How to Start Real Estate Investing as a Total Newbie?

Real Estate Investing

You know what I thought when I first learned about real estate investing at 25 years old? “There’s no way. That’s only for rich people with massive down payments and property empires.”

I assumed it took boatloads of cash, insider connections, and some magic wealth gene I definitely didn’t possess. How could a dead-broke entry-level worker like me ever invest in real estate?

But then I read stories about regular people building wealth through real estate. They started with surprisingly little money down. I got inspired, stopped making excuses, and decided to take the plunge myself.

Want to build semi-passive income and wealth through real estate investing? Keep reading, because this post will show you exactly how I did it, starting from zero.

Part 1: Budgeting to Invest

The first step on my real estate investing journey? Budgeting like a manic minimalist honey badger. I got extreme about cutting costs so I could save a down payment faster.

I made a budgeting spreadsheet in Google Sheets to track every dollar. I separated my “needs” like food and shelter from my “wants” like daily fancy coffee runs and clothes’plosions at the mall.

Those “wants?” I eliminated them like a heat-seeking missile launched at my own lifestyle spending. I stopped going out to eat, cancelled cable and subscriptions, and downgraded to a used car. I slashed my rent by moving to a cheaper (but nice!) area.

With my expenses bleeding red ink no more, I looked for ways to earn extra income through side hustles. I monetized my language skills by tutoring rich families’ kids for $600 per month. I picked up freelance writing gigs for extra income too.

Each month, I set up automatic transfers from checking into a high-yield savings account. I made those automated savings a non-negotiable fixed cost, just like paying rent. That cash piled up faster than I expected into a decent down payment fund within two years.

Part 2: Choosing Your Investment Strategy

With my carefully-saved down payment in hand, I had to choose my real estate investing strategy wisely. I didn’t want to pick wrong and waste years spinning my wheels.

Option 1: House Hacking

This involves buying a small multi-unit property, living in one unit, and renting out the other unit(s). The brilliant move? You live for free (or nearly free) while your tenants cover most of your mortgage payment.

For example, let’s say you buy a duplex for $200,000 with 20% down ($40,000). If you rented out one unit for $1,000 per month while living in the other unit, your tenant essentially paid $12,000 of your $12,960 annual mortgage that year. Hello, free housing!

Option 2: Buy and Hold Rental Property

This classic strategy involves putting 20-25% down on a rental property, getting a mortgage to cover the rest, then letting tenants pay down the mortgage for you. Once the mortgage is paid off in 15-30 years, you own the property free and clear, plus all those years of positive cash flow.

The downside? You need a decent amount of cash for the down payment. But there are ways to get around that, which we’ll discuss later.

Option 3: Fix and Flip

This strategy is higher risk, but higher reward. You buy an undervalued, often distressed property. You fix it up using contractors or your own sweat equity. Then you sell it quickly for a nice profit.

The upside is making a huge chunk of cash quickly if you picked the right property and renovations. The downside is taking on huge risk if your repair costs skyrocket or you can’t find a buyer fast enough.

Option 4: Real Estate Crowdfunding

This passive approach lets you invest in a pool of real estate properties or mortgages through crowdfunding platforms like Fundrise. It’s lower risk, more diversified, and easier – but also less lucrative.

After assessing my options, skill set, and financial situation at the time, I decided to start with house hacking. It allowed me to get the real estate investing party started with my tiny down payment.

Once I got some experience and savings under my belt, I knew I’d transition toward buying and holding rental properties. That would build my long-term wealth while continuing to benefit from positive cash flow.

But how does a single gal like me find the perfect house hack?

Part 3: Finding and Funding Your First Property

Here are the exact steps I followed to locate and purchase my first investment property:

Step 1: Get Pre-Approved for a Mortgage

I knew I’d need to prove to sellers I was a legitimate, able-to-close buyer. So I spoke to lenders and shopped around for the best rates and terms.

Once I found one I jived with, I provided documentation on my income, debts, and assets. After reviewing everything, the lender gave me a powerful pre-approval letter stating the maximum mortgage I qualified for.

Step 2: Find Markets with High Rent-to-Value Ratios

Location is crucial for earning positive cash flow. You want to buy in areas where rental prices are high compared to home purchase prices.

I spent weeks researching different cities, neighborhoods, and their expected rent prices versus home values. I read real estate investing blogs and joined online forums to get local insights.

Once I identified a few high rent-to-value areas that met my criteria, I connected with realtors who worked those neighborhoods. They gave hyper-localized data on market conditions and rent potential for specific listings.

Step 3: Make Offers Under Market Value

Real estate investing is a numbers game, so I went in planning to make A Lot of offers to boost my odds. My realtor and I ran the numbers on every potential deal, estimating repair costs and projected rents.

We looked for out-of-state or desperate sellers likely to accept lower offers. Then we’d put in an offer around 10-15% below comparable sales prices, leaving room to negotiate up a little if needed.

Step 4: Get Creative with Financing

The classic way to invest is putting 20-25% down using a conventional mortgage. But there are tons of other financing strategies I employed:

  • FHA loans allow 3.5% down payments for primary residences like house hacks
  • Portfolio lenders give mortgages based on assets rather than income
  • Partnering with friends/family to combine funds for 20%+ down

With some creativity, I pieced together enough for a 20% down payment on a $125,000 two-family house in an emerging neighborhood.

Part 4: Managing and Maintaining the Property

You’ve got the investment property, wahoo! Now how to actually manage this real estate investment?

Option 1: Do Everything Yourself

Want to maximize profits? Handle every aspect of landlording yourself – marketing vacancies, showing units, screening tenants, making repairs, handling accounting.

It’s exhausting, but you keep 100% of the rent revenue minus expenses. As a new investor, I wanted to learn the ropes firsthand.

Option 2: Hire a Property Manager (My Preference)

Eventually I got tired of the 3am clogged toilet calls and ‘OMG-this-stove-is-broken’ emergencies. I hired a professional property manager to handle 80% of the headaches for me.

Typically, good property managers charge 8-10% of the monthly rent, plus finding fees. It’s worth every penny to keep my life sane.

Option 3: Use a Turnkey Company

Want true real estate investing passivity? Hire a turnkey company to rent out your new property from Day 1. They handle everything – renovations, tenants, maintenance, you name it.

Of course, for that ultimate convenience, you pay the highest fees which can eat into your cash flow. But some investors are happy to sacrifice returns for a completely hands-off experience.

No matter which property management route you choose, always budget for three key expenses:

  • Maintenance
  •    Vacancies
  • And periodic capital expenditures.

Maintenance covers those leaky faucets, HVAC tune-ups, and all the general wear-and-tear that comes with tenants living in your units. Rule of thumb? Set aside at least 1% of the property’s value annually for ongoing maintenance.

You’ve also got to prepare for vacancies between tenants by budgeting accordingly. Even in a hot rental market, you’ll likely experience some downtime while turning over units. I always assume my properties will be vacant for two months each year so I have enough reserves.

Finally, you need to save for those big-ticket capital expenses that pop up every 5-10 years: new roof, appliances, exterior paint, etc. Annual capital reserves of 5-10% of the property’s value will cover those costly bills when they arrive.

Raising Rents Responsibly

Once you’ve got tenants in place, you’ll want to bump up rents each year to keep pace with your rising property taxes, insurance, and maintenance costs.

But don’t get too greedy! Rent increases over 3-5% annually will likely trigger high vacancy rates, as tenants get sticker shock and move out. Then you’re dealing with months of lost rent, plus turnover costs.

Instead, I recommend smaller 2-3% annual bumps. Justify the increase by showing tenants market data on rising rents in the area. With clear communication and reasonable terms, high-quality tenants will renew.

Conclusion

There you have it – my complete roadmap for getting started with real estate investing as a total beginner!

We covered budgeting tips to save a down payment quickly through cost-cutting and side hustles. Then how to analyze potential markets and properties to find good investments that cash flow. And finally, different options for financing and managing your rental units for maximum profits.

Real estate investing is completely learnable, even if you’re starting from zero like I was. The hardest part is taking that first step through fear and doubt. But massive long-term wealth awaits those who start building their empire one property at a time.

Trust me – if I can achieve financial freedom through real estate at a young age, an ordinary person like you can too. What’s your excuse for not getting started today?

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