Over the many years that we’ve been serving real estate investors, one of the most asked questions on our site, BiggerPockets.com, has been, “How do I get started in real estate investing?”
People from all over the world have been coming to BiggerPockets to find the answer to that question. While some may lead you to believe that there is a simple answer that works for everyone, that just isn’t the case. We’ve built this guide to help simplify the process of figuring out how YOU can get started. Of course, this guide is not an all-encompassing “how-to” manual. It will not cover every aspect of real estate investing. Instead, it will provide a broad-stroke overview of the best ways to start down your path to financial freedom through real estate investments.
Are you ready to begin?
As you work your way through this guide, remember that this is not all-encompassing. It is a 40,000-foot view of how real estate investing works, and it is designed to give you the basic tools to get past the all-important question of how to get started. As you read along, take note of any questions, or highlights pertinent information, and then visit BiggerPockets.com to search the site or ask questions on our forums to learn more about anything that’s still on your mind.
For those unfamiliar with our site, BiggerPockets.com is an online community of real estate investors with the largest collection of advice for new and experienced investors. It is free to join and to begin participating, learning, and growing.
If you are new to BiggerPockets, start with our real estate forums. The BiggerPockets forums contain more than 4,000,000 posts about every aspect of real estate investing, updated hundreds of times a day. Search through the site or create a new thread and ask any questions you’d like; many of our 1.3 million members will be there to help answer them. Also, check out the BiggerPockets blog—which holds more than 9,000 articles from experienced investors in many different real estate investing niches—and the BiggerPockets podcast, now the leading real estate podcast on iTunes. These sources, along with hundreds of other pages on the site, make BiggerPockets.com the largest source of real estate investing knowledge on Earth.
It is perfectly natural to be intimidated, but our goal at BiggerPockets is to help you overcome your fears and countless questions by providing as much free information as possible and help you make the best decisions for your own needs.
How to invest in real estate
There are many places you can put your money besides underneath your pillow, including in stocks, bonds, savings, mutual funds, CDs, currencies, commodities, and of course, real estate investments. There are positive and negative aspects to each investment option, but since we’re here to learn about real estate, we’ll focus on that and that alone.
One of the most commonly stated reasons people give for investing in real estate is that they are seeking out financial freedom, but there are others, as well. Of course, each person will have his or her own personal reasons. They are typically seeking one or several of the following:
- Cash flow
- Tax benefits
The decision to begin investing in real estate is a personal one, and we absolutely recommend that you make sure you and your family are 100% committed.
Find your investing strategy
How to Invest in Real Estate: The Ultimate Beginner’s Guide to Getting Started will give you an insider’s look at the many different real estate investing strategies that are out there. Find which one works best for you, your resources, and your goals!
Can I invest in real estate if I have a full-time job?
Yes. The kind of real estate investing you see on television or may hear about from a guru is not the only kind of real estate investing there is. In many situations, the kind of investing you see on TV is not even investing at all, but rather gambling or speculating.
The truth is, there are hundreds of ways to make money in real estate. Some of these techniques or strategies may require 40 hours a week, while others may only require 40 hours per year. The amount of time it takes to grow your real estate business largely depends on your investing strategy, your personality, your skills, your knowledge, and your timeline.
You’ve probably heard the age-old question (perhaps from your high school guidance counselor), “If you suddenly had one million dollars and didn’t have to work anymore, what would you do?” The answer, some say, reveals what career field you should enter.
If your dream path is to open up a shelter for abused animals or to move to Aruba and train tourists to surf, you probably should not become a full-time real estate investor. That’s not to say that you shouldn’t invest in real estate—you just probably shouldn’t go full time.
However, you don’t need to make it your career in order to build wealth in real estate. If you love your job, you don’t need to quit it to invest in real estate. You can achieve the same (or better) results by investing on the side, same as you would as a full-time real estate investor.
Advantages of investing while working a full-time job
By keeping your day job, you have several advantages over a full-time investor. First, you do not need to live off the cash flow you make—that’s what your nine-to-five is for. By reinvesting all the profits from your investments, you can fully realize the incredible benefit of exponential growth. Additionally, you have a much easier ability to get long-term bank financing thanks to the stable income from work, which can also help increase and stabilize your wealth building.
You can invest in real estate while keeping your day job by doing the following:
- Partnering in a larger piece of property
- Investing in a buy-and-hold property with property management
- Serving as a private or hard-money lender
- Investing in notes (mortgages)
Real estate can be highly profitable whether it’s your career or you’re just investing while working a “normal job.” However, the choice is yours as to which path you take. Don’t simply decide to quit your job and become a full-time investor because you read about other investors who have been successful doing it that way. Having a concrete plan for how you’re going to proceed in real estate is essential; we’ll get into that a little later in the guide.
That said, life is too short to be stuck in a job you hate. Choose a career that makes you excited to wake up in the morning, energized throughout the day, and content when you fall asleep at night. If that desire leads you to full-time real estate investing, welcome to the club! Just make sure you are not simply building a career, but building a future.
Do I need to pay some guru?
Absolutely not. Countless investors have become successful without the help of the guru crowd. The goal of many of these individuals is to sell you on the dream of quick riches, fancy cars, easy money, and so on—many prey on people who desperately want to make money and may use very slick and often dangerous (for you) techniques to sell you on their very expensive courses, bootcamps, mentoring, training, etc. In fact, the tactics used to get you hooked are very well documented, and there is absolutely no such thing as a free lunch.
Keep in mind that there are many in our industry who benefit from marketing these gurus. Most websites that focus on the investment niche are affiliated with them, collecting large referral fees—often to the tune of 50 percent—in return for marketing their wares. Additionally, a large percentage of real estate clubs derive revenues from products and events sold by gurus who “teach” there. And yes, they also get a nice 50 percent cut for doing so.
Remember, real estate gurus are in the business of marketing and selling you on the dream. Through this guide and the thousands of articles and hundreds of thousands of discussions available on BiggerPockets, you can absolutely learn everything that you’d pay thousands of dollars to a guru for, and you can do so for free. If you want to read an excellent article about the guru seminar trap, read “The Real Estate Guru Trap—How It Works & 4 Ways to Avoid It,” available on BiggerPockets.com Also, if you find a real estate guru that you are interested in learning more about, be certain to be careful, and check out our real estate guru review forum to find out the real deal from other investors.
That all said, they aren’t all bad, and some of these individuals are very knowledgeable. Just remember: caveat emptor (let the buyer beware). Do your homework and don’t get caught up in the hype or promise of secrets; there aren’t any.
Can I invest in real estate with no money?
No Money Down. The simple answer is: yes, it is possible to invest in real estate if you don’t have any money at all. However, money is involved in every real estate transaction. The issue, therefore, is not whether you’re investing with “no money,” but instead whether you’re investing with “none of your own money.” Investing in real estate without using any of your own money requires using Other People’s Money (OPM). Learning to strategically invest in real estate without any of your own money is one of the most complex, but important, tools you can develop in your real estate investing career.
The key to investing in real estate without any money of your own is simple: bring something to the table. If you lack money, there are other things you can bring to the table in a transaction—if structured correctly—including education, time, connections, confidence, intelligence, and creativity. By reading this guide, you are already taking steps toward building your strengths in those areas.
Many investors use little or none of their own money when investing in real estate. They’re able to achieve this by using one of several methods, including:
- Using partners
- Using lease-option strategies
- Via FHA (3.5 percent down payment) loans
- Using USDA or VA (no down payment) loans
- With home equity loans or lines of credit
- Using private/hard money
We will look at each of these options in more depth later in this guide, but we want you to recognize that investing in real estate without income is possible. It just may not be as easy as the gurus would have you believe.
Working in real estate without investing at all
Many would-be real estate investors get their start by simply working in the real estate industry—earning money while gaining a solid hands-on education. Here is a brief list (far from exhaustive) of careers you can take on to learn the real estate business:
- Real Estate Agent
- Mortgage Broker
- Construction Worker
- Resident Manager
- Title/Escrow Agent
- Project Manager
If you are looking to get into real estate investing with no experience and no money, choosing one of these careers may be a great way to get your feet wet in the industry, helping you to begin plotting your move to a full-time real estate investing career. The experience you’ll gain from mastering one or several of the other trades in the industry can be invaluable in helping you succeed.
Is real estate investing a way to “get rich quick”?
How many late-night real estate infomercials have you seen where the real estate guru is sipping drinks on the back porch of their beachside home, beckoning you to join them in the life of luxury?
No doubt one of the largest draws to real estate investing is the image of investors driving fancy cars, living in large homes, and ultimately being rich. And while many real estate investors do build significant wealth during their careers, real estate investing is not a get-rich-quick scheme. Yes, there are some who make a lot of money in a short time; however, these situations are generally the exception, not the rule.
Investing in real estate takes planning, patience, and persistence. Don’t expect to make millions of dollars in your first year. Instead, plan on creating a business through real estate that will steadily grow year after year, enabling you to meet your financial goals—and hopefully accomplish your dreams. No matter what you may hear, being successful in real estate requires hard work, just like any other field. It is also important to know that there are no shortcuts to being successful in real estate—there are no products or tools that will do the work for you, either. You must learn the fundamentals and then apply them. Of course, our goal here is to help you with that.
Whether you decide to go full time or just invest on the side, real estate can be the path toward a bright financial future for you and your family. In the next chapter, we are going to look at the very first step (and one of the most important ones) you should take on your journey: education.
Your real estate investing education
As we discussed at the end of chapter 1, real estate investing is not a get-rich-quick scheme. Just as any solid home needs a strong foundation, the same is true when it comes to your real estate education—a solid foundation is key to a long-lasting business.
This guide, while not exhaustive on every aspect of real estate investing, will help develop that foundation. We created it to serve as a first step in your real estate education—and as an introduction to the possibilities that come with real estate investment.
There are many different ways to get educated in real estate investing, and you don’t need to pay hundreds or thousands of dollars to learn the business. Below, you’ll find a list of sources that provide real estate investing education; be sure to consider each before making a final decision on how you’re going to move forward. What works for one person may not work for another.
As the old saying goes, “Those who lead, read.” Books are fundamental in gaining an education in real estate and may be the most widespread learning method for investors. Real estate books are produced each year by the thousands, and every major bookstore in the world contains an entire section on real estate investing. Chances are, if there is a way to make money from real estate, there has been a book written about it. If reading books, however, is not your thing, you are in luck. Today, we live in a world where nearly every new book is also available as an audiobook. (Try audible.com for the web’s largest selection.)
Perhaps the most powerful way to gain a good education in any field of study is through a mentor—and the same holds true in real estate. While there are dozens of professional real estate mentors who charge for their service, there are also millions of mentors all over the world who will charge you as little as a cup of coffee—they are your local investors. People enjoy sharing what they know, and seasoned real estate investors are no different. By introducing yourself to a successful local real estate investor whose career you’d like to emulate, you’ll gain the opportunity to learn from someone in the field who knows your market and may ultimately become a partner someday. We’ll talk more about mentors later in this chapter.
One of the newer ways people are learning about topics of interest like investing in real estate is through podcasts. Through virtually any device with internet connectivity or downloading capabilities, you can listen to hundreds of podcast shows and episodes covering a wide variety of real estate topics whenever you’d like—whether in the car, jogging, or lying in bed—for free. Be sure to check out the pitch-free BiggerPockets podcast, or search Spotify, Google Play Music, or several other podcast platforms for more options.
Real estate math
You don’t need to be a college calculus student to understand real estate math. In fact, most of the math you’ll need is grade-school level. This section is going to quickly touch on some of the basic concepts and math formulas you’ll need in your real estate investing career.
Income is simply the amount of money that a property brings in. This math is perhaps the easiest of all: simply add up the amount of rent collected and any additional fees that come in.
For example—you own a rental house. The home rents for $1,000, and the tenant also pays $25 for the use of the garage.
$1000 + $25 = $1025. Your total income was $1,025.
Income could also include late fees, application fees, pet fees, laundry or other vending machines, and any other value your rental brings in.
Expenses are simply the things within your investment that cost you money. For example, if the loan from the bank is $500 per month, maintenance is $100 per month, and the garbage bill for a home is $50 per month, then the total of these three expenses is $650.
$500 + $100 + $50 = $650. Your total expenses are $650 for this particular month.
Keep in mind that there are many other expenses that you’ll face as a real estate investor, including taxes, insurance costs, management costs, holding costs, capital expenses, and various others.
Cash flow is simply the amount of money left over at the end of the month after all expenses are paid. To determine the cash flow, simply subtract the total expenses from the total income:
$1025 – $650 = $375. Your total cash flow is $375 for the month. Let’s look at a few more math equations.
Return on investment
Return on investment (also known as ROI) is a fancy way of describing what interest rate you make on your money each year. For example, if you invested $250 and you made $250 from that investment (for a total of $500) over the course of one year, you would have made a 100 percent return on investment. Similarly, if you invested $5,000 and made an additional $2,500 over the course of the year (for a total of $7,500) you would have made a 50 percent return on your investment that year.
The actual calculation for return on investment looks like this:
ROI = (V1 – V0) / (V0)
where V1 is the ending balance and V0 is the starting balance.
A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1,000 into a bank account. On the following January 1, you cash out the account for $1,100. Your ROI on the investment is:
ROI = (1100 – 1000) / (1000) = .1 (or 10%)
You start with $1,000 and end up with $1,100 after a year for a return of 10 percent.
These simple concepts present the foundations upon which almost all other real estate calculations are based. The rest will come in time, but bear in mind that most calculations will be related to these.
Real estate investing mentors
A mentor is an individual who will teach and instruct you based on his or her first-hand experiences; mentors have lived this life before—walked it, talked it, and breathed it. Finding a mentor and learning from those who have come before you is one of the most important steps you can take in your real estate investing education—yet perhaps it’s the most misunderstood. This section will focus on what makes a great mentor and how to find one. It will also explore whether or not you should pay for one.
How to find a real estate mentor
For those who have been led to believe that the only mentors available are the kind that cost $19,997.97, the concept of an organic mentor may seem profound. After all, why would a seasoned, professional real estate investor bother to help a newbie? You may find yourself asking, “Won’t I just be wasting their time?”
There are a variety of reasons why a seasoned real estate investor may choose to help a newbie, but the fact is, many do. Whether it’s with the goal of passing on a legacy or simply having someone with similar interests to talk with or the prospect of future deals, organic mentorships happen each and every day. These mentorships are usually identified by another name, though: friendships.
On the other side of the spectrum, there are new wannabe investors who tend to approach relationships as if the mentor should feel lucky to work with them. This entitled attitude leads many of these newbies to the BiggerPockets forums where they proudly announce that they are looking for a mentor to teach them all they know, offering nothing in return but the privilege of working with them.
If you’d like to attract a mentor into your life, seek ways to organically foster a mentor-mentee relationship. Try these tips for building those relationships:
Concentrate first on establishing a relationship with seasoned investors who you would like to learn from. Make yourself valuable in a way that is meaningful (read: profitable) to the other person. What can you offer someone whom you want to learn from? Do you have a free weekend to help them clean up a vacant unit? Do you have web-design or cold-calling skills? Value comes in many different forms to many different people. Make it your goal to provide solid value to every relationship you’re in.
Don’t expect anything in return. You didn’t build your early mentorships (parents, grandparents, etc.) expecting something in return. You built them because you were simply going through life. Provide value, and in return, you may receive something back—but don’t expect it.
Always think win-win; don’t simply focus on what’s in it for you. Your mentor may be far more successful than you, but that doesn’t mean you can’t help her or him become even more successful. As the popular phrase states, “A rising tide lifts all ships.”
Most successful investors are willing to help, but only after you have proven that you are worthy of their involvement.
Should you pay for mentorship?
A mentor’s role is to make the journey from point A to point B a little quicker and a little easier for the mentee. For many wannabe investors, paying for a mentor is the quickest and easiest way to find one. But should you?
If you’ve hung around BiggerPockets for any length of time, you’ll understand that it is our core belief that you do not need a paid mentor or guru to help you succeed. There is a vast amount of information out there, most of it available for free, that you can use to learn and grow as a real estate investor. Furthermore, online spaces like BiggerPockets forums offer the ability to ask your questions and receive answers from many actual, seasoned real estate investors. Think about it—there are over over a million users on our site, and many of them are active on our Q&A forums. You can pay a single person thousands of dollars to be there to answer your questions, or you can just ask them for free on our forums and get answers from your peers who are active in the field. We tend to believe that the input of many is certainly superior to that of one person.
Of course, the choice to pay for mentorship or training is 100 percent up to you. A product or training from a guru is intended to improve your processes and make your journey easier, not necessarily shorter. The theory is, if you spend $500 on a product that helps you achieve $1,000 in profit, then the product is worth it. The problem is that most individuals simply choose to buy a product looking for a shortcut and do not actually put into practice the lessons learned.
Before ever paying for training, we recommend that you first exhaust all options in trying to find a local mentor, as discussed above. A paid mentor may be unfamiliar with the intricacies of your local real estate market, while a local mentor will usually have a much better grasp on the situation.
If you cannot find a local mentor, next seek out education via books, forums, blogs, and other sources. Besides pointing you in the right direction, this will also help guarantee your full commitment. After all, you don’t want to pay hundreds (or thousands) of dollars just to lose interest the next week.
Fear: A real estate roadblock
For every successful real estate investor out there, there are dozens of people who were too fearful and uncertain to ever actually do a deal. If you are just beginning, chances are you have some fears, as well. But don’t worry; fear is a natural part of life and is designed to help us avoid bad decisions and the consequences derived therefrom.
Get off your duff
If you are looking to real estate investing as a means to get out of a job you hate, then you need to start replacing the income from your job with money from your real estate activities. Develop a plan, and work that plan every day—just like you would get up and go to work every day for a paycheck. If you expect to do one deal and then permanently retreat to a beach somewhere, wake up. Successful real estate investors work hard, and you will need to do the same. Instead of working for a company you’re not fond of, you’ll be working for yourself—both a blessing and a curse.
STOP buying courses and other materials or seeking out mentors or coaches until you are committed to step one above. If you are not committed, no course, class, or trainer will get you any closer to your goal. Almost all real estate courses focus on the mechanics, but the real action is in what’s going on between your ears. When you can get that under control, it won’t matter what technique you use; you will find success as a real estate investor! Realize that you can spend a lot of money having someone show you the mechanics, but if you are not willing to deal with the issue of conditioning, you’ll just be wasting money.
BiggerPockets is filled with knowledgeable real estate investors who are willing to share what they know for free. Sign up for an account and interact daily. Don’t just lurk; participate, ask questions, connect with others, and build relationships. If you are afraid to ask questions, then you’re probably going to be afraid to speak to a seller or to negotiate with a big city developer. Interactions are part of an investor’s life, so the faster you can overcome this fear, the more successful you’ll be. Being visible to your peers online and off will ensure you’ll stay at the front of their minds—and that’s great for business.
Learn the lingo
Without knowing the lingo of a real estate investor, you will always be afraid to sound like you don’t know what you are talking about. Understanding the lingo will help build confidence and make it exponentially easier to talk to people and land deals.
Learn the concepts
Once you have the lingo down, you need to start learning the concepts. If you can’t adequately explain what a debt-to-income ratio is or why 70 percent ARV is important in a house flip, you need to spend more time learning. Fear is often a result of being unclear. If you need help, look back at chapter 3 for places to look for more knowledge. And once you have a good knowledge base, help teach someone else. Teaching others a difficult concept helps cement it in your own mind.
By surrounding yourself with investors who do the kind of investing you want to do, you will naturally begin picking up on the traits that make them successful. If this means working nights and weekends for a local investor for free, then that’s the price of admission. You’ll find that you quickly overcome fear when you’re helping others accomplish success, which will help give you the confidence to eventually strike out on your own.
Choosing your niche and strategy
Have you ever received a box of chocolates as a gift? There are always so many choices, and sometimes, you need to take a little bite of each one to figure out exactly what’s inside. In a way, learning how to invest in real estate is like that same box of chocolates. There are dozens (if not hundreds) of different ways to make money as a real estate investor, and it’s up to you to choose the niche you want to get into.
You may absolutely love some niches and strategies, while others may make you shudder. You don’t need to choose them all. Learning how to successfully invest in real estate is about choosing one niche and becoming a master. This chapter will open up that box of chocolates for you to sample, pulling back the curtain of the most common real estate niches.
Remember: once you identify the niche you want to get started with, you will be able to narrow down your focus, become an expert, network within that niche, and begin building wealth by executing a plan of action.
Most common real estate niches
The following list includes the most common property types that real estate investors deal with. Each has many subsets as well, but remember, you don’t need to know about them all. This is merely a list to help you understand what options are available, from a 20,000-foot view.
Raw land is nothing more than basic earth. Land, on its own, may be improved (adding value), and it may be leased or rented to create cash flow. Land can also be subdivided and sold for profit. Some investors choose to buy raw land with hopes (or plans) to someday sell it to be used in external developments like the construction of a freeway or a housing development.
Perhaps the most common investment for most first-time investors is the single family home. Single family homes are relatively easy to rent, sell, and finance. That said, in certain areas, the rents derived from single family rentals (SFRs) won’t be enough to provide positive cash flow.
Multifamily houses: Duplexes, triplexes, and quads
Small multifamily properties (two to four units) combine the financing and easy-purchasing benefits of a single family home. Bought properly, these can produce a good amount of cash flow, and there is often less competition than you’d run across bidding on single family homes. Best of all, these properties can serve both as a solid investment and a personal residence for the smart investor.
By buying a small multifamily property, you’ll be taking advantage of the economies of scale, because only one loan is needed to secure multiple units. One of the things that makes these investments so appealing is that most banks evaluate small multifamily properties (less than five units) with the same guidelines as a single family house, which can make it easier to qualify for the loan.
Small apartment buildings are generally made up of between five and 50 units, although the line between small and large apartments is not set in stone. Properties with more than 50 units can be more difficult to finance than single family homes or those with two to four units, because they rely on commercial lending standards rather than residential ones. However, these properties often provide significant cash flow for an investor who can deal with the more management-intense nature of these properties. Additionally, there is generally less competition for this property type, because they are too small for big professional Real Estate Investment Trusts (REITs) to invest in (more on this below), but too large for most novice real estate investors.
Instead of being priced based on comparable properties (often referred to as “comps”), the value of these properties is evaluated based on the income they bring in. This creates an enormous opportunity to add value by increasing rent, decreasing expenses, and managing the property effectively. These properties are a great place to utilize on-site managers who manage and perform maintenance in exchange for free or decreased rent.
This class of property refers to the large complexes across the country that often have pools, work-out rooms, full-time staff, and high advertising budgets. These properties can cost millions, but they can also produce stable returns with minimal personal involvement. Many large apartments are owned by syndications—small groups of investors who pool their resources.
Real estate investment trusts
In the most simplistic definition, a REIT is to a real estate property as a mutual fund is to a stock. A large number of individuals pool their funds together, forming a REIT. This alliance makes it possible for the REIT to purchase large real estate investments, such as shopping malls, large apartment complexes, skyscrapers, or bulk amounts of single family homes. The REIT then distributes profits to its individual investors. You can buy shares in a REIT via your stock account, and they often have a relatively high dividend payment. This is one of the most hands-off approaches to investing in the real estate business, but you should not expect the returns to be as great as those produced by hands-on investing.
Commercial investments can vary dramatically in size, style, and purpose, but ultimately will involve a property that is leased to a business. Some commercial investors rent buildings to small local businesses, while others rent large spaces to supermarkets or big-box megastores. While commercial properties often provide good cash flow by way of consistent payments, they also may carry much longer holding periods during times of vacancies; commercial properties can often sit empty for many months or years. Unless you are starting from a very solid financial position, investing in commercial real estate is not recommended for beginners.
You can start investing in mobile homes with little money out of pocket. Whether it’s a home in a mobile-home park or on its own land, many of the strategies used in other types of real estate investing can be applied to mobile homes.
When homeowners don’t pay their taxes, the government (local, state, or federal) may foreclose and then resell the property to investors for the amount owed. This can often mean incredibly inexpensive properties, but be sure to do your due diligence and don’t just jump into this kind of investing unprepared. Tax-lien sales are complicated transactions that require research, knowledge, and experience.
Investing in notes involves the buying and selling of paper mortgages. When a home is purchased with a loan, a “note” is created explaining the terms of the contract. For example, an apartment owner decides to sell his property for $1 million. He offers to carry the full note (thus allowing the new buyer to avoid using a bank loan), and the new buyer will make payments of 8 percent per year for 30 years until the full $1 million is paid off.
If the owner decides he no longer wants to be involved, he may choose to sell the mortgage to a note buyer. Just like any other real estate investment, a note will oftentimes be sold at a discount when the seller is motivated. A note buyer will then begin collecting the monthly mortgage payments and can keep the note or sell it again in the future.
Most common strategies
However, when learning how to invest in real estate, it is not enough to simply know what these property niches are. Instead, as an investor you will use a variety of strategies when dealing with these investment niches to produce wealth. The section below explores three of the most common strategies that you can use to make money with these vehicles.
Buy and hold
Perhaps the most common form of investing, the buy-and-hold strategy involves purchasing a property and renting it out for an extended period of time. It’s probably the most simple and purest form of real estate investing there is. Essentially, a buy-and-hold investor seeks to create wealth by renting the property out and either collecting monthly cash flow or simply holding the property until it can be sold for a future gain. Among this strategy’s advantages is the fact that while you hold the property and rent it out, the mortgage gets paid down each and every month, decreasing your principal balance and increasing your equity over time.
One of the most important things for a new buy-and-hold investor to understand is how to evaluate deals and opportunities. By far the most common mistake we see new investors make with this strategy is buying bad deals because they simply don’t understand property evaluation. Other common problems include underestimating expenses, making bad decisions on tenant selection, and failing to properly manage your assets. These mistakes can all be avoided, however, if you simply learn the business. Jumping in without proper education can be extremely costly—both financially and sometimes legally.
Ultimately, there is much more to buy-and-hold investing than meets the eye, but if you can learn how to evaluate and purchase good deals, find quality tenants, and manage your assets properly, you’re going to be on your way to running a successful business.
One of the most popular tactics for making money in real estate, due largely to the numerous shows on cable TV that promote it, is flipping houses. House flipping is the practice of buying a piece of real estate at a discounted price, improving it in some way, and then selling it for a profit. In reality, the flipping model is quite similar to the retail model “buy low, sell high.”
Flipping is not a passive activity. Instead, it’s like an active day job. When an investor stops flipping, they stop making money until they begin flipping again. Many investors choose to use flipping to fund their day-to-day bills and to provide financial support for other more passive investments.
The wholesaling process involves finding great real estate deals, writing a contract to acquire the deal, and selling the contract to another buyer. Generally, a wholesaler never actually owns the piece of property they are selling; instead, a wholesaler simply finds great deals by using a variety of marketing strategies (see chapter 7), puts them under contract, and sells that contract for what we call an assignment fee. This fee typically ranges between $500 and $5,000 (or more depending on the size of the deal). Essentially, a wholesaler is a middleman who is paid for finding deals.
Some wholesalers sell their contracts to retail buyers, but most sell their contracts to other investors (often house flippers), who are typically cash buyers. When dealing with these cash buyers, a wholesaler may get paid within days or weeks, building solid connections in the real estate community all the while.
Many investors choose to begin with wholesaling due to its reputation as being an easy strategy and one with low start-up costs. Because the property is never actually owned by the wholesaler, there are no rehab costs, loan fees, contractors, tenants, banks, or other complications. Wholesaling is the most popular strategy taught by real estate gurus. As a result, it often receives the most attention, although it is not as easy to become as successful a wholesaler as the gurus make it sound.
Don’t worry if you don’t know exactly which one you want to pursue yet—this is simply the beginning of your education. Learning how to invest in real estate will take time.
Create your real estate investing business
If you were to get in your car and take a road trip across the country to somewhere you have never been, would you just trust your gut and start traveling in the general direction of your destination? Most likely, you’d bring a road map of sorts.
The reason we use maps and GPS is because oftentimes the road is unpredictable, and the right road may seem to lead to the wrong place. Other times, the wrong road might seem to point directly toward your destination. Road maps are created to identify the easiest route, pitfalls you want to avoid, and special things to see along the way.
The same principle applies for your journey into real estate investing. This section will discuss building the road map that you’ll follow on your real estate journey. In business, we call it a business plan.
Start with a business plan
If you talk to investors who have a few failures under their belts, you’ll find that the majority of failures were due to a lack of preparation and planning. Don’t fall into this trap. Here’s what your business plan should include.
- Mission statement: When people ask you what you do, what do you tell them? Your mission statement should clearly define your purpose and it should include the benefits your business provides.
- Goals: Where do you want to go? What do you want real estate to help you to achieve?
- Strategy: There are hundreds of ways to make money in real estate—but you don’t need that many. You simply need to choose one strategy and become a master of it.
- Timeline: Be realistic, but don’t be afraid to reach, either. Do you want to retire in 10 years? Are you planning to quit your job next month? Document your timeline here.
- Market: Define your market. What kind of properties will you look for? As a new investor, plan on investing in a property that is within short driving distance of your home (unless your local market makes it impossible).
- Criteria: Before you go out and start looking for deals, you need to establish a strict criteria for them to adhere to. You’ll want to define your loan-to-value, cash-flow requirements, max purchase price, max rehab budget, and max timeline, to name a few.
- Marketing: How are you going to create a marketing system that brings in motivated sellers? How will you find the best deals that are listed?
- Financing: How do you plan to acquire deals? Are you using conventional loans, hard money, private money, equity partners, seller financing, lease options, or some other creative method?
- How you do your deals: How are you going to turn a property purchase into a profit? Clearly define the steps.
- Teams and systems: Clearly define your team and the systems you will use to delegate and automate tasks. You don’t necessarily need to know who will fill those positions, simply figure out what roles you will need the people on your team to play.
- Exit strategies and backup plans: Developing multiple clearly-defined exit strategies will be extremely important to your business plan.
- Example deals: Think about what the next 10 years will look like in an ideal but feasible world. Illustrate purchases, cash flow, appreciation, sales, trades, 1031 exchanges, cash-on-cash return, and more, in order to demonstrate what your path forward may look like.
- Financials: What do you bring to the table? Do you have any equity you can use? Are you starting with nothing? Document your current situation and update it whenever it changes.
Remember that road maps and business plans are guides, not rules. A business plan is meant to provide direction and to motivate you to follow through. It is designed to keep you headed in the right direction at the correct speed. When you have a clearly defined business plan, carrying out the plan and envisioning the end game becomes much easier.
Assembling your team
As an investor you are required to wear many different hats, but you don’t need to (and can’t) wear all of them. Instead, you need a team. Here’s a brief look at who should be on any winning real estate investing team:
- Mentor: Every successful entrepreneur needs a good mentor, a guide.
- Mortgage broker/loan officer: A mortgage broker is the person responsible for getting you loans—especially if you are going conventional (rather than hard or private money). Find someone who has experience working with other investors, someone who is creative and smart.
- Real estate attorney: It is important to have someone on the team who can go through contracts and knows the legalities of your moves. Don’t try to pinch pennies by foregoing this valuable team member.
- Escrow officer or title rep: If you live in a state that uses title and escrow companies, your escrow officer or title rep will be the person responsible for closing the deal, taking you from the offer to the keys.
- Accountant: As you acquire properties, doing your own taxes and bookkeeping will become increasingly difficult. As soon as possible, hire an accountant (preferably a certified public accountant).
- Insurance agent: Insurance is a must, and as an investor, you will probably be dealing with a lot of insurance policies. Be sure to shop around for both the best rates and the best services.
- Contractor: A good contractor is often the most difficult team member to find. Contractors can make or break your profit margin. Find someone who gets things done on time and under budget!
- Realtor: An exceptional real estate agent will be fundamental to your investing career. You (or your spouse, if you’re working together) may even choose to become a real estate agent in order to gain access to the incredible tools that agents have. Either way, working with an agent who is punctual, eager, and a go-getter is essential.
- Property manager: If you don’t want to actively manage your properties, a good property manager is important to have.
- Handyman: You’re going to need someone to take care of the little things that come up on a daily basis.
One of the best sources for finding these team members is through referrals from other investors.
What makes a great team?
A great real estate team is defined by its ability to consistently produce reliable results. As you might suspect, it’s way more difficult to construct a team in real life than it is to discuss it here.
People often talk a good game, so watch everyone closely when it’s their turn to produce. A great team member will exhibit certain traits that are sometimes difficult to immediately recognize but can be identified through conversation or through other people’s referrals. For example:
- Are they really experts?
- Do they interact well with everyone?
- Are they a pain to contact?
- Do they return calls and emails quickly?
- Do they hit deadlines?
- Do they produce, as promised, when promised?
- Can they communicate clearly and efficiently?
Assembling the team will not happen overnight, but once it’s together, it will give you the assistance and backing you’ll need to make your real estate investing dreams come true.
Should I use a partner or go it alone?
Before beginning your real estate journey, you will need to decide if you want to pursue your career on your own or with the help of a partner. This decision is not the same for everyone and depends largely on your knowledge, time commitments, abilities, talents, and timeline. If a partnership is something you plan on pursuing, the kind of partnership becomes important as well. Some individuals choose to invest with a partner from the start. Others choose to invest with partners on a case-by-case basis.
- Team brainstorming: Two heads are better than one.
- Pooling resources: Real estate investing generally takes a lot of resources and can often be too expensive for one person to handle alone.
- Analysis assistance: There are hundreds of things to consider when searching for your first real estate investment deal, so having someone else looking at your numbers will increase your odds of an accurate analysis.
- Complementary qualities: Different people bring different strengths and weaknesses to a partnership, e.g. analytical vs. hand on, construction vs. financing, time vs. knowledge.
- Task division: Effectively and fairly dividing tasks can ensure that all partners are able to contribute to the business without being overwhelmed.
- More networking: Networking with others, within and outside the real estate industry, will be vital to the growth of your real estate investing endeavors.
- Accountability: A partnership, if both sides do their part, will help to keep the business moving forward; you’ve got a built-in accountability partner.
- Confidence and motivation: Starting out in real estate investing can be overwhelming. A partnership can help inspire confidence and motivation when obstacles arise.
- Split risk: As with any investment, real estate investing involves a certain level of risk. Having a partner splits the risk (and thus, the profits) and can lessen the burden.
- Personality conflicts: When you rely on another person to get things done, if you don’t mesh perfectly, conflict can easily arise.
- Difference of opinion: Everyone has an opinion about how things should be done. Partnership will require you to compromise.
- Lack of trust: As with any close relationship, there’s potential for suspicion and trust issues to arise—especially when things aren’t going well.
- Delayed decision-making: When you act alone, you have the ability to quickly make decisions yourself. In a partnership, you will most likely have to discuss all decisions.
- Smaller profits: When you form a partnership, your profits, by nature of the agreement, will be split.
- Mixing business and friendship: Partnerships don’t always work out, and when they don’t, the relationship may be severed for good.
- Unrealistic expectations: When you rely on someone else, it’s easy to get caught up in your expectations of how things should be done.
- Responsibility: While the legal ramifications will depend largely on the entity structure you set up, you and your partner will still be in business together, which will mean you’ll be responsible for your partner, too.
- Tax complications: If you work alone, your taxes will be much more straightforward than if you work with a partner (or partners)
While partnerships come with many benefits, they are not for everyone. What’s worse, if they are not created properly, they may end up being the silent killer of your investment plans.
If you decide to create a partnership, be careful. Many people simply do not make good business partners. If you decide to pursue a business partnership, choose a business partner who will treat you fairly, add value to the relationship, and maintain similar goals.
Incorporating your business
Incorporating your business is almost universally regarded as one of the best ways to protect yourself from personal liability. There are many opinions about what structure to set up, when to create one, and so on. BiggerPockets recommends that you consult with a real estate attorney or accountant when making these important decisions.
How to find investment properties
You won’t start your investing career by landing a big fat check; these types of checks will come after you’ve successfully implemented your investment strategies. The profits you make, however, can be made or destroyed at the time of purchase. So what does it mean to profit “when you buy?”
To make your profit when you buy, you must purchase a property at a price that will ensure your desired profits based on your ability to execute your exit strategy. In other words, you need to buy smart. If you vastly overpay for a property, no amount of wishing, hoping, or improving it is going to make your investment worthwhile.
While you can’t predict with 100% accuracy where the market may go, you can figure out where it’s at today.
Your investment property shopping criteria
Now that you understand why getting a great deal is important (to lock in your profits at the beginning), it’s time to start looking for a property. Before you do, define your selection criteria. This section will focus on criteria, why it matters, and how to define yours.
Your selection criteria is designed to keep you focused on shopping for the things you need so you don’t waste money on other good-looking things along the way. Having a clearly defined selection criteria will help you stay focused and avoid analysis paralysis—and keep you on track to buy a great investment property.
By defining your criteria, you’ll narrow down the choices in the market, thus eliminating the vast majority of deals (distractions). Instead, you’ll focus on finding only the kinds of deals that you are interested in buying.
Creating your selection criteria
There are a number of different items to consider adding to your criteria list. These may include:
- Property size (square feet)
- Lot size
- Property condition
- Number of units
- Cap rate
- Cash flow
- Appreciation potential
No one can tell you exactly what your investment property criteria should or should not include. Some of it will come down to personal preference, such as, “I only want to buy in Seattle,” or “I only want houses with basements,” but most of your chosen criteria will be specific to the type of investment. For example, if you are looking to become a buy-and-hold investor of small, multifamily units, your criteria will include small, multifamily properties and it will exclude old commercial buildings.
If you simply tell people, “I am looking for real estate,” the response will most likely be, “Good for you…” However, if you instead mention that you are looking to buy a small, single-family house in the Rockford neighborhood for under $150,000, you’ll enable others to think of properties that match that description, which may ultimately get you connected with a deal.
Understanding the investment property rules
Perhaps the most important aspect of the criteria you’ll put together is the financial component. Generally speaking, a listing won’t publicize all of the important information you’ll want to know about the financials of a property. Yes, you can generally determine the amount of income a property makes, but you won’t know immediately how much monthly cash flow the property will produce, how overpriced the property actually is, or how much you should offer.
Additionally, it’s not going to make sense to get out your spreadsheet and do a full property evaluation on every single deal you glance at. This is when rules come into play. Applying rules will help you quickly evaluate a property’s financials on the fly. As with any rule of thumb, it’s not always an exact science and should never be entirely relied upon to decide whether or not a property is a good investment.
According to the 1% rule (formerly the 2% rule—ah, how things have changed!), monthly rent should be approximately 1% of the purchase price. In other words, a $100,000 home should rent for $1,000 per month; a $50,000 home should rent for $500 per month. This is a very conservative estimate that is very simplistic, but can help in deciding if a property warrants a deeper look.
The 50% rule is a great rule of thumb that will help to fairly accurately predict how much a property’s expenses will cost you each month. The 50% rule simply states that 50% of your income will be spent on expenses—not including the mortgage payment.
As mentioned above, most real estate listings will identify the monthly income of a property. By dividing that number in half, you can easily figure out how much you’ll have left to pay the monthly mortgage (principal and interest). Any income left over after the 50 percent for expenses and mortgage payment will be your cash flow.
Investors use the 70% rule to quickly determine the maximum price they can pay for a property based on the after-repair value (ARV). While this rule is most commonly used by house flippers, it can actually be used for any strategy when you want to find a good deal. The 70 percent rule says that you should only pay 70 percent of what the after-repair value is, less the repair costs.
Remember, a rule of thumb should only be used to quickly and efficiently screen a property to determine if it’s worth further investigation. Never use a rule of thumb to decide exactly how much to pay or whether or not to invest. Don’t confuse a rule of thumb for a license to skip doing your homework.
Where to find real estate investments
Once your criteria is set, it’s time to start looking for your investment property. No doubt you’ve seen “For Sale” signs in front of homes, but there are many other ways to find investment properties. This section will explore the various ways to find properties. The list is not exhaustive but a good start for new investors.
Multiple listing service
The multiple listing service (MLS) is a collection of properties for sale by different real estate brokers across the country. When you search a site like realtor.com or redfin.com, you’ll be searching the MLS. This information is widely distributed for the most eyes to see.
Word of mouth
Some homes are simply sold the old fashion way—by word of mouth. By letting everyone know that you are in the market to buy (and defining your criteria, as discussed above), you’ll place yourself in the best position to find deals via word of mouth.
Craigslist.org is a free classifieds website that millions of people use to buy, sell, trade, or give away nearly anything you can imagine—including real estate.
Outbound marketing means finding sellers and bringing them to you. You can do this by way of advertising, direct mail, or a number of other marketing techniques.
LoopNet is a marketplace for commercial properties. From small multifamily properties to large apartment complexes, shopping malls, fast food restaurants, and beyond, LoopNet is the place to search for publicly listed commercial properties for sale.
By now, you should understand the importance of a clearly defined set of shopping criteria, which should include both personal and financial requirements. This well-defined criteria list will help narrow down your choices and help weed out bad investments, allowing the best chance for a solid, profitable investment that best meets your needs.
Real estate financing
Do you need a lot of money to invest in real estate?
The short answer is no. The longer answer is more complex. There are numerous strategies that investors use to invest in real estate without having a lot of cash. Some deals can be done without using any money—period!
Below you’ll find several strategies for financing your real estate deals, but if you want more in-depth information, we invite you to pick up a copy of The Book on Investing in Real Estate with No (and Low) Money Down, sold here on BiggerPockets. This book was written by Brandon Turner, co-host of the BiggerPockets Podcast, and contains numerous tips, ideas, and strategies for investing in real estate using other people’s money (OPM). If you’d like a copy of this book, head to BiggerPockets.com/NoMoney today!
With that, here’s a summary of the financing methods available for your real estate deals:
Many investors choose to pay in cash for an investment property. In most cases, the buyer brings a check (usually certified funds, such as a bank cashier’s check) to the title company, and the title company writes a check to the seller. Other times, the money is sent via wire transfer from the bank.
This is the easiest form of financing, as there are typically no complications, but for most investors (and probably the vast majority of new investors) all cash is not an option.
Financing your investment property may produce significantly better returns than paying in cash. Most investors choose to finance their investments with a cash down payment and a traditional conventional mortgage.
Conventional mortgages are the most common type of mortgage used by home buyers and generally provide the lowest interest rates.
The Federal Housing Administration (FHA) is a United States government program that insures mortgages for banks.
FHA loans are designed only for homeowners who are going to live in the property, so you cannot use an FHA-backed loan to buy a property purely as an investment. However, you can take advantage of an exception that allows an FHA-financed home to have up to four separate units. In other words, if you plan to live in one of the units, you could buy a duplex, triplex, or fourplex with an FHA loan.
The benefit of an FHA loan is the low down payment requirement, which is currently just 3.5 percent. This may help you get started quicker since you won’t need to save up 20 percent.
A subset of the FHA loan, a 203k loan allows a buyer to purchase a house that is in need of some rehab work by building the cost of repairs or improvements into the loan itself. Like a standard FHA loan, a 203k loan still allows for a low down payment.
Banks or other giant lending institutions are not the only entities that will finance a property for you. In some cases, the owner of the property you want to buy can actually fund the purchase; in this case you’d simply make monthly payments to the seller rather than a bank. Typically, the only time a property owner will do this for you is if they own the home free and clear, meaning they don’t have an existing mortgage on the property.
Hard money is financing that is obtained from a private business or individual for the purpose of investing in real estate. While terms and styles change often, hard money has several defining characteristics:
- Loan is primarily based on the value of the property
- Shorter term lengths (due in 6–36 months)
- Higher than normal interest (8–15 percent)
- High loan points (fees to get the loan)
- Many hard money lenders do not require income verification
- Many hard money lenders don’t require credit references
- Does not show on your personal credit report
- Hard money can often fund a deal in just days
Hard money lenders understand when the property needs rehab workHard money can be beneficial for short-term loans in certain situations, but many investors who have used hard money lenders have found themselves in tough situations when the short-term loan ran out. Use hard money with caution, making sure you have multiple exit strategies in place before taking the loan.To find a hard money lender, try the following tips:
Private money is similar to hard money in many respects, but it’s usually distinguishable due to the relationship between the lender and the borrower. Typically, with private money, the lender will not be a professional lender like a hard money lender. Instead, it will be an individual looking to achieve higher returns on their cash. Oftentimes, there is an established relationship with a private money lender, and these lenders are much less business-oriented than hard money lenders.
Home equity loans and lines of credit
Many investors choose to tap into the equity in their primary home to help finance the purchase of their investment properties. Banks and other lending institutions have many different products, such as a home equity installment loan (HEIL) or a home equity line of credit (HELOC) that will allow you to tap into the equity you’ve already got.
While most of the options above focus on residential loans, the world of commercial lending may also be a viable option for your investing. In fact, if you are looking to buy a property other than a one- to four-unit residential property, a commercial loan is probably exactly what you’ll be needing. Commercial loans typically have slightly higher interest rates and fees, shorter terms, and different qualifying standards.
There a multitude of other investment and savings products available for use in real estate investing. We won’t cover each of these in detail here, so be sure to speak to a qualified financial advisor about ways you can use these products in your investing career.
Real estate marketing
As a real estate investor, the first and most important thing you’ll be marketing is yourself—your own personal brand. It doesn’t take a lot of money, and it doesn’t take a lot of time. You will begin building a brand around yourself the moment you begin talking to others about real estate.
You never know where these conversations are going to lead, so guard your brand fiercely. Let’s look a little deeper at how to effectively market your own personal brand.
Marketing through networking
One of the most important marketing tactics you can start implementing today is networking. Networking is simply the process of getting to know others for the purpose of moving both individuals forward. It doesn’t need to be a formal meeting, but your day-to-day interactions should be part of your networking strategy. Networking is often thought of as something that take place at an event, where dozens of people get together to mingle, exchange cards, and tell industry-specific stories. While yes, this is a form of networking (most often seen at industry-specific conferences and meetings), networking is actually a lifestyle.
Some of the most noteworthy connections you’ll make will come from impromptu conversations about your real estate investing. I’m not suggesting that you simply walk up to strangers and start telling them about your dreams and goals, but take advantage of talking about your business when the opportunity presents itself. You’ll be surprised at how many people are interested in real estate and how often one quick mention leads to an entire conversation.
Not only is networking valuable for meeting people and businesses that can move your business forward, but it’s also effective for building your real estate team. No person can succeed entirely on their own, so finding the best people to work with is one of the most important tasks you can do at the start.
Your marketing funnel
Marketing funnels are designed to grab the attention of people who may have no prior knowledge of your company and encourage them to engage in a business relationship with you. People use marketing funnels in nearly every form of business, and real estate investing is no different.
Think of an actual funnel, often used for pouring large amounts of liquid into a small space—like putting oil in a vehicle. At the top, the funnel is at its widest, collecting the most amount of whatever substance. As the substance moves down the funnel, it gets smaller and smaller until it comes out the bottom. In the same way, your marketing funnel will be set up to bring in the most amount of people at the top, and through progressive steps, your funnel will get more specific until you have a much smaller number of people left to produce your desired goal.
As a real estate investor, you need to be constantly measuring and tweaking your marketing funnel. You can, and should, test your funnel to continually increase conversions—the percentage of people who make it all the way through the funnel to your desired outcome.
Buying real estate is great, but no one gets into it because it’s a fun hobby. Investing in real estate is a means to an end: wealth building. Over time, your property should gain serious equity and provide you with substantial income and (hopefully) appreciation. Some investors choose to hold onto their investments indefinitely. Some will simply hold onto cash-flowing properties forever with no intention of getting rid of them.
However, in your investing career, you will most likely elect to get rid of one or more of your properties for various reasons. Choosing the best strategy for exiting your real estate investment is just as important as deciding which one to buy. This chapter will give you a broad overview of the various exit strategies you can use in your investment career.
Traditional selling with a real estate agent
When listing your home with an agent, be sure to interview several agents to find one you are comfortable with. In the world of real estate agents, the 80/20 principle often holds true: 20 percent of the agents sell 80 percent of the listings. It’s important to find that 20 percent and allow them to work their magic.
When you choose the agent who you’d like to list your property, you will typically sign a listing agreement, giving them the right to earn a commission if they sell the home. The agent will discuss with you all the important features of the property and enter them into the multiple listing service (MLS), which all agents have access to.
At this point, you will decide what price the property should be listed for. Pricing is very important, as you do not want to list too high (adding months to your holding time) or too low (leaving money on the table). A good agent will be able to look at other similar properties and determine the best price to list.
The listing agreement also spells out the commission to be earned by the agent. The typical commission for a real estate agent is 6 percent (though that can change slightly depending on price, property type, and location). This fee is usually split between the agent who brought the buyer and the listing agent. In the case where your selling agent is representing both you and the buyer, the whole commission is given to the agent.
Many individuals feel that locking down an agent is the end of their duty in selling the property and expect the agent will take it from there. However, this is not the case. There are many tricks and techniques that you, the seller, can do to ensure the property is sold for the highest amount—and quickly.
Start with making sure the appearance of the property is desirable, including both the interior and exterior. Look around at competing properties, and aim to look better than the rest.
If selling a single family house, consider staging the home with furniture, artwork, plants, flowers, and other accessories to help the buyer see a home rather than simply an empty house. If selling a multifamily or commercial property, do your best to ensure all units are filled and operating at peak efficiency.
Once an offer is received, negotiations begin, and hopefully both parties will agree on a price and terms for the sale. Paperwork for the sale of the property will be handled by either a local title and escrow company or an attorney, depending on the common practices in your area. Both parties will sign the documents, the money will be funneled through the title and escrow company or attorney, and the deal will close, leaving you with a large check to invest in more real estate and grow your empire.
Selling FSBO (for sale by owner)
For some, the cost of a real estate agent is too high, so they choose instead to sell it themselves. A major deterrent to selling yourself, however, is that the listing won’t get put up on the MLS. Without being listed there, you’re missing out on reaching the vast majority of individuals looking for a property.
To remedy this, one tool available to FSBO sellers is what’s known as a flat fee MLS listing service, in which a seller will pay a flat fee to a real estate broker to list the house. This fee generally ranges between $150 and $400 and includes very limited help from the broker. The broker will simply place the home on the MLS and might even offer a sign in the yard, but he or she will do very little other than this.
This leaves negotiation, setting up title and escrow, and managing the closing in the hands of the seller themselves. Additionally, since a real estate transaction includes both the buyer’s agent and the seller’s agent, a commission is still paid to whichever agent brings a buyer to the deal. Instead of 6 percent, it usually will end up being around 3 percent out of pocket.
1031 exchanges: Avoiding taxes on a sale
As with any business venture, when you are successful, Uncle Sam will be there to collect his share. When it comes time to sell a property that you own, chances are you will have significant taxes due, especially if you followed the advice in this guide and bought a great deal. Thankfully, if you are paying taxes in the United States, the government provides a way to defer those taxes to a later time.
There are a number of rules to be followed, but if done correctly, you can possibly use the money you would have paid toward capital gains tax and instead put it toward your next property using a 1031 exchange. Essentially, this is the government’s way of partnering with you on your investment deals. There are a lot of complicated things that go into a 1031 exchange, so be sure to talk to a qualified tax specialist before making any decisions.
At this point, you should have a clear understanding of how to eventually get out of your real estate investment. If you begin with the end in mind, you’ll make it much easier to unload your property and clear a nice profit.
While you have reached the end of the BiggerPockets Ultimate Beginner’s Guide to Real Estate Investing, your journey is just beginning. You now have a very clear understanding of real estate investing and how to begin profiting from it. Now it’s time to put what you’ve learned into practice. If you have not yet done so, please head over to BiggerPockets.com and sign up for a free account.
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