it’s often used for commercial development.
III. Types of Real Estate Investments
Real estate investments come in many forms, with varying effort, risk, and potential reward.
Now that you’ve learned about the different categories of real estate properties and the types of properties within each category, let’s explore the various ways you can invest in them.
If you look across all types of real estate investments, they effectively boil down to two categories: passive investments and active investments. As you may have guessed, this aligns with how you want to participate as an investor in each investment: as a passive or active investor.
Types of Passive Real Estate Investments
Passive real estate investing can be an excellent option for two groups of people:
New investors who want to start generating passive income while learning about real estate investing.
Experienced investors who want to generate passive income without taking on the work of active investing.
The common thread?
If you want to generate truly passive income through real estate, passive real estate investing is likely for you regardless of your investing experience level.
Let’s review different ways you can invest passively in real estate.
Real Estate ETFs
Real Estate Exchange-Traded Funds (ETFs) are publicly traded securities that track a broad range of real estate assets without owning them directly. Real estate ETFs provide an easy way for investors to gain exposure to real estate markets while managing risk and avoiding the need for significant capital to purchase properties outright.
Public Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust (REIT) is a specific company that owns, operates, or finances income-producing real estate. Many real estate investment trusts specialize in specific property types. For example, some REITs specialize in lodging or hospitality real estate, whereas others specialize in commercial multifamily.
Like a real estate-specific ETF or mutual fund, real estate investment trusts provide investment opportunities for everyday individuals—not just large banks and hedge funds—to invest in real estate and access dividend-based income.
Real Estate Mutual Funds
Real Estate Mutual Funds are professionally managed funds that invest in a collection of REITs, Commercial Mortgage-Backed Securities (CMBS), and other real estate-related companies.
Like real estate ETFs and REITs, Real Estate Mutual Funds are an excellent way for investors to access respectable returns from real estate without owning rental real estate directly.
Note: one additional benefit of real estate ETFs, mutual funds, and REITs is that they’re relatively easy to buy and sell on public exchanges. If you have a brokerage or retirement account holding stocks and bonds, you can likely access real estate-specific securities and trade them like you would stocks.
Private REITs share similar features to publicly traded REITs in owning and managing multiple properties.
The main distinction is that while anyone on an exchange can purchase stock in a publicly traded REIT, private REITs are only offered to accredited investors and institutions through private placement offers.
Real Estate Crowdfunding Platforms
Real Estate Crowdfunding has taken off in the last handful of years. Real estate crowdfunding platforms allow passive investors to invest in pre-vetted real estate deals with as little as $5,000.
This money is pooled with other passive investors to raise the necessary amount to fund the project (hence the name crowdfunding). Then the active investors working for the real estate crowdfunding platform use the funds to execute the project plan and deliver the projected returns to the passive investors.
One important thing to note about real estate crowdfunding platforms is that if you enter a crowdfunding project, your funds will likely be tied up longer than they would with an ETF, REIT, or mutual fund. This is because your money goes directly to financing, renovating, and stabilizing properties which takes time.
Another important note is that some online real estate platforms and crowdfunding companies only allow accredited investors to participate, whereas others are open to non-accredited investors. Before researching a platform’s deals, investigate which type of investors each platform works with and ensure you can invest. Learn more about the different kinds of real estate investors.
Real Estate Syndications
A real estate syndication is similar to real estate crowdfunding, except it’s more private because a real estate syndication is often not promoted in national marketing campaigns like a crowdfunding platform.
In a real estate syndication, a group of active investors (also known as sponsors) find deals and then present them to passive investors to raise capital to help fund the deal. The active investors then acquire, renovate, and stabilize the property according to the plan and strive to deliver the projected returns to the passive investors.
Real estate syndications can be great for passive investors who either have enough real estate investing knowledge to evaluate a deal on their own or know an experienced active investor who they immensely trust.
Learn more in our article that answers, “What is a real estate syndication?”
Many real estate investors like the idea of having their money backed by a tangible asset but don’t like the idea of needing to serve as property managers or deal with the many challenges that inevitably arise with active real estate investing.
If this sounds like the way you want to invest, and you have a large sum of cash sitting around, private notes may be an excellent option for you.
Private notes in real estate offer a straightforward way for passive investors to delve into specific real estate projects without getting their hands dirty.
To invest with private notes, you (as the passive investor) find an active investor needing capital and then effectively give them a loan with your money.
To do this, you would evaluate the project you want to pursue and decide if it’s something you want to invest in, then you would draft and sign a promissory note detailing your terms and conditions, including the interest rate and repayment plan.
If the active investor agrees to the terms, they can accept the loan and repay you following the promissory note.
Types of Active Real Estate Investments
Some investors don’t want to be passive—they want to get their hands dirty and be the ones doing the work. To be an active real estate investor means you’re materially involved in making decisions about an income-producing property. In that light, any property where you are participating in the material decisions is considered an active real estate investment. This applies across all types of real estate, from residential to commercial.
But to provide more guidance, there are three main approaches to investing in real estate actively. You can develop properties from the ground up, acquire distressed properties and renovate them, or acquire recently built or renovated properties to hold on to them long-term.
The neat thing about this is that you can utilize these three approaches across all property categories (commercial and residential) and all property types, opening a big realm of possibility. Let’s explore each of the approaches now.
Real Estate Developers
Real estate developers are professionals who identify and purchase land, secure financing, manage the development process, and rent or sell the completed project. They make money by building properties for less cost than their completed market value and then selling or refinancing them to pull out the profit.
Value-add investing in real estate is a method that involves buying underperforming properties, making renovations and improvements to the property, and then selling or refinancing it at a higher valuation.
If you’ve heard of “house flipping” projects or the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method, these are both value-add methods.
Value-add investing tends to generate higher returns than other real estate strategies by leveraging insights about local markets, acquiring properties below market value, and then making improvements to bring the property’s revenue and valuation up to market rate.
Buy and Hold
Buy-and-hold real estate investing involves purchasing and holding onto an income-producing property long-term.
This approach is active because, as the rental property owner (whether it’s a strip mall, gas station, or single-family home), you are the one making the material decisions about the rental property.
That said, the buy-and-hold approach is the most “passive” of the active investing approaches because you can hire a property manager to handle almost all of the property’s operations. As the owner, you still need to manage the property manager, which is often significantly less work than managing the property itself.
There are two primary ways you can profit from a buy-and-hold property. You can rent it out using various lease structures to long-term tenants, or you can rent it out to short-term tenants.
Long Term Lease
Long term leases can be anywhere from one year (often residential) to five or ten years (often commercial). The lease term you sign depends on the type of tenant you’re trying to attract and the type of property you’re renting. Some commercial investments can benefit from a NNN Lease, whereas properties like a triplex will require more detailed information.
In the residential category, a short-term rental is often a residential rental property rented out for periods less than 30 days, often weekly or nightly, on platforms like Airbnb and VRBO.
In the commercial category, a short-term rental is often a hotel, motel, or bed and breakfast.
These types of investments can be lucrative due to the potential for higher rental income than traditional long-term leases. However, they also come with certain risks, such as seasonality and added expenses like laundry, cleaning fees, lodging taxes, and additional insurance.
IV. How to Create Your Investment Plan
Now that you are familiar with all the different types of real estate properties and investments, let’s look at some steps you can take to establish your real estate investing strategy.
Step 1. Identify Your Investment Goals
How much money are you trying to earn? Are you more focused on securing monthly cash flow or building your net worth? How soon do you want to earn money? What does your timeline look like? Are you considering a five-year plan or a 30-year plan? Work through these questions—and any other related questions you can think of that may be important to your unique situation—and outline a clear picture of your investment goals.
Step 2. Evaluate Your Financial Situation
What type of funds do you have to work with? What kind of monthly savings or contributions can you rely on? What’s your risk tolerance look like? What percentage of your investment portfolio will you allocate to real estate?
Determining where you are financially and how much capital you have to work with is a major component of determining which path(s) to pursue.
Step 3. Determine if You Want to be an Active Investor or a Passive Investor
One of the most impactful decisions you need to make is what type of real estate investor you want to be because it will heavily impact which types of investments are good options for you.
One way to determine if you want to be an active or passive investor is to evaluate your financial situation and determine what kind of time, energy, and money you can commit to the endeavor.
If you don’t have a lot of time or don’t want to be involved in operating real estate properties, then being a passive investor may be the best choice.
On the other hand, if you have time to pursue active investments and find the hands-on activities of real estate investing exciting, then being an active investor may make more sense.
Remember, you can always transition from one type of investing to another depending on the stage or circumstances of your life. Perhaps you want to start investing passively, and then over time, you want to transition to active investing—that’s possible! You can also mix both, which we talk about next.
Step 4. Outline Your Unique Investment Allocation
Once you’ve identified your investment goals, evaluated your financial situation, and considered what type of investor you want to be, it’s time to outline how you want to divvy your time and funds.
Real estate investing is flexible because you can mix and match investment niches and approaches to perfectly align with your unique situation and goals. Furthermore, you can adjust your niches and approaches to remain aligned with your situation and goals as they change.
For example, if you want to go all-in on active investing, you can start raising capital for a specific property type and work to make deals happen. Alternatively, if you want to dollar cost average into the same REIT for 30 years and let your wealth build on autopilot without thinking about it, you can also do that!
Alternatively, you may want to do a little bit of active investing and a little bit of passive investing. In this instance, one example would be to acquire a fourplex in your hometown so that you can house hack and live in one unit while renting out the other three to cover your mortgage payments and live rent-free. That would be an active approach to investing, and you could simultaneously decide to put some of your additional funds into another passive investment, such as a REIT or syndication.
Think through all the components you’ve outlined in steps 1–3 and create an allocation that will work for your life.
Step 5. Create your real estate investing action plan.
Building wealth through real estate is like building a house: you must have solid foundations and plan every step carefully before construction begins.
Once you’ve identified your investment goals, evaluated your financial situation, and selected your real estate investing allocation, the next step is to create your plan for investing.
Take the time to think through your goals, investment allocation, and financial situation. Taking all of that into account, start to outline action steps that you can take to start deploying your capital or taking action to achieve your goals. This plan should include your budget, investment vehicles, timeline, and exit strategies.
By creating an effective real estate investment strategy and action plan, beginner investors can feel more confident about their decisions and start investing on a strong note.
Once you have created your real estate investing action plan, the next step is to start implementing it.
V. How to Start Investing in Real Estate for Beginners
Now that you have a foundational understanding of real estate investing and a plan tailored to your unique situation and goals, it’s time to start investing.
But before you dive in, know that due diligence is a key trait of all successful real estate investors, and you should build excellent due diligence habits from the start. Thoroughly research your opportunities to understand the risks and benefits before investing in them. Neglecting due diligence will increase your risk of losing money.
In this section, we explore the first steps you can take today to start investing in real estate as an active or passive investor.
How to Start Investing in Passive Real Estate Investments
If passive investments are part of your plan, you can likely start relatively soon.
How to Invest in Real Estate ETFs, REITs, and Mutual Funds
Real estate ETFs, REITs, and mutual funds are all available on public exchanges. If you have a brokerage or retirement account (like a 401(k) or IRA), you can likely login and see which securities are available to you.
If you don’t have a brokerage account, you can apply to open one with various platforms such as Vanguard, Charles Schwab, M1, and more.
Once you have an account to invest with, begin researching the different real estate ETFs, REITs, and Mutual Funds to determine which ones are aligned with your plan. Then, transfer money to your account and purchase their shares like stocks and bonds on the stock market.
How To Invest in Real Estate Crowdfunding
Real estate crowdfunding is another passive investment that is relatively easy to access. To get started with real estate crowdfunding, research a variety of platforms and determine which ones best support your plan.
Don’t forget, when it comes to real estate crowdfunding, some platforms only accept accredited investors, whereas others allow all investors. Additionally, different platforms and investment opportunities have different minimum contributions, so include these factors in your research.
Once you’ve found a platform that will work for you, create an account and follow the platform’s instructions to get started.
How to Invest in Private REITs and Syndications
Investing in a private REIT or a real estate syndication typically requires a larger amount of money to participate compared to other types of passive investments like ETFs, mutual funds, and some real estate crowdfunding opportunities.
While some syndications accept lower amounts of money, it’s common for a real estate syndication to require a minimum investment of $50,000 or more. Private REITs can require even higher amounts.
Research private REITs and real estate syndications and identify opportunities that align with the property type you want to focus on and the amount of capital you have. One of the most efficient ways to do this is to start networking with real estate investors in your area and ask for investors running syndications or private REITs. You’ll likely be surprised that when you start networking with the right real estate investment groups, you’ll quickly be connected with some great active investors in your area.
How to Invest in Private Notes
Investing in private notes is arguably the most “hands-on” form of passive real estate investing. This is because you, as the passive investor, must evaluate the active investor and the deal at hand on your own, create your terms and conditions, then ensure you’re collecting the money according to the terms and conditions.
However, with this additional responsibility comes the power and flexibility to only invest in the deals you want on the terms you want.
To get started, network with investors in your area and tell people you’re interested in investing with private capital. As word gets around the network, active investors will start bringing you deals to consider. It’s also a great idea to talk with a real estate lawyer in your area who can help you draft a strong promissory note to ensure you’re protected and will get what you hope to get out of the investment.
How to Start Investing in Active Real Estate Investments
If active investments are part of your plan, you likely don’t want to go at it alone.
Active investing in real estate is a team sport because there are more components to consider when putting a full deal together than passively investing. Therefore, to be successful, you must surround yourself with the right people—experts who can help you make informed decisions and guide you through finding, financing, and managing your investments.
The key to getting started with active real estate investing is to find your strength, hone your skill, and find a partner or team with different strengths than yours. By bringing different, necessary skill sets to the table, you benefit from doing business with one another.
Here are a few essential skill sets that good real estate teams need:
Sourcing and Evaluating Deals
Every team needs someone to find, underwrite, and evaluate deals. If you like the thrill of the hunt and enjoy running numbers, this could be a great area to focus on.
Once good deals are found, someone needs to raise capital to help fund them. After a deal is funded, the team needs someone to keep investors updated with the project and answer any questions investors have throughout the holding period.
If you have great communication skills and enjoy engaging with and educating investors, this could be a perfect area to focus on.
Every deal is a puzzle with multiple financial pieces. Whether working with various lenders to create the debt stack, keeping tabs on renovation costs, or managing the day-to-day operating budget of a property, being a financial expert is a huge value add to any team. If you have a finance background and enjoy ensuring every cent is accounted for, this could be the perfect skill set for you to hone.
Every project has deadlines, and if nobody is monitoring the work as it happens to ensure things are moving smoothly, it can cause significant complications. Being a project manager and ensuring deadlines are met, and the appropriate people take the correct action at the right time is essential. If you have a project management background or enjoy managing deadlines, this could be for you.
Real estate requires a lot of legal paperwork to ensure the ownership of properties changes properly, investors are protected, state and federal laws are abided by, and more. This is a huge benefit for any team if you have the legal expertise to review and revise contracts associated with a real estate transaction.
To get started with any of these areas, start researching the skill sets on your own and begin networking with real estate investment groups and real estate agents in your area. Be an open book to learn the ins and outs of real estate deals, and begin figuring out how your unique skill set can be of value to the right team. Eventually, you’ll find another investor or team in need of your skillset and you’ll have something of value to offer them in exchange for being part of the deals.
It’s important to note that we recommend pursuing active real estate this way because it is a value-add strategy. Effectively, you provide something of value to an investor or team, and they bring you into a deal as a result. After all, if you don’t have any value to add, why would another investor or team trim down their profits without receiving any value in return?
VI. Financing Your Real Estate Investments
For passive investments, you typically need to fund the investments yourself out of your pocket. While you could consider taking loans and investing the funds in opportunities projected to yield a higher rate of return than the loan’s interest rate, the risk likely isn’t worth the reward. Because of this, we recommend you use the funds you already have to invest passively.
However, you can finance your acquisitions and use other people’s money rather than your own for active investments. This is one of the most significant benefits of actively investing in real estate, and learning how to finance your investments can open up new opportunities for growth and success for you.
This section explores financing options available to active real estate investors for residential and commercial investments, from traditional bank loans to more creative seller financing and syndication methods.
Residential Real Estate Financing Options
For most residential real estate investors, a cash down payment and a traditional conventional mortgage is typically the top funding choice. This is because conventional mortgages come with some of the lowest interest rates available on the market, and they’re by far one of the most popular residential loan types among buyers.
If you want to house hack (live in one room or unit of the property and rent out the others while you live there), you can secure a conventional mortgage for as little as 5% down. Then, when you move out, you can convert the property into a full rental.
If you don’t plan for the property to be your primary residence and simply want a conventional loan for rental property investing, you will need to put 20–25% down.
Similar to a conventional loan, if you want to acquire a property for a low down payment and can live in it as your primary residence for a while, you may qualify for a loan with the Federal Housing Administration (FHA).
FHA loans offer a fantastic advantage: you only need to put down 3.5%, which could allow you to start your investing journey for much less out of pocket.
The FHA loan has a subset called the 203k loan, which makes it possible for a buyer to purchase and repair any home needing renovation. Like an ordinary FHA loan, you only need to pay a minimal amount as a down payment with this kind of mortgage if it’s your primary residence.
Hard money loans are loans from hard money lenders.
These loans are primarily based on the worth of the property and are provided for shorter terms with higher interest rates and loan points (fees) than conventional loans. The upside to them is that you can typically secure them in a faster amount of time with less paperwork.
In residential real estate investing, hard money loans can be an excellent option for house flipping or BRRRR projects.
Home Equity Loans and Lines of Credit
If you already own a primary residence, you may have enough equity to pull out a Home Equity Installment Loan (HEIL) or a Home Equity Line of Credit (HELOC).
Many banks will allow you to take up to 75% or 80% of the house’s value, which could free up substantial cash for you to fund another investment.
Commercial Real Estate Financing Options
Conventional Bank Loan
Traditional Loans, also known as conventional loans, are similar to those associated with residential mortgages because they usually have a fixed interest rate and a longer repayment timeline.
Traditional loans are a great option if you’re a buy-and-hold investor aiming to acquire a property for over three years and want to focus on generating consistent positive cash flow.
Commercial Hard Money Loans
A Commercial Hard Money Loan could be the answer if you’re looking for a competitive edge in a deal or need quick cash.
Similar to residential hard money loans, these are short-term loans provided by private investors and specialized lenders with higher interest rates than traditional banks but allow investors to make all cash offers on properties or provide quick access to cash for projects.
If you’re looking to quickly acquire and renovate a commercial property before refinancing it into a conventional loan, a commercial hard money loan could be for you.
Learn more about commercial hard money loans.
Small Business Administration (SBA) Loans
The U.S. Small Business Administration (SBA) offers two loans that small businesses can use to purchase commercial property.
To qualify for these loans, you must have a business or start a business that needs real estate.
While these loans aren’t useable if you want to run a syndication or purchase an investment property, they are helpful tools if you do own a business and want to acquire commercial real estate through the business.
Commercial Bridge Loans
Commercial Bridge Loans are a convenient financial solution for commercial real estate investors, giving them the capital to quickly purchase property before obtaining long-term financing.
Commercial bridge loans effectively bridge the gap between purchasing and refinancing or selling, allowing investors and developers quick access to funds so that a transaction isn’t delayed.
Commercial Blanket Loan
A Commercial Blanket Loan, sometimes called a Commercial Portfolio Loan, can be an ideal financing solution for real estate investors and developers who own or plan to purchase multiple properties.
Rather than securing individual loans for each property, a blanket loan allows the owner to bundle all properties into one loan. This streamlines the borrowing process and can sometimes also lower costs.
Another benefit is that it’s possible to access the collective equity across all properties through this type of loan to help purchase more properties.
Commercial Construction Loans
Commercial construction loans are utilized to finance the development of a new commercial property.
These short-term loans provide funds throughout the construction process, after which developers typically sell their newly constructed property to reap profits and refinance it into more favorable long-term financing with competitive interest rates.
Commercial Mortgage-Backed Securities (CMBS) or Conduit Loans
Commercial Mortgage-Backed Securities (CMBS) or Conduit Loans are created and sold as securities to investors by bundling several commercial mortgages.
These CMBS/Conduit Loans package hundreds of different loans together to generate a profit through their sale. Upon combining mortgages into a conduit loan and calculating the resulting blended rate of return, investors can purchase shares of this bundle with comparable terms, rates, and types of properties.
If you want to avoid banks to finance a deal, consider utilizing seller financing for commercial real estate projects.
Like residential real estate, seller financing is a contract created between a buyer and seller where the seller provides some or all of the financing to purchase a property.
This type of financing is beneficial because it allows buyers to buy properties without qualifying for conventional bank loans, giving them access to capital with more favorable terms than traditional lending sources. It also offers sellers more control over when their property will sell and to whom they will sell it.
Seller financing typically involves the seller providing either a part or the total amount of the sale price while charging interest on the loan in exchange; this makes it easier for buyers to acquire real estate with zero money down.
Learn more about the different types of commercial real estate loans.
Frequently Asked Questions About Financing Real Estate Investments
What is the best way to invest in real estate with little money?
As a passive investor, the best way to invest in real estate with little money is through low-fee ETFs, REITs, and mutual funds. You can often get started with these investments for less than $100.
As an active investor in residential real estate, seller financing is a great option to invest with little money, but it also requires more work to find a seller willing to do a seller financing deal. Other little-money options for residential include an FHA loan, which only requires a 3.5% down payment, 203k loans that make it possible to buy and repair any home in need of renovation, and home equity lines of credit where you can use the existing wealth from your primary residence for additional investments.
As an active investor in commercial real estate, seller financing and syndications are fantastic options to invest in real estate with little money. If you’re interested in learning about how to invest with no money down, read our article How to Buy Commercial Property with No Money Down.
How can I invest in real estate for $500?
If you have $500 to invest, your best bet will likely be a passive investment option such as an ETF, mutual fund, or REIT.
How can you invest $1,000 in real estate?
If you have $1,000 to invest, you can purchase shares of real estate ETFs, mutual funds, and REITs. You also may be able to consider some real estate crowdfunding opportunities.
Is 10k enough to invest in real estate?
With $10k, you can access most passive real estate opportunities, such as ETFs, mutual funds, REITs, and crowdfunding deals. You could also lend that money to active investors with a private note and potentially participate in a syndication.
How can you invest 50k in real estate?
With $50k, you can likely invest in each passive real estate investment type. You’re also likely able to invest actively in residential real estate and perhaps some commercial real estate depending on the size and location of the property.
VII. Top Real Estate Investing Resources for Beginners
Real estate investing is a powerful and proven way to build wealth, but it can be daunting for beginners who may not know where to start. That’s why having access to the right resources is crucial to success in this industry.
Podcasts and books are two of the most effective ways to glean knowledge from experienced investors and expedite your learning curve. Here are our top picks to learn about real estate investing for beginners.
- The 15 Best Commercial Real Estate Podcasts for Investors
- The 15 Best Books on Commercial Real Estate Investing of All Time
VIII. Real Estate Terminology
Without understanding the terminology involved, making informed decisions, getting investment advice, or having meaningful conversations with your financial advisor or other investors can be challenging.
We’ve created this section to help beginner investors learn the essential real estate investment terminology and confidently approach investment conversations with clarity.
So let’s dive into real estate investment lingo and explore the key terms you need to know!
Appreciation: The natural or forced increase in the value of a property over time.
Cash Flow: The regular profit generated from a property after all expenses are paid.
Capitalization Rate (Cap Rate): The rate of return on an investment property based on the expected income.
Equity: The difference between the property’s value and the amount of debt owed.
Depreciation: The decrease in the value of a property over time due to wear and tear, aging, and other factors.
Gross Rent Multiplier (GRM): A method used to evaluate the value of an income-producing property.
Leverage: Using borrowed money to invest in larger properties.
Letter of Intent (LOI): A non-binding letter with offer terms that a buyer sends to a seller to express their interest in purchasing a property and initiate the negotiation process.
Mortgage: A loan used to purchase a property secured by the property itself.
Net Operating Income (NOI): The income generated by a property after deducting all operating expenses.
Real Estate Investment Trust (REIT): A company that owns and operates income-producing properties and offers shares of ownership to investors.
Return on Investment (ROI): The profit or loss generated by an investment, expressed as a percentage of the initial investment.
Tenant Improvement (TI): A sum of money provided by the landlord to the tenant to improve the space to suit the tenant’s specific needs.
Vacancy Rate: The percentage of unoccupied rental units in a given period.
Appraisal: A professional assessment of the value of a property.
Down Payment: The initial cash you must provide to a lender to secure a loan.
Cash-on-Cash Return: The annual return on investment concerning the amount of cash (or equity) invested in a property.
Debt Service Coverage Ratio (DSCR): The ratio of a property’s net operating income to its debt payments.
Due Diligence: The process of thoroughly researching and evaluating a property before making an investment decision.
Escrow: Holding funds or documents by a neutral third party until certain conditions are met.
Fixed-Rate Mortgage: A mortgage with an interest rate that doesn’t change for the entire loan term.
Interest Rate: The percentage of a loan charged as interest by a lender.
Lien: A legal claim against a property as collateral for a debt.
Principal: The amount of money borrowed for a mortgage or loan.
Property Management: The daily management of a property, including rent collection, maintenance, and tenant relations. Rental property owners often hire property management companies to manage their investments.
Refinancing: Replacing an existing mortgage with a new one at a different interest rate or loan term.
Title: The legal property ownership, as recorded in official documents.
Underwriting: The process of running numbers and evaluating a property as an investor or evaluating a deal and borrower’s creditworthiness as a lender.
Yield: The annual return on investment, expressed as a percentage of the property’s value.
1031 Exchange: A tax-deferred exchange of one investment property for another, allowing investors to defer paying capital gains taxes.
Absorption Rate: The rate at which available homes or properties in a specific market are sold or leased during a given period.
Amortization: The process and timeline of paying off a loan over time through regular principal and interest payments.
Commission: The amount or fee paid to a real estate agent or broker for their services in buying or selling a property.
Contingency: A clause in a contract that outlines the mandatory conditions that must be met before the contract can be completed.
Equity Investment: A real estate investment where the investor buys an ownership interest in a property, typically in the form of shares in a partnership or LLC.
Triple Net Lease (NNN): A lease agreement in which the tenant pays rent and covers all costs associated with the building, including property taxes, building insurance, utilities, and maintenance.
Inspection: A professional inspection of a property to assess its condition and identify any issues that need to be addressed.
Real Estate Owned (REO): A property owned by a lender or bank due to foreclosure.
Zoning: The regulation of land use by local government determines what structures and activities are allowed in specific areas.
- Opportunity Zones: Specific areas that receive tax benefits for real estate investment and development.
IX. Frequently Asked Questions About Real Estate Investing for Beginners
Real estate investing is a complex and intimidating endeavor for beginners, but it doesn’t have to be. With the proper knowledge, you can confidently begin your journey and build wealth with real estate.
In this section, we answer a handful of frequently asked questions about real estate investing for beginners so you can get started on the right foot. Let’s dive in!
What type of real estate is best for beginners?
It depends on the individual investors and their unique circumstances and goals. For some beginners, investing in REITs can be the best, whereas jumping straight into active commercial real estate investing can be best for others. Review section IV and V above to learn how to create a real estate investing action plan for yourself regardless of your experience level to help answer this question.
Can Residential Real Estate Investors Invest in Commercial Real Estate?
Yes, residential investors can learn how to invest in commercial real estate.
Commercial real estate investing offers different opportunities and potential rewards than residential real estate investing strategies but follows the same basic principles.
Beginner investors should research the commercial real estate market, build relationships with experienced investors and professionals in the real estate industry, evaluate potential investments based on their goals and budget, and create an action plan for investing.
Should you pay for mentorship?
It depends. Mentorship can be a great way to get you up to speed on the real estate niche and approach you to want to pursue.
That said, not all mentorships are guaranteed to help you. Some can be amazing and help you reach your next level quickly, whereas others may feel like a waste of energy and money afterward.
As you conduct research for mentors that focus on real estate investing for beginners, ensure you genuinely trust the person you are paying for mentorship before signing a contract.
Can I Invest in Real Estate if I Have a Full-Time Job?
Yes, you can invest in real estate while having a full-time job. Commercial real estate investing is an excellent option for those with limited time because they can use passive strategies and income streams through syndications or REITs.
You can also look into active investing with a full-time job by partnering with other investors to distribute the workload. When multiple individual investors form a real estate investing business together, it’s possible for all of the individual investors to maintain their full-time jobs while investing on the side.
X. Next Steps
By now, you should have more clarity on real estate investing and the various niches and methods you can use to achieve your goals. Hopefully, you’re feeling like real estate investing for beginners is a bit more approachable than you once thought, and you’re ready to take the next steps to begin investing.
As a next step, explore and build your real estate investment plan (from Section IV). Once you have an investment plan, you’ll have a clearer picture of what to do to start investing.
As an example, if you want to invest in real estate ETFs soon, you will need to put an action plan together to research which ETF(s) you wish to invest in, open a brokerage account, move funds to the account, etc.
If you want to go all-in as an active investor, you’ll likely need to start networking with real estate investment groups and real estate professionals in the niche you want to explore (E.g., multifamily vs. industrial).
When you start with your ultimate goal and plan accordingly, you will save a lot of time and energy along the path to achieving your goals.
But remember, real estate investing is not a get-rich-quick scheme. It’s an investment vehicle that can help you build wealth over time if you consistently make wise choices. A popular saying amongst seasoned real estate investors is: “Don’t wait to buy real estate. Buy real estate and then wait.”