By Dr. Peter Kim of Passive Income MD, WCI Network Partner
People tend to join our community because they want to take their investment strategies to the next level to pursue financial freedom through multiple streams of income. Whenever you talk to financial advisors, much of the discussion is focused around simply stocks, bonds, and mutual funds; and while those are very beneficial investment options, there are many other avenues as well. One such avenue is real estate investing, which can be a very lucrative way to generate passive income, retire early, and build wealth.
I talk quite a bit about both active and passive real estate investing. Active investing is where you directly own the property. In other words, you are a landlord. Passive investing focuses on investing in others’ deals.
If you’re interested in becoming an active real estate investor, there are a few very important details you must know. I’ve broken down my top six tips you should consider before getting started.
#1 Educate Yourself
Investing in your real estate education should be a top priority when it comes to investing in real estate as a beginner. I’m not suggesting you need to know everything, but I suggest you educate yourself on the essentials before you get started. Before you started treating patients, you spent the first few years building a foundation of knowledge.
A good place to get started is reading books, magazines, and articles; finding a mentor; enrolling in online courses and communities; and enrolling in online events where you can connect with seasoned real estate investors and become well-informed.
And guess what, most of them are all completely free.
Free knowledge is great, but I’m also a big fan of investing in resources that will save you time, headache, and, ultimately, money. So my suggestion is to dive into a few resources to get started, but if you find yourself somewhat drowning in info, find a couple of well-curated resources that will help you achieve a defined goal—for example, learn to confidently invest in deals in four weeks.
#2 Focus on Building a Great Team
Investing in active real estate is not a solo venture. You need to surround yourself with people more experienced and well-connected in order to maximize success. In fact, you want to learn to leverage others and their expertise.
This is what they do full-time and it’s taken them years to get where they are, just like you have to get where you are.
Successful investors assemble a team of experienced professionals, including property managers, tax advisors, contractors, realtors, attorneys, and trusted lending partners.
When it comes to real estate agents, they might be your most important team member. Not all realtors are experienced in helping investors, and as an investor, you don’t have time (or patience for that matter) to deal with an agent who doesn’t have any experience working with investors or who isn’t an investor themselves.
Make sure that you choose a realtor who has sold a large number of investment properties and also understands concepts such as return on investment (ROI), net operating income (NOI), and debt service.
There’s just too much at stake for a novice real estate agent to make mistakes during the negotiation, contract, or due diligence phase.
#3 Find Rental Properties in Emerging Neighborhoods
If you’re hoping to have a high ROI on your investment properties, then you’re going to want to focus on emerging neighborhoods. Think places in a popular school district area that attracts single families or are located in a college town.
Having a property in an HOA is also a huge selling point for tenants and takes a huge burden off of your plate as an investor. When potential tenants realize there’s a property where they don’t have to worry about lawn maintenance or couches on the curb every day, they’ll be impressed and more likely to choose your property over competitors.
#4 Have a Rainy Day Fund
Anything can go wrong at any time as a real estate investor. It’s important you have plenty of cash stashed away in the event something goes wrong. An air conditioner that needs to be replaced, damaged roofing, or event time between tenants can put you under.
Some landlords save up to six months of their mortgage costs to afford themselves the added financial stability, but choose the amount that works best for you. Of course, if you own multiple properties, that number varies greatly.
#5 Hire a Property Manager
Owning multiple properties while being a real estate investor is not a one-person team. As a busy professional, you’ll want to bring in a property manager. Property managers take care of the day-to-day so you don’t have to operate the building. You just need to own it and make high-level decisions.
If your only concern is the cost of hiring a property manager, you might want to reconsider. Property managers take a huge weight off your shoulders as an investor; including finding and screening tenants, dealing with on-site issues, maintenance, and everything in between.
Your time is also worth quite a bit and so having someone there to take care of the day-to-day is well worth your time as a high-net-worth individual.
#6 Diversify Your Investments
While investing in real estate in your specific geographic area may seem more convenient, you’re limiting your profitability potential by limiting yourself to one small area. It is important that you diversify your real estate investments.
By considering investments in other cities or states, you'll have more (or even better) investment opportunities and options. Investing across a large geographical area allows you to diversify your investments while protecting your portfolio against the ever-changing local markets.
Investing in real estate doesn’t always come with a road map, and every investor’s journey is different. However, there are certain practices and techniques you can implement now in order to start yourself on the right track for a financially independent future. Remember, above anything else, the harder you work and the more effort you put into your real estate investments, the greater your reward will be over time.
What questions do you have about investing in real estate as a beginner? Comment below!