How to Start Investing in Real Estate

To start investing in real estate, there are several recommended steps to follow. Many start out with no experience in the real world — or business — making it a rough beginning. While there is plenty to learn from books, mentors, and seminars, investing in real estate takes some real skill to be successful. 

One of the best ways to get started in real estate investing is to learn from the pros. This includes following a step-by-step plan from an experienced real estate investor. This can allow a beginner to get a sense of the process while moving through it like an experienced real estate investor. 

How much capital do you need to start investing in real estate? 

The first step is to determine your financial stability. There are different ways to invest in real estate and each requires a different amount of capital. If you are just starting out investing in real estate, consider your overall financial picture and your goals. 

For many, the top goal is to reach financial independence. That said, many are just starting out and may not have much money saved. Others may have some money saved but also have significant debt or could be balancing other investments. 

Is it better to invest in stocks or real estate?

“Is it better to invest in real estate or stocks?” is a tricky question. It is largely up to personal preference and investing style. It may also boil down to the details of an individual investment opportunity. It’s not as straightforward an answer as many would hope. 

There are pros and cons to each investment. Some of the benefits of investing in real estate include: 

• Real estate investing is a more familiar investment type than stocks.
• Real estate investments are tangible. You can live in your investment.  
• Real estate investing is less prone to different types of fraud.
• Real estate debt (leverage) is less risky than that associated with stocks. 
• Real estate has a good track record of being an effective inflation hedge. 

On the other hand: 

• It may take more work to invest in than stocks.
• Investment properties that go unoccupied could cost out-of-pocket money to the investor each month.

When considering the positive aspects of investing in stocks, it’s worth noting that: 

• Historically, stocks have proven to be a consistent wealth creator. 
• Owning stock means owning part of a business without actually having to do any work.
• Owning shares in a company that pays out dividends means both share price and your dividend amount could increase over time. 
• It’s easier to diversify with stocks than real estate.
• Stock investments, unlike real estate investments, are liquid, so you have access to your money.
• It’s easier to borrow against the value of stocks than against the value of real estate investments. 

But also take note that: 

• Investing in stocks and being successful requires one to be unemotional.
• Short term stock prices may fluctuate greatly, which can trigger anxiety for beginner investors.
• When the market is sideways, dividend-paying stocks may appear to have stalled in value growth. 

What is the average ROI in real estate?

The average return on investment (ROI) in real estate varies greatly depending on a number of factors and circumstances. Having a good ROI is important for real estate investors who need to know how profitable property investment strategies will be. Knowing an average ROI can help real estate investors determine their profits. 

What is considered a “good” return on investment will differ depending on location and based on various factors. That said, anything above 6 to 8 percent can be considered good. Identifying the average for specific locations can be helpful to get a clearer understanding of your return on an investment property. Other important metrics to follow are actually deviations of ROI. These include cash on cash return and cap rate. 

Cash on cash return (CoC) is similar to the return on investment formula but replaces property price with the total amount of cash invested in a property. Cash on cash return also looks at pre-tax cash flow instead of the difference between rental income and expenses.

Capitalization rate or cap rate calculates ROI regardless of the method of financing. This can be hugely beneficial when comparing rental properties for purchase. 

How do I get started in real estate investing?

To get started in real estate investing, one should first consider their preferred investment strategy. There are many different ways to get started in real estate investing, depending on your financial situation and what you hope to gain. 

One way to get started is to invest in real estate investment trusts (REITs), which allow you to invest in real estate without the actual physical real estate. They are similar to mutual funds in that they are companies that own commercial real estate and tend to pay high dividends, making them a popular retirement investment. 

Another strategy to get started is to use an online real estate investing platform that connects real estate developers to investors who want to finance projects, either through debt or equity. Investors on these sites are hoping that they’ll receive monthly or quarterly distributions in exchange for taking on a significant amount of risk.  

What is the best book for real estate investing?

Finding the best book for real estate investing can be a time-intensive task. Investing in real estate is a great way to diversify a portfolio, but it does require some working knowledge to be successful. Finding the best book to read about real estate investing can help.

Consider the following books: 

• The Book on Rental Property Investing
• The Book on Flipping Houses
• The Intelligent REIT Investor
• Mastering the Art of Commercial Real Estate