We often hear about how we should consider investing in real estate- it’s a relatively low-risk investment and the returns can be great. We’re going to talk about the unfiltered truth about investing in real estate, starting with what’s typically the first step- buying your first property.
Here are some important things to know:
- Cash flow is extremely important.
- You will need some capital on hand for the initial real estate investment.
- Real estate investment isn’t easy
The Importance of Cash Flow
Cash flow in real estate is amazing if you do it right. You have the possibility to replace the income you earn from your job. Say you’re making $2,000-$3,000/month. If you start getting into real estate investment, you could be making double your previous income from the cash flow of your rental properties.
It’s important to note that there are different ways you can make money from owning real estate.
When you invest in real estate, you’re getting physical land/property. There are a few ways to make money from real estate:
- You can lease out your property and collect rent, creating passive income through your cash flows from rent.
- The land/property can appreciate, and you can sell for a profit.
We’re talking about the first way, making money through collecting rent.
What About Cash Flows from REITs?
Profits from REITs are not the same as passive income cash flows from owning a rental property.
A real estate investment trust (REIT) is a company that owns, operates, or finances properties. 90% of the profit from REITs must be distributed as dividends to shareholders, so they can be a good investment opportunity.
So when you invest in a REIT, you are investing in a real estate company. You do not own any of the properties, but you own a piece of the company which owns the properties.
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Real Estate Investing Requires Money to Start
When you buy your first rental property, you could either pay for the entire property outright (a huge initial investment), or you could finance your property through a mortgage. With a mortgage, you will most likely have to invest a down payment for the house, which is a capital investment you need to be aware of.
As always, there are exceptions to every rule, and there are ways to get into real estate with no money down. If you want to invest in real estate for no money down, check out our series on this topic:
- How to Get Into Real Estate With No Money Down-Seller Financing
- How to Get Into Real Estate With No Money Down- Hard Money and Gift Money
- How to Buy Real Estate With Credit Cards
Even with these different options to get into real estate investment cheaply, you still will have to pay for closing costs, and a small percentage of the home value (7-8%), which can add up to thousands of dollars.
Your investment might seem like a lot of money, but if you’re smart about your purchase and your leasing process, you could have investment-grade tenants and high cash flows.
It’s important to get your down payment together, but it’s also imperative to get your credit score together. A good credit score can save you lots of money, decrease your interest rates, and improve your chances of getting a better mortgage. Stay on top of your credit score, and if you need to, invest in a credit repair company if you must.
Real Estate Investment Isn’t Easy
When you invest in real estate, be prepared to spend a lot of time and energy researching the markets, fixing up your property, taking care of the property and tenants, etc. When you own rental properties, you are now a landlord, and with all the passive income, comes the full-time responsibility.
You have to act as the property manager, and handle any problems/tenant concerns as needed. You also have to put in work to find the best tenants you can and lease out any vacancies you may have.
Additionally, you have to put in work to collect rent. You want to list a rent that’s enough that you won’t leave money on the table, but not too high that you’re unable to fill vacant spaces.
That being said, investing in real estate can enhance your portfolio by limiting your exposure to risk and volatility. It also has a low and sometimes negative correlation with other major asset classes, which allows for beneficial diversification.
It may seem daunting, but if you take the steps one at a time, you’ll be on your way to success in real estate investment in no time. Once you get past your first property, your following properties will be a lot easier as you gain experience. Passive income doesn’t come at the very beginning, it comes later because you have to do your due diligence initially.
To wrap everything up…
Getting into real estate isn’t easy. There can be high barriers to entry, a lot of initial work and due diligence, and research. It’s not as easy as just logging into Robinhood and starting to immediately invest.
However, once you get into real estate, the cash flows, tax benefits, and appreciation will come. Real estate has made more millionaires than any other kind of investment. And the reason behind that is because of those barriers of entry. So don’t give up, and keep on working hard!
Investing in real estate will allow you the opportunity to have the financial freedom you deserve, but there are many barriers and challenges to real estate investment. The Orlando Academy created a “Real Estate for Beginners” course, based and designed around Orlando Miner’s 10+ years of real estate investing experience. With over $500,000,000 in transactions closed, the program has been proven to work over the last 15 years.