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I became the landlord somewhat by accident. I did not have great investment strategy or clearly defined financial goals… But I found myself living in an affordable real estate market and decided to buy a house of four apartments and live in one apartment and rent out the rest.
Looking back, this is one of best financial solutions I’ve ever done. The rental income covered my mortgage and expenses, and even made a small profit. A year and a half later, I learned enough to understand that real estate investing can be an important part of my financial independence. I also saved enough money to buy a second investment property, this time a two-family home, fully occupied by tenants.
If this all sounds overwhelming to you, I understand – at first it was for me too. But there are many different ways to get started, depending on your goals and how much money you have. Here is a detailed description of how you can do it.
Getting Started Tips
one. Buy a single family home and rent out additional bedrooms
Most new buyers see a single-family home as a home for their family, a place to call their own.
But this single family home could also be your first real estate investment if you have extra space. Especially in big cities, the demand for rent means there is a market for spare bedrooms or refurbished basements.
Craig Kerelop, real estate agent and investor in Denver and co-founder FI Team, is one of many who call this strategy “home hacking”. He advises many of his clients to consider adding roommates as a way to generate income from their main residence.
“Home burglary is definitely the most popular way” to start investing in real estate, Kurelop said.
He joined this strategy when he first moved to Denver. Now he has broken into his fifth home and is helping his clients do the same.
“It really changed my life a lot,” said Kurelop.
2. Buy an apartment building and rent out apartments
This is probably what you think about when you think about investing in real estate: become traditional homeowner.
This path definitely has a higher barrier to entry. Multi-family homes are more expensive – sometimes prohibitively more expensive in large metropolitan areas – and require a higher down payment if you’re not going to live there.
You also need to make sure you have a stomach to handle emergency calls.
“It can pay dividends, but it’s work and you have to be willing to put your work into it,” he said. Randall Lee, partner and financial planner at TrustCore, a financial planning company. He and his wife have been landlords together for over 25 years.
Lee uses his own experience to help new investors avoid some of the pitfalls of investing in multiple families. Does he say one of the biggest? Lack of thorough verification of tenants.
“What most determines the success of a rental property relationship is the quality of the tenant who is there,” Lee said.
Both costly and unexpected costs can arise. A pipe could accidentally burst, causing a night flood, or you may need to build a new concrete road, which can cost a lot of money. Easily spend money on necessary repairs when you first enter a rental property, regardless of how the checks were conducted.
Finally, you need to take an honest look at the numbers to make sure they’re worth it. Positive cash flow alone is not enough. Lee advises doing math to determine the true return on investment: how much return the property will generate versus the capital you put into the home. Becoming a homeowner isn’t for everyone, so make sure it’s something that you can actually afford.
3. Find an investment partner and buy property together
Maybe you are looking to buy investment property but are hesitant to do it alone. If you have financial constraints or just want to lean on someone with different skills, this is where finding a partner can really be beneficial.
Lee says that partner investors often counterbalance each other with different areas of expertise: maybe one investor is a genius in mathematics and finance, while the other has experience with contractors and may be involved in building renovations.
Building these types of partnerships can be a win-win: both parties get a share of the investment and the help they need to succeed. In addition, it can make buying possible in a market where house prices are too high to invest alone.
“There are different strategies that work best depending on your location,” Kurelop said.
But make sure you can really trust your investment partner. When you buy property together, you are probably bound by that relationship for 15 or 30 years (depending on the type of mortgage).
four. Invest in a real estate investment fund (REIT)
If the idea of direct ownership completely turns you off, there is another way to invest in real estate: REITs.
Real estate investment fund this is a type of public company which allows investors to buy shares in a large diversified real estate portfolio. The REIT does all the work of buying and managing real estate, and shareholders receive a portion of the profit.
“They may have the advantage of earning some income,” Lee said without being the direct homeowner.
But Lee advises his clients to take a close look at these funds before investing, and warns that they cannot withstand economic downturns in the same way that directly owned real estate does.
“They usually don’t provide the protection you are looking for in a nasty market,” Lee said.
Make sure you invest for the right reasons
Patricia Hausnost understands the “temptation” of investing in real estate. She worked 20 years in real estate finance before becoming a certified financial planner and she saw many of her clients do well. But he warns that this is not for everyone.
“While this is true, you can invest well in [real estate]“If you don’t have the courage to consider potential downsides, you may want to consider investing more passively (in the stock market, for example),” Hausnost said.
Lee also tries to make sure his clients are investing in real estate for the right reasons.
“What will it give you that a diversified portfolio of stocks and bonds won’t give you?” Lee often asks. In most cases, the answer is higher profitability. But it can also mean more headaches.
Trust me: investing in real estate has given me a lot of financial support, but it has brought with it quite a few emergency calls, dirty work, and tricky situations.