Real estate is arguably the best investment vehicle for building wealth, and certainly one of the safest. Today, the median U.S. home value is just under $230,000
; in 1980, it was only $47,200, and as recently as 2000, it had only risen to $119,600
. Barring Apple stock, it’s hard to find a better investment than that, much less one you can live in while it’s appreciating.
Is real estate a great investment? Absolutely. Is it a risk-free investment? Absolutely not. First-time investors should tread carefully, do their due diligence, and consult with experts before they sink their life savings into property. That being said, if you invest wisely, it’s safe to say you’re going to be pleased, if not outright amazed by your returns.
Here are some general rules and guidelines that can prime you for success as you begin your real estate investing journey.
Find a Mentor
Do you know what a 1031 exchange is? Should you buy that “as is” property? What do you do when a tenant refuses to pay rent?
Building wealth through real estate isn’t just a matter of ponying up the money to buy property. That’s just the beginning. Once you become an owner, the real work commences. And making decisions on the fly, with little experience and your own money on the line, can be nerve-wracking.
The good news is, there are people out there who’ve done what you’re setting out to do, who’ve been where you are. Seek them out. There’s a camaraderie among investors, and there are a lot of people out there who’d love to help you avoid the mistakes they made when they were starting out. You’d be surprised how much you can learn just by asking.
Do Your Homework
Let’s say you’ve found a property that you think has great investment potential, but it needs a rehab. You get an estimate from a contractor, which seems reasonable. Now what? Do you pull the trigger?
Not if you’re a smart investor. A smart investor gets one or two or ten more estimates, figures out which contractor offers the best ratio of quality to cost, and maybe even looks into doing the work themselves. And that mindset should apply to everything from potential neighborhoods to the fine print in the sales contract.
The point is that when you’re starting out as an investor, you should take nothing for granted. Ask questions and read (and listen to) everything. Like any industry, real estate is rife with inefficiencies, and finding and taking advantage of enough of those small edges can mean the difference between breaking even or turning a huge profit.
Work with an Experienced Real Estate Agent
Of course, it will take years of research and immersion before you have a deep, comprehensive knowledge of the market. But an experienced real estate agent already has that knowledge, and partnering up with one gets you the benefit of their network and their expertise.
Some novice investors think they don’t need an agent because they can just look at listings online, but this underestimates everything that a good agent brings to the table. Once you tell your agent exactly what you’re looking for, they can take you directly to the most relevant listings, saving you countless hours or weeks of aimless browsing. They can also help you get the best deal by advising you on the mindset of sellers, filling you in on the history of a property, or helping you time the market to strike at periods of low buyer interest.
And what about when it comes time to negotiate the price? You won’t be sitting down across from the seller; you’ll be squaring off with their agent. A great agent has negotiated dozens or hundreds of deals, and will drive the best possible bargain on your behalf — a better bargain, let’s be honest, than you could get yourself.
Identify Up-and-Coming Neighborhoods
Buying in an up-and-coming neighborhood
is like getting in on the ground floor of a stock before it shoots up. Before you know it, that boarded-up house you bought for $70,000 is worth close to a million.
But how do you predict what areas are set to get hot? It’s an inexact science, but there are clues
. Talk to real estate agents and developers to find out where artists and young people are moving; those populations are often priced out of established neighborhoods, and lead the way to revitalizing marginalized areas.
If local government is investing big money in major projects like parks or mass transit, depressed areas nearby are also a good bet. And neighborhoods that suddenly have features like bikeshare stations, high-end coffee shops, or art galleries, are often ready for a sudden rise.
Purchase Small Multi-Family Units to Start
Multi-family units are the best entry-level investment for novice investors. Why? Two words: cash flow
Let’s say you’re looking at a three-unit complex. You can find out what the complex’s income is before you buy, so you’ll have relative clarity on whether your cash flow will exceed your expenses. If you do buy, small sets of two, three, or four units can be renovated relatively quickly and inexpensively, which enables you to make them more appealing to renters. And you’ll have the option of living in one of the units while renting out the rest, essentially giving yourself free rent while your tenants pay off your mortgage.
Sound too good to be true? It’s true, but there are sometimes complications. Ask any property manager: from midnight calls about clogged plumbing to visiting eviction court over months of unpaid rent, dealing with tenants can be frustrating and time-consuming. But if you screen your tenants carefully, possibly with a professional screening service, and hire a property manager to lighten your load, owning a multi-family unit can be an easy, and incredibly lucrative, experience.
And to be honest, that applies to any real estate investment you make. It can be time-consuming, it can try your patience, problems could pop up, but in the end, it’s a good bet that your net worth is going to make it all worthwhile.
Related: 1031 Exchange: How to Save on Taxes When Investing