No doubt you’ve heard those radio commercials. You know, the ones that promise that real estate investing is the key to making you rich. Well, guess what?
That could be true. Real estate investing can yield sizable profits, if it’s done correctly.
The problem comes when people fail to account for that “if” statement. The process of how to become a real estate investor can’t be one of trial and error; there’s too much on the line to allow for that.
So how does someone become a real estate investor? And more importantly, how does someone become a successful, profitable real estate investor? We’re here to help you find out.
How to Become a Real Estate Investor in 3 Important Steps
Notice: the line above doesn’t say “three easy steps”. While the process of becoming a real estate investor might be simple, it’s not easy. Each of the following three elements are fundamentally important.
1. Strategize
As you consider how to become a real estate investor, think about what type of investing suits you best. As we’ll discuss later in this article, there are many different ways to invest in real estate, but the first step is to think through which general strategy fits your current reality.
Active investing.
Active investment strategies are those that take a hands-on approach to each opportunity. Active investing takes a significant amount of time, both during the initial investment and during the lifespan of ownership. Active investment opportunities include fix-and-flip properties, owner-managed rentals, wholesaling, house hacking, and more.
Somewhat active investing.
Those who don’t have the time to pursue active investment strategies can still take a somewhat hands-on approach. For example, they may decide to do a simple buy-and-hold purchase, or they might partner financially with an active flipper. Other options might include pursuing a multi-family or commercial rental and then hiring a property manager to handle the day-to-day issues.
Passive investing.
Passive investors are usually involved in the general growth of the real estate market without getting involved in individual deals. Passive real estate investment opportunities could include REITs, crowdfunding, or loans.
2. Finance
Make sure that you have enough working capital to fund whatever strategy you intend to pursue. For those following an active or somewhat-active strategy, that doesn’t mean you have to save up enough cash to purchase an investment property outright. There are plenty of financing options to consider, including:
- Conventional loans
- Hard money loans
- Private lenders
- Home equity loans
- HELOCs
All financing options have a different set of requirements, and there are pros and cons to each type of funding. Be sure to research the best type for your personal situation, and have the prerequisites in place before pursuing a real estate deal.
3. Learn
No matter what real estate strategy you choose, it’s important to educate yourself before jumping in.
Learn about your intended market.
Before you purchase an investment property, be sure you have a good understanding of the local market. Learn about the area’s fair market value, expected rental rates, its local landlord/tenant laws, its insurance requirements, and more. Networking with other investors in your intended market can help you along in this process.
Learn about REI best practices.
Some would-be investors think that since they’ve purchased a home before, they’ve got all the knowledge they need. But what you don’t know can hurt you, or in this case, can hurt your bottom line. From cap rate to construction costs, there’s a lot of lingo, formulas, methodology, and creativity involved in real estate investing. Make sure you take the time to learn it.
It’s not necessary to spend a lot of money on courses or conferences. These books are a great place to start. Plus, there’s a wealth of online information –– including our New Western resource center –– that can give you a free jumpstart to your real estate education.
In fact, let’s get started right now. Answering the question of how to become a real estate investor starts with a basic understanding of what a real estate investor is, along with an overview of the major types of REI.
What Is a Real Estate Investor?
A real estate investor is someone who strategically buys and sells the property for the purpose of creating income or growing wealth. There are many ways to invest in real estate, as we’ll cover below, but all share a similar goal: to make money by participating in the real estate market, either actively or passively.
Real estate investors are not regular homeowners who purchase property for their own primary residence (although some investors do live in their properties as a part of their strategy).
Types of Real Estate Investors
Cash Flow Rentals
Perhaps the most familiar type of real estate investing involves purchasing a property that can be rented out either through long-term leases or short-term agreements. The cash flow from the rental payments provides income to the investor.
Investors who want to get into income-producing rentals need to evaluate properties (either residential or commercial) by looking at the gross expected income minus the anticipated expenses. The result is the expected cash flow.
They’ll also want to look at cash-on-cash returns, meaning the percentage of the initial investment they can reasonably get back each year in cash flow. In general, investors tend to look for at least a 10% cash-on-cash return, preferably higher.
Buy-and-Hold Properties
A buy-and-hold investor takes a more long-term perspective than an investor who’s interested mainly in cash flow. Buy-and-hold strategies depend upon future appreciation rather than immediate cash flow.
Granted, the cash flow still needs to be positive for the investment to make sense. But in general, the major profits of buy-and-hold properties come years later after significant appreciation.
An example of a good buy-and-hold property might be vacant land that is purchased near an expanding suburb. As the town expands, the property becomes more valuable for both residential and commercial developments, yielding a nice appreciation for the investor.
Another example could be a multi-family building in a pricey urban area. While the cash-on-cash returns may not be great because of the large upfront cost, the desirable location will likely continue to drive up the value significantly over time.
Fix-and-Flip Method
Thanks to home improvement shows, flipping is another well-known type of real estate investing. The fix-and-flip method involves buying a property that needs to be updated or repaired, doing the necessary renovations, then immediately reselling to realize the added equity.
Flipping can be very profitable –– the average national return on investment is 32.3% –– but it’s not without risks. For the fix-and-flip method to be profitable, the costs of renovations and holding (interest, utilities, etc.) should be carefully considered prior to purchase.
BRRRR Strategy
The BRRRR investment strategy is a combination of flipping and cash-flow renting. BRRRR stands for: Buy Rehab Rent Refinance Repeat. Using this strategy, an investor will purchase a home that needs TLC and fix it up. But instead of selling it, they’ll find tenants to rent the property. Once tenants are established, it’s easier to refinance and pull out the equity to use as capital on the next property.
House Hackers
House hacking is a creative form of investing in which the investor rents out a larger property by the room. House hacking can be an ideal strategy in hot urban-adjacent locations. A house hack offers young professionals more space at a lower rental price when compared to downtown alternatives.
The house hacking strategy is popular among young investors who want to purchase a home to build equity, but don’t need all the space personally. Often these investors will live in one room and rent out the others. The draw of live-in house hacking is the idea of “living for free”, or having the rental income pay all the utility and mortgage costs. (However, not all house hackers are live-in investors.)
Wholesaling
Wholesaling is a way to be involved in real estate investing with little to no capital. Wholesalers look for distressed properties and create a deal with the sellers. Then they bring in an interested buyer who will take over the deal with a pre-determined premium added in for the wholesaler’s time and effort.
Many busy investors like working with wholesalers because the wholesaler will do all the legwork that they don’t have time for, such as researching and vetting properties.
REITs
Not all investors have to take an active part in purchasing, renting, or flipping houses. Investing money into a Real Estate Investment Trust (REIT) is a great way to take part in the financial aspects of the real estate market without being involved in the hands-on part.
REITs are large companies that invest in income-producing properties. Shares of REITs are sold via the stock exchange, which means individual investors can choose to buy and sell at will. This increased liquidity and decreased time commitment make REITs a good choice for investors who have full-time jobs in another sector. For more detailed information see our comprehensive REIT guide.
Silent Partner Investments
Similarly, some real estate investors choose to be involved by providing capital for hands-on investors. Through crowdfunding or real estate networking, active investors connect with like-minded silent partners who put money into a deal upfront and then share in the profits when the property sells.
Becoming a silent partner is a good option for those who don’t have the time to manage a property but still want to be involved in the selection and details of the deal.
How to Become Successful as a Real Estate Investor
Choose a niche that fits your lifestyle and goals.
As you can see, there are many ways to be involved in real estate investing. Not every strategy works for every investor. The key to initial success is picking a method of investing that fits your budget, your skill set, and the time you have available. Start with the niche that makes the most sense for you now, and work toward bigger goals later.
Run deal scenarios regularly.
Just like athletes put in the time to practice before the big game, successful investors need to take time to run “practice deals”. Look at for-sale properties, run the numbers, and figure out what it would take to make it a good deal. With enough practice, pinpointing good deals becomes second nature, and you’re able to move fast when the time is right.
Keep up-to-date on trends.
Real estate markets are constantly shifting. Stay in tune with what the market is doing in your investment area. Is there a new industry coming to town that will increase housing demand? Is there an untapped niche for short-term rentals? Are sales prices falling or rising in your neighborhood?
Also, be mindful of when you might want to look at other markets. Is there a certain locale that’s booming for investors? Following our quarterly market recap reports can help.
Network with like-minded people.
Consider joining a local or online investors’ group. It’s a great way to meet other people, talk about your experiences, and maybe even collaborate at some point. While investors may be each other’s competition for certain deals, in general, the REI community is very supportive. Sharing knowledge and resources not only makes you a good human, it can make you a successful investor as well.
Think, but don’t overthink.
Sometimes newbie investors get stuck in analysis paralysis. Do your due diligence with every deal, for sure. But don’t overdo it. Eventually you’ve got to take the plunge. After all, you can’t achieve REI success if you never actually invest.
Utilize top investment tools.
With more and more people getting into real estate investing, the markets and margins are tighter than they used to be. In order to get in on good deals while their hot, successful investors utilize tools to help them stay competitive. New Western is one of those tools. We help investors connect with great deals in their target market, deals that might otherwise be unavailable through mainstream searches.
FAQs About Real Estate Investing
Do real estate investors need a license?
No, investors do not need a real estate license. Some investors –– usually flippers –– choose to get a real estate license so they can list their own properties on the MLS. But getting and maintaining a license is not without cost, so investors should be mindful of how that cost fits in with their overall goals.
Licensed real estate professionals sometimes choose to work with companies like New Western to help broaden their scope and make the best use of their licensure.
Can real estate investing be a good full-time career?
Yes. At New Western, we work with many successful full-time investors. However, new investors should be aware that becoming a career investor takes time and momentum. With the right strategy, many investors are able to quit their day job sooner rather than later, but discretion and balance are needed in the process.
If you’d like to learn more about real estate investing and jumpstart your career – take a look at our career opportunities here.
How much do real estate investors make?
It depends. Investment incomes vary by the investor’s goals. Some only want to maintain one rental property for a little side money –– maybe an extra $300 per month to supplement their household income. Others flip multiple houses each year –– nationwide gross profit for a flip is $65,000.
Is investing in real estate a good idea right now?
Yes! Even in today’s tight real estate climate, there are still many good deals that investors can take advantage of. Whether you’re looking to invest in that next great deal, or you’re an agent looking to facilitate that next great deal, get in touch with our New Western team. It’s always a good idea to explore your options in real estate investing!
