Invest in Rental Property

Real Estate Investing For Dummies: A Beginners Guide

Listen Money Matters is reader-supported. When you buy through links on our site, we may earn an affiliate commission. How we make money.
real estate investing

Getting started with real estate investing can initially seem intimidating, but it shouldn’t. There are just some key fundamentals you need to know. Real estate investing has a place in every investment portfolio, even beginners. Moreover, it’s a great source of passive income. So, if you want to get in the game, you need real estate investing for dummies.

Start With Passive Real Estate Investing

Still on the fence about owning a rental property? Then try a hands-off way of investing in a REIT to get into real estate investing. An essential part of your personal finance strategy is diversification and an excellent way to diversify your portfolio, and you can get started with only a few hundred dollars.

Investing in REITS or real estate investment trust is a great way to start investing in commercial rental properties without actually buying and managing those properties yourself. REITs are companies that own income-producing real estate and pay out significant dividends.

Essentially, it’s investing in real estate without the hassles of becoming a landlord.

Fundrise allows individual investors to invest in commercial real estate online through an eREIT. Their crowdsourcing model sets them apart from a traditional REIT allowing the average investor to participate in deals for as little as $500. Now anyone can diversify outside of the public markets with private real estate, with built-in risk management and improved stability.

In addition, their platform is easy to use and perfect for new real estate investors looking for a passive way to make money. Invest and manage your portfolio through our easy-to-use website and mobile app. Track your performance and watch as properties across the country are acquired, improved, and operated via dynamic asset updates.

We have invested a significant amount of our money into Fundrise, and in 2021 they boasted average returns of 22%. Yeah, 22%.

Fundrise

Diversify into income-producing real estate without the dramatics of actual tenants. Currently their return is 2x more than Vanguard's REIT Index Fund.

Location, Location, Location

When evaluating properties, location is the number one consideration when choosing an investment property. Allison focuses on college towns, preferable in the Midwest, where low real estate prices.

College towns have a strong demand for rental property. You might be afraid that you’ll rent to Animal House-type tenets, but plenty of older graduate students, professors, and support staff need housing in a college town.

There are also many ways to vet potential tenets to protect your real estates investment like credit checks, financial statements, guarantors, references, criminal background checks, and just a good old-fashioned Google search.

Future Barcelona, with buildings, modern windmills, and people riding bikes everywhere.

Want to grow your income with Rental Properties?

Our proven, data-driven approach to building a portfolio of income-producing rental properties that perform in the long-term.

Get the Course

Buy Local?

If you are new to rental property, it might not even occur to you that you can buy in far-flung cities, and most real estate investors don’t. Instead, the vast majority own within a 30-minute drive of their own homes.

You can see the appeal, know the area well, respond quickly to problems, and handle the property yourself rather than hire someone else to do it for you.

But there are disadvantages too. For example, you may not be able to afford your local area or at least can’t afford to buy as many properties as you would like to own.

You also have all your eggs in one basket, and if the area hits an economic slump or there is a natural disaster, your investment is vulnerable.

If you want to buy outside your market, you can use a property management company which we will cover below.

Metrics to Measure By

There are five criteria that Roofstock has developed to determine if an area is an excellent place to invest in rental property; median home value, median income, percent employed, percent of owner-occupied homes, and average school rating.

roofstock-review

Those data points will give you an economic picture of an area. However, there are other things to consider too.

Is the area considered hip? Younger people move around more and are more likely to rent than older people. They want to live in cities with a specific culture, many events, a good restaurant and bar scene, an arts community.

Fewer young people own cars, so they want to live in walkable and bikeable cities and have a public transit system. You can see how walkable a particular address is at Walk Score.

No one wants to live in a crime-ridden neighborhood. However, there are plenty of ways to ensure you aren’t buying in a crime hot spot. Read local newspapers, the city local sub-Reddit if there is one, and look at a crime map.

Not all cities publish this information, but if they do, it’s an excellent way to see where the high crime areas of a city are located.

How Much to Spend

The answer will depend on if you are going to (or can) pay cash, or you’re going to be leveraged – have a mortgage for your down payment. There are pros and cons for both.

Cash

Avoiding the whole mortgage process is a good reason to pay cash, as is not paying interest. Offering a cash sale may also leap from you over other buyers because sellers like money.

But you are paying cash ties up a lot of assets in one investment, the opposite of being diversified. If you have a limited amount of money to invest, paying cash is not ideal.

Leveraging

Some financial sites recommend being leveraged as the best decision even if you have the cash or could come up with it by raising capital. If your property’s value increases, the investor will not have put a lot down but can make a much bigger profit than the original investment.

Being leveraged also means you have the cash to invest in other asset classes, you’ll be more able to diversify. Even if you buy more than one property this way, you can still be diversified. Your money is allocated across different properties and perhaps different markets when you own in more than one city.

There are risks to leveraging too. If the real estate market were to tank and property values could decline sharply, you could owe more than the house is worth. It’s essential to do your homework and find the best mortgage terms that will work for you and your property purchases.

Roofstock

A turnkey rental property marketplace. Every property has a tenant, is certified, and comes with a 30-day money-back guarantee. They also screen and negotiate with property managers so you get a high-quality team for a good price.

Running the Numbers

You can run all kinds of calculations when deciding on a property, but we like the 1% rule for its simplicity.

The rule is that one month’s rent is equal to or greater than 1% of the home’s value to get the best return on investment.

So if you paid $100,000, your property should rent for $1,000 a month. If the home price is less than what your research has shown other similar homes in the area are renting for, it’s probably overpriced. It would be best if you did your due diligence.

The 1% rule doesn’t tell you everything you need to know, but it is an excellent way to weed out a long list of properties you’re considering as real estate investments.

Another way to measure if a property is a good deal is if the rental income is enough to cover all of your expenses and pay off the mortgage in 10-15 years.

This number is imprecise though, compared to the 1% rule because while you can estimate regular expenses, you have no way to know if there would be catastrophic expenses like replacing a roof or an HVAC system.

Getting a Property Inspection

If you’re new to rental property and have never owned a home yourself, you don’t know what to look for when spotting problems or potential problems with a home.

A good home inspector has more than 1,600 items on the list of things they look at. You having a kick at the tires isn’t going to cut it.

If you have a home inspection contingency in your offer, you can negotiate with the seller to fix the issues the inspector found or sell the property at a reduced price. The inspection can also turn up so many problems that you decide to pass on that particular property.

An inspector looks at some of the essential things are the age of the roof and HVAC system, listing cracks in the foundation, signs of water damage, and the home’s exterior condition.

A home inspection is not where you want to skip or skimp on to save money. On the contrary, a reasonable inspection can save you money and aggravation.

Have a Reserve Account

investment-strategy-building_an_emergency_fund

Having a reserve account for your rental property is non-negotiable. It protects your investment, but it protects your peace of mind. A reserve fund is like an emergency fund for your rental property.

It’s money kept in a savings account or other highly liquid account and used for routine repairs and unexpected expenses like replacing a roof after a hurricane and when the property is vacant between tenets.

One rule of thumb is the amount a mortgage lender requires a buyer to have in reserve before approving a loan, which for most lenders is six months of mortgage payments.

If your home is older and therefore may need more repairs than a newer property, you may want to increase that number. You should also increase the number if the property has a history of extended vacancies between tenets.

Too Much Work!

Owning rental properties seems like it would be a lot of work. There is a lot of research to find the right house in the right place, and that’s just the beginning.

This is supposed to be about making passive income, the money you don’t have to work for, like investing in the stock market!

You have to advertise your place, find and screen tenets, respond to repair problems or at least hire someone to fix things for you, collect the rent, deal with what could be a protracted eviction process depending on the state, and then start all over again when one tenant moves out.

Laws regarding tenets and landlords vary by state. Even if you only own property in one place, there are many laws and rules to remember, never mind if you have properties spread across more than one state. In addition, there are federal laws regarding habitability and discrimination you have to follow.

Have you ever written a lease? You can use a generic one found online, but you would have to make sure it adheres to local laws and regulations, particularly regarding evictions which can be incredibly complicated.

Who wants to do all of that? The good news is, you don’t have to. Hire a property management company. They do everything listed above and more. You can set the level of involvement you want.

Do you want to know every time a light bulb needs to be replaced, only if a repair is over a certain dollar amount, never, aside from your yearly tax statement?

You might think you can save money by being a hands-on landlord but remember, your time is not free. Every time you have to deal with something related to property is the time you could be doing something else, whether that is working and making money at your regular job or going on vacation without fear of interruption. So you better sign up for a landlord 101 class before jumping into it.

Have a Team in Place

There are three different hands. One is holding a calendar, another writing a note, and the last pointing at something on their smartphone.

If you want the whole process of buying and owning rental property to go as smoothly as possible, you need the right team in place, especially if you’re going to continue acquiring more and more properties.

It can be hit or miss, like finding a good doctor, hairdresser, mechanic, or anything else, and you may have to kiss a few frogs before finding a prince.

The best way to find your team is word of mouth. Fortunately, we have the internet for that, which is especially helpful when buying property outside your local area.

Just type in whatever position you’re looking for, followed by the word reviews and the area you are looking to buy. For example, “Property management company reviews Denver.”

This is at least a place to start. Once you have a few names, you can see if your choices have Yelp reviews. If you are only buying locally, find out if there are any Meetups related to real estate and attend a few events. This way, you can talk to people and get some recommendations.

Now that you have a few final contenders, you can arrange phone or in-person meetings and select your new team member.

You need to fill three key positions for your team: property manager, home inspector, and real estate agent. Once you have a team in place, you have to tell them you’re ready to buy your next property, and they get to work.

Rental Properties for Passive Investors

Our proven, data-driven approach to building a portfolio of income-producing rental properties that perform in the long-term.

Passive Income

Most of us will not get rich simply from our jobs, and we only have so much time to dedicate to actively working. Therefore, to achieve financial independence, we have to cultivate passive income sources.

Being a successful real estate investor is one of the best ways to increase your cash flow. However, make sure you understand all the do’s and don’t’sdon’t’s before you decide to jump into the market as an investor.

If you are not ready to own a property, you can also invest in a Real Estate Investment Trust or REIT. Think of an eREIT as a crowdfunded real estate, and you can start wetting your feet in the passive real estate market with just $500 with companies like Fundrise.

As a first-time investor, we encourage you to read the best-seller, Real estate Investing for Dummies by Eric Tyson and Robert S. Griswold. Hopefully, our beginner’s guide will give you a condensed version with tips to get started today.

Now that you have our real estate investing guide for dummies, you can start growing your real estate investing strategy and building wealth. If you want to learn more about real estate investing in single-family homes, you can find our resources here.

Get our best strategies, tools, and support sent straight to your inbox.

Candice Elliott - Senior Editor Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.
learn courses podcast popular toolbox