What I Tell My Friends When They Ask Where to Start in Real Estate

I wrote this article to cover a lot of the basic questions people ask me regarding real estate investment. I have been investing in rental properties for five years now, thus by no means am I an expert, however I have put a lot of effort into building a network and sharing real estate knowledge with as many young, black professionals as I can. This work has been done through conversations, podcasts, Instagram, articles, coffee dates, and other mediums. Along the way I began to realize most folks had the same questions and concerns, and I think a lot of time could be saved if I stashed this info in a location that I can easily share. If you're a frequent reader of BiggerPockets, perhaps you are in the same boat as I, and I hope this article helps you in your own efforts to mentor and help those newer in the game than yourself.

So to begin - if you’re reading this you want to invest in real estate… but why? The overarching reason to invest in real estate is to seek returns on your investment capital that are higher than what the stock market traditionally offers (6-10%). How are these returns secured? There are an infinite number of ways or models to “invest” in real estate, but traditionally an investor is purchasing equity in an appreciating asset, reaping some dividends during the holding period (rents, parking, laundry, tax benefits), then selling the asset to cash out on the appreciation seen during the holding period. A lot of investors, myself included, are looking to do some variation of this process repeatedly, while ever so often acquiring an asset that cash flows very well, with the intent on holding onto that asset forever. You win the game when you have enough cash-flowing assets that your living expenses are covered by them, allowing you to retire, raise your kids, pursue your passion, or do anything else with your life. If you still want to play this game after my simplified breakdown, continue on reading these steps which I find to be critical to follow for the person looking to get started.

1- Know Your Finances!

You need to have a firm handle on the business that is your life before you go adding more complexity to it. First, figure out the answers to these questions ASAP-

How much do you make (post-taxes) each month?

How much do your bills total to each month?

How much do you spend (excluding those bills) each month?

How much are you saving in your 401k, and into your savings bank accounts each month?

How much debt do you have?

In order to invest in real estate, you need capital. For most people, capital is going to come from saving money from your W2 income (your 9-5 job). So the first order of business is setting up a budget that allows you to save.

2- Improve Your Financial Situation with Proper Order of Operations

Ok, once you’ve set up your new budget, and cut out all the fat from your monthly spending, you’re probably wondering how much do you need to get started, and how much should you have socked away (separate from your “seed” capital) before you get going. Fortunately, financial advisors are very aligned on this topic. It’s widely accepted that you should start with paying down high interest debt, then focus on building six months’ worth of living expenses into a savings account (use one with the best interest rate available), and then begin building your market-exposed portfolio (mutual funds, index funds, REITs). I should note that if your company matches 401k contribution, you should contribute at least as much as they are willing to match, since that’s literally free money, and that step should definitely be in place as soon as you get a job with that perk. I myself am not a fan of our 401k system, because the fee structure is extremely non-transparent, the vehicles you can invest in are extremely limiting, and the idea that I should hand over my money to a company that will hold it for 30-40 years, but I can’t get it back, only to avoid paying taxes on said money right now (when I’ll still have to pay taxes later) is just ludicrous. Particularly for someone like myself who’s an active investor. Sorry for that aside. Anyway, once you begin building your market-exposed portfolio, I recommend you begin setting aside some funds for your initial real estate investment.

Once you begin that work, you’ll want to know how much you need. This is extremely market dependent, and generally much less than people think. The big item to consider is if you want your first purchase to be your primary residence, or a rental property. Most folks would like it to be their primary residence, though a lot of us folks in these extremely expensive markets (Bay Area, NYC, DC, LA) have decided to invest in rental properties in cheaper markets for the short term, while we work and wait for larger liquidity events (code switch = major bag moves) to come through so we can afford our markets. If you choose the primary residence path, you can secure an FHA loan with 3-5% down, depending on your credit score. This generally means you can get yourself into a home for $10,000-$15,000 as long as you aren’t in the crazy expensive places I mentioned above. If you choose to invest in a rental property first, you’ll generally need 25% down. In this case, you’ll need to identify some neighborhoods in which you’d like to own and see what homes, or condos, or small multi-family buildings are “trading” (real estate lingo for buying/selling) for there. Then you can do your own calculations and figure out how much you need. Don’t be afraid to go to cheaper areas, neighborhoods, or even neighboring cities/suburbs to find something you can afford.

3- Do Your Homework

Now that you’ve prepared yourself to get started, you should begin your research while building up your seed capital. As discussed, the first decision is primary residence versus investment property. If you live in a more affordable city, I would generally suggest you start with your primary residence. Also, consider house hacking! This is where you purchase a small multi-family building, live in one of the units, and rent out the other(s) to hopefully cover your mortgage and live free! I can’t stress how much I recommend this to anyone that is able. If that is not possible, and you decide to purchase an investment property, then it’s time to think about what kind of deal you want to operate (buy and hold, develop, rehab and flip, etc). When getting started, the simple, more tried and true stuff is usually best. Lastly, beyond that you’ll need to think about what kind of property you want. There’s single family homes, condos, multi-unit buildings, raw land, mobile homes, and endless other options. There’s advantages and disadvantages to each, and you’ll want to be aware of what’s readily available in your geographic areas of interest.

Once you’ve made some progress in those areas, there are many additional steps to cover (building relationships with lenders and brokers, financial modeling and deal analysis, operating your deal/property management, etc). Those will probably be covered more in depth in future writings, and are definitely covered ad nauseam all over the internet. So I’ll stop the tactical stuff here. I’ll leave you with one parting thought: invest with a partner! While buying your primary residence is something that makes sense to do alone, there’s no reason to invest by yourself in an investment property if you have no experience. Save yourself some money, and leverage the knowledge of any friends, associates, or anyone else in your network that’s looking to do deals and partner. As a newbie, you have to recognize what you have to offer, which is generally capital and time, and recognize that you’re looking to partner with someone who has experience and knowledge. There are also opportunities to invest completely passively in deals by investing in crowd funds or larger syndicated deals (like with us - Harriet Capital!). The specifics of those I’ll delve into with future articles, but just know that you have options, and many of those options don’t come with needing to fix toilets at midnight, or shovel snow. Happy Investing!