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How To Invest In Real Estate

May 11, 2020
Tips & Tricks

(This advanced blog summarizes real estate investing tips and insights Lofty AI has acquired from working with thousands of investors and institutional funds.)

Getting started

Many people want to invest in real estate. They just do not know where to get started.

In this real estate 101 guide, we will teach you the tips and tricks to get started investing on the right foot. We will also break down the real estate investing strategies beginners should and should not be using.

Lastly, we will dive into the most important aspect: How to make money from real estate investing.

Most “real estate investing for beginners” books and real estate “how-to” videos are useless.

This post contains actionable tips on how to be a property investor. While it is certainly important to do your research and due diligence before investing in any properties, do not spend endless hours memorizing facts and figures.

The best way to get started is to dive in headfirst and start talking to other real estate investors. This will help you to begin to build your own real estate investing business plan.

Trading cash for an investment property

Joining a real estate investment group

A big advantage of real estate investing compared to stock market investing is all the available meetups and groups.

We recommend joining a local real estate investing group. This will allow you to connect with experienced investors and real estate moguls. It is a great place to start to learn how to become a real estate investor and grasp the different investment strategies in real estate.

In socially distant times like these, you can also do this online. A real estate investing website we recommend is Bigger Pockets. BP contains more insight on how to start real estate investing as well as daily real estate investing news.

The real estate industry is beyond old school. So, when at these meet-ups, take the advice you receive from investors with a grain of salt. Try and treat their advice as if they were beta testers of a new product or service that you have just released.

Here's what I mean by that:

In your conversations with beta testers of a new product you just released, you would listen very intently to the problems they face.

In contrast, you would not want to listen to their proposed solutions to those problems, because they are almost always wrong.

You want to come up with those solutions yourself—it is your product, which is why you know best.

Approaching these meet-up groups the same way will allow you to learn generic tips for real estate investing. It also allows you to funnel out old-school ways of thinking about problems that are easily solved by current technology.

Real estate investing can also look different for different people, based on their economic and living situations. It is important to remember, what may work for someone, may not always work for you.

Listen to their advice on things they wish they knew when they first started out investing, such as:

Aspects you should be doing research on yourself include:

  • Whether to buy a duplex or a single-family home
  • Which real estate investment apps you should use
  • Which markets you should be investing in
  • Whether to flip or buy-and-hold

For example, most rental property owners are comfortable with real estate investing returns of 3% per year on appreciation.

With all the available technology today, that is no longer the case. By leveraging A.I. and machine learning, you can now identify neighborhoods on the precipice of rapid appreciation from the comfort of your own home. You no longer need to settle for these extremely low returns.

The real estate industry is beyond old-school. You will quickly realize there are many ways to automate the manual processes that old-school investors are clinging onto.

Quote by Grace Hopper

The first thing I always hear from real estate investors and real estate investing blogs is that you should only be investing locally, or “in your own backyard”.

This stems from the notion that because you are most familiar with the area you live in, you have the best idea of where and how to invest there compared to an area that you have never been to before. This logically makes sense, but there are major issues with this line of thinking. Read on to find out why.

The issue with local knowledge

The physical location of your investment property is very important. You want to invest in a neighborhood that is up-and-coming. There should also be available properties that are cash flowing with high average occupancy rates.

The biggest issue with local knowledge is that it is based purely on luck.

What if you happen to be living in a neighborhood with zero good deals and negative appreciation over the past 5 years? Are you fated to never be a successful real estate investor because you happen to lie there?

Beware of most real estate investing blogs that tell you to invest locally or "in your own backyard". Chances are they will have all the little details about your hometown. This includes which blocks are up-and-coming, the most popular bars, which side streets are the quickest during rush hour, and so much more.

That advice exists because most people know their local area very well and it also makes the property easier to manage. This is true, but only helpful if you happen to be living in a fantastic neighborhood to invest in. The chances of that are slim.

Because aspiring real estate investors are unable to find a deal in their local neighborhood, they often give up before they’ve even started.

This mindset prevents a lot of people from getting started in real estate investing.

With the uptick in digital property management tools, it has become very simple to be a rental property owner outside of your local market.

This is why we built Lofty AI. We are able to automate local knowledge by leveraging real-time, idiosyncratic social data.

It's as if we have millions of boots-on-the-ground analysts walking around every single neighborhood in the US 24/7. Each analyst is picking up on the nuances and social cues that someone living there would notice.

This way, you can invest within an area even without being physically present there.

Professor X in Cerebro

Debt is good

I often hear from you should be buying your property with all cash and no leverage because debt (leverage) is “bad”.

Ever wonder how regular Joes with 9-5 jobs are able to buy a couple $100k+ properties per year?

It's because they are using debt.

The truth is, debt is only bad if you are spending more money per month on operating expenses and your mortgage than what you bring in with rent. If your rent is greater than your expenses, you have positive cash flow.

The ultimate goal is to generate positive cash flow while your property appreciates in value simultaneously.

With leverage, you can buy a $100,000 property by only putting $20,000 down. The rest, you can borrow from a bank (mortgage) or borrow from a hard money lender. Be sure to understand the difference between these two lenders and which one would be right for you.

So, instead of buying one property for $100,000 upfront, you are able to buy 5 properties for $20,000 down on each.

The minimum down payment for an investment property is typically 20% of the home's purchase price. A 20% down payment will allow you to generate cash flow and get a good interest rate.

Conventional mortgage rates

People often wonder how to invest in real estate with little money. Using leverage is the answer.

House hacking

If you are wondering how to start as an investor in real estate, house hacking is the way to go.

House hacking means that you live in one unit and rent out the unit next-door for cash flow.

With this method, you get to live in your investment property while also keeping an eye on it at all times. House hacking is the perfect scenario for a first-time investor wanting to know how to learn real estate investing. It can also be assumed that you will be more in control of your tenants and their activities if you are right next door, which is helpful when protecting your investment.

If you want to become an investor in real estate, house hacking, specifically in a duplex is a great place to start.

Value-add

You can also improve the value of a property by doing a bit of rehab. Otherwise known as value-add. You do not have to have a construction background or pay tens of thousands of dollars to add significant value to a property.

Usually, you want to look for a property that is move-in-ready, but could use quick fixes like a new roof and granite countertops.

Adding a new roof costs around $3,000 and you can buy new granite countertops for $30 per square foot. With these two cheap upgrades, you can substantially increase the value of your property right off the bat, without having to do any crazy amount of construction or manual labor.

Duplex

Managing risk

When investing in a property, you want to make sure to protect yourself from all the associated risks.

The best way to do this is to create an LLC, or a limited partnership, rather than investing in your own name. This way, if a tenant is injured and decides to file a lawsuit, these legal entities can protect your personal assets. Ultimately, you would only lose the money you had already invested.

Investing in REITs

A question I often hear from people wondering how to begin real estate investing is how to invest in real estate stocks or a real estate investment trust (REIT).

In light of the COVID-19 pandemic, these instruments are not looking favorable for the next 5 years. This is because they mainly focus on commercial properties. Our advice is to stay away from real estate stocks and REITs for the foreseeable future.

The pandemic & social distancing will take a toll on all commercial assets in different ways:

  • Multi-family - People will want to maintain a greater distance from each other even after lockdown orders are relaxed.
  • Office - Companies are finally starting to realize how easy and convenient it is to work from home because tools like Slack and Zoom exist. This will prevent them from wanting to spend a bulk of their funding on rent.
  • Retail - In the wake of all social distancing measures, people have favored online shopping more than ever before. Almost everything is available with just the click of a button nowadays.

How to use Lofty AI to invest in real estate

Lofty AI makes it easy to invest in real estate from the comfort of your own home.

Our app shows you cash flowing, A.I. vetted properties primed for rapid appreciation in 30 different US markets.

Lofty AI platform with a full list of cities for investing in real estate
Lofty AI platform in Oakland, California

Our goal from the get-go was to automate local knowledge. We equip you with the same knowledge about a market as an investor who has been investing there for the past 30 years.

We do this by using real-time, alternative data and 50+ leading indicators, such as social media data trends, restaurant review patterns,  sewage data, and much, much more.

We will only show you properties that are both undervalued and within a very close proximity to a micro-neighborhood that’s primed for rapid appreciation.

This is the rental property investment strategy everyone should have regardless of whether you're a Lofty AI user or not. We just make the process 100X faster and more efficient.

Our data is updated every single day and is granular down to the city block level.

By contrast, the rest of the industry uses yearly or quarterly updated data that’s granular at the wider city level.

Want to learn more? Click the button below to request access today.

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