Real Estate Investing for Beginners

Real estate is the favorite long-term investment option for Americans, according to Gallup. In a 2023 survey, 34% of Americans preferred investing in real estate, beating out gold, stocks, mutual funds, and savings accounts. Real estate is oftentimes viewed as a stable investment, whether you are buying a house to live in or looking for an investment property to rent out. 

Many Americans have watched home prices rise in recent years and want to get in on this form of investing. However, real estate investing is still complicated and requires financial know-how to make smart decisions. 

What Is Real Estate Investment?

Real estate investment involves the purchase of commercial or residential properties — such as houses, businesses, or parcels of land — to rent them out and collect passive income. Alternatively, some real estate investors buy damaged homes, repair them, and sell these properties for a profit. 

Real estate can be a long-term investment that lasts for decades or a short-term investment that pays off in a few months depending on your goals. If you are buying properties to repair and resell, known as flipping, then you might turn a profit in a few months. If you are buying a house that you intend to collect rent from, then you might own the property for several years — or even decades. 

Pros of Real Estate Investment

There are several reasons why real estate continues to be a popular form of investing. Here are a few benefits of choosing this option: 

• You have complete control over the amount you invest, when you buy and sell the investment, and what you do with the investment while it is in your possession. 
• Real estate is a tangible investment that you can use. You can buy a vacation home and spend your summers there until you sell this investment. 
• Real estate is viewed as a stable investment. Even though the market might drop on occasion, housing is known to appreciate. 

If you invest in real estate in a desirable area, you could potentially recoup profits from your investment within a few years, either through your rental income or by selling the property. 

Cons of Real Estate Investment

Despite the confidence that many Americans have in real estate investing, there are some potential drawbacks to choosing this option. Here are a few things to consider. 

• Real estate investments require upkeep. You will need to make sure the property stays in good condition as long as you own it. 
• You may have to hold on to properties longer than you like to turn a profit on them.
• Renting out properties takes time and money. Real estate might not be an ideal investment option if you’re looking for a set-it-and-forget-it route. 

Real estate investments also come with other costs, as you will need to pay taxes and insurance for as long as you own the property. You will also be responsible for utility costs like electricity and water unless your tenants cover this. 

How To Get Into Real Estate

You have multiple potential channels if you are looking to get into real estate. Here are a few steps to begin your ventures: 

• Explore the various types of investing options. You can decide whether you want to flip houses or rent out a property.
• Set a budget for your investment. If you are buying a property, estimate how much house you can afford.  
• Decide if you are ready to take out a loan. You might decide to take out a conventional mortgage to buy the property or you could explore stock loan options so you can pay for a house in cash. 
• Get to know the options in your area. Meet with the real estate agent to tour homes or commercial properties.
• Make the purchase. Once you find an ideal property to invest in you can buy it, fix it up, or start renting it out. 

You may also be able to join an investment group that requires less upfront capital and reduces your overall risk. 

How To Invest and Make Money in Real Estate

Making money through real estate might seem simple at first, but hidden expenses could eat away at your profits. Here are a few tips to increase your chances of making money: 

• Set a clear budget for expenses. This will tell you how much leeway you have when unwanted costs crop up.
• Create a timeline for turning a profit. Some real estate investors don’t break even until they completely pay off their mortgage on the property. 
• Track local financial markets. Learning about market trends will help you decide if it is a good time to sell or guide you on charging fair rental rates.
• Continue investing in your property. Home improvements can increase the overall value of your investment and increase your selling price. 

Your investments might be more profitable in some years than others. Changes in taxes or unexpected repairs could eat into your profits one year but not affect you in the next year. 

How To Get Capital for Real Estate Investment

There are multiple ways to fund your real estate investment. You can either save up and bootstrap the project on your own, or you can seek out sources of funding. Here are a few options for securing the capital you need.

• Explore conventional mortgages: You might be able to buy a house with the help of a standard mortgage lender.
• Apply for small business loans: A small business loan can help you get the working capital you need to make any repairs or upgrades on your investment. 
• Consider a Home Equity Line of Credit (HELOC): You can pull equity from your primary residence as a means to fund your investment. 
• Secure a loan through your stocks: Stock loans allow you to secure funding by using your investment in publicly traded companies as collateral. This is a non-recourse loan because the lender keeps the collateral if you cannot pay them back. Learn more about securities-backed loans to see if they are a good fit for you. 

Whether you need financing to buy a house or simply need a little cash to handle repairs, each of these options could be a good choice depending on your needs. 

Common Costs Associated With Real Estate Investing 

Real estate is a significant investment because it comes with a variety of costs — both common and uncommon. Here are a few line items you should track in your financial records. 

• Homeowner’s insurance;
• Property taxes;
• Utilities;
• Repair and maintenance costs;
• Business insurance;
• Real estate agent commission;
• Closing costs; 
• Property management fees;
• Marketing costs to attract tenants;
• Landscaping costs;
• Land surveying;
• Accounting and tax preparation fees. 

Once you account for all of these costs, you can make sure that your real estate investment breaks even and eventually turns a profit. This way you don’t lose the collateral for the loan you provided.  

Real estate investing can be enjoyable if you buy a vacation home or understand how to complete basic home repairs. However, if you’re not prepared for the costs that come with it, this investment can be stressful. Make sure you have a clear financial plan before you enter the market.