A Newbie’s Guide to Real Estate Investing

Today, you can find me writing over at The Frugal Cottage while I share this corner with Chris from Money Mozart – a personal finance blog that focuses on living well below your means, saving money, making money in odd ways, and overall just practicing frugality like a bo$$. He’s an avid craft beer lover and also enjoys long walks on the beach with his wife and miniature poodle. Take it away Chris…

Investing in real estate can be incredibly rewarding. My father in law is someone who I know that’s been very successful at it. In fact, he’s never worked a day at a “real job” in his life. He’s always owned his own businesses and invested in real estate. He retired in his 50s.

One awesome story I have is when he decided to invest in commercial real estate for the first time. He found a cluster of apartment buildings for sale in a less-than-stellar area. The seller was anxious to unload the property because he saw the area wasn’t what it used to be, and probably didn’t want to be a landlord any longer. Having years of real estate investing experience in his life, my father in law knew this was a great investment opportunity. He knew that areas that were going downhill for home sales were typically very strong areas for renting. He had also lived in this part of town before in his life, so he knew it very well.

His plan was not to be a landlord. His plan was to flip the properties like he did with homes in the past. After doing some research, he decided to make an offer. After some negotiation, he picked up a few apartment buildings that were grouped together as one ‘complex’. Instead of re-selling all of them at once, he learned of a way to split the property into two, make two separate apartment ‘complexes’ and sell them off individually. He was able to sell the first newly split property for as much as he paid for both. He then held on to the other property, collected rent on it for a couple of years, and eventually sold it off for a profit.

If that’s not smart real estate investing, I don’t know what is.

It’s not always that simple though. Your money is going to be tied up for potentially a very long time. You may lose money, as with any other investment. Here are a few tips to consider before jumping into investing in real estate.

Learn the Biz

Before you jump into buying up real estate, make sure you know you’re doing. Just like any other type of investing, you can’t just take advice from one person, one time, and think you’ll be a rock star. It doesn’t work like that. This means you need to invest time. One excellent resource for real estate investing is Bigger Pockets – check out this post on 5 things you can do to learn as much as possible when starting out.

Be financially ready and DO NOT use your only savings

First and foremost, I strongly recommend against using your personal emergency savings or any retirement account to invest in real estate. If you don’t have the extra money on hand, don’t do it. Having your savings tied up in property can cause a lot of stress – both emotionally and financially. I saw this happen with a relative of mine, and it wasn’t pretty. If you’re considering investing in real estate, like starting any other business, you should set money aside and be able to live without counting on any income from the investment properties for a while.

Understand the Costs

Even if you can find a lender to give you a mortgage with less than 20% down, I do not recommend it at all. You’ll be paying extra insurance (called PMI) which eats into your profits. You should also consider more than just the cost of the property itself. You’ll have things like closing costs and legal fees to consider. The property might need work done on it. Consider the cost of upgrades and fixes like a new water heater, furnace, plumbing, electrical, etc. You may also want to pay a staging company to deck the place out so it sells or rents faster. Lastly, you have to consider the time-cost. What if the property doesn’t sell or rent right away? You’ll be paying the mortgage until it does. Before you decide what your expected profits could be, just make sure to factor in costs like these. You may also want to reach out to a licensed financial adviser who specializes in real estate investment for more guided advice.

Know the area, inside and out

I’d never suggest buying a property in an area you didn’t know very well. Here are a few questions to consider:

• Are there any major projects being done in the area?
• What type of retailers are now established?
• Is there a Starbucks nearby (yes, this actually matters)
• What major employers are in the area?
• How are the schools?
• Is it a college town?
• Do you already own property in the area?
• How far is the property from your primary residence?

What’s great about real estate investing is you can certainly try to re-sell the property at a gain (which isn’t as easy these days) or you can rent it out. Oftentimes when an area isn’t a “buyers market” (people aren’t buying homes for much) the rental market is booming. Our small home for example is in an area with poor public schools and generally low home prices. But if I were to list it for rent, I’d get at least double my mortgage payment. It sounds backwards, but more Americans are renting, and paying more for it, as home ownership falls. This Actually leads into my next tip…

Know what you can rent for

Before throwing a price out there as a rent payment, do your research. Use a tool like rentometer to get an idea of what you can charge, then follow-up with a real estate agent. This should go without saying, but make sure the rental payment covers your mortgage and any other monthly recurring expenses you’ll have to pay on the property, such as home owner’s association fees. Even if you’re not profiting a ton from the rental price now, you own the property and it’s an investment. By managing your leases correctly, you could line yourself up to sell the property in a few years if you wanted to.

Screen your tenants (legally)

Never EVER rent to someone without screening them first. My father in law rented to a girl who worked with my wife and didn’t do a screen, assuming he could trust her. Not only did she not pay rent, but she welcomed 8 other people into the apartment with her and they used an outdoor charcoal grill in the kitchen. That’s right, a charcoal grill in the kitchen. Smoke burns everywhere on the inside of the apartment, ruined carpet, and a smell that wouldn’t go away were only a few of the issues. Evicting the girl was a horribly long and annoying process as well. Do yourself a favor and screen tenants before you rent to them.

Other Options

You don’t necessarily need to go out and buy a piece of property to become a real estate investor. In fact one of the most popular methods of real estate investment is a REIT (Real Estate Investment Trust). A REIT is a type of investment that invests in properties and mortgages and typically trades like a stock or ETF. Think of it like a mutual fund for real estate. It gives you a very liquid way to invest in real estate, and there are tons of different types of REITs that range from risky to more safe, depending on the types of investments and where they’re located. A really good resource to learn more about REITs is REIT.com.

So whether you’re buying a commercial or residential property alone, with a partner, or just loading up your portfolio with REITs, investing in real estate can be incredibly lucrative. Make sure you know what you’re doing and involve and talk to other people who have experience in real estate investing when you’re unsure. As I stated above, my father in law lives an incredibly frugal life, ran a successful painting business, and otherwise just invested in real estate opportunities when he saw them. He retired in his 50s, but probably could have retired sooner had he wanted to. Before diving into the real estate investment game, the first thing I’d suggest is that you start slow. Once you have your finances ready to invest in real estate, I’d recommend starting with one small property and going from there. Just remember that investing in real estate isn’t always a walk in the park.

Do you now, or have you in the past, invested in real estate? What type of investing do you/did you do? What other tips and/or resources would you add to this list?