Real estate investing 101: Tips for Beginners

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

Why real estate investing?

This post gives you actionable tips to get started in real estate investing.

Real estate investing is by far the best way to create generational wealth and set you up with passive income for life.

But, there's a right way and a wrong way to do it.

This post walks you through the right way to invest, starting with the basics.

First, let's start by discussing the advantages of investing in real estate.

1. Cash flow

When you hear real estate investors use the phrase “mailbox money”, they’re referring to cash flow.

Cash flow is income generated when your rental returns exceed your monthly expenses.

When you're generating cash flow, you're generating passive income.

For buy and hold investors, cash flow is king.

2. Appreciation

Real estate values tend to increase over time, which allows you to turn a profit once you eventually sell your property.

Appreciation is simply the increase in a property's value over time.

The goal for every real estate investor is to identify a neighborhood primed for appreciation before the rest of the industry catches on.

There are certain early signs you can look for. These include:

• New retail shops opening
• Tech companies opening up
• An abundance of electric scooters
• Airbnb nightly rates shooting up

3. Tax advantages

Another advantage of real estate investing is the tax breaks and deductions.

The government offers tax breaks for the following:

• Property depreciation
• Insurance
• Maintenance repairs
• Travel expenses
• Legal fees
• Property taxes

You're also entitled to lower tax rates for your longer term investments.

4. Portfolio diversification

Another benefit of investing in real estate is the ability to diversify your assets.

This means the addition of investment properties to you portfolio can lower your volatility and provide a higher return per unit of risk.

5. Leverage

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 it from a hard money lender.

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

6. Inflation hedge

The final advantage of real estate investing is that it's hedged against inflation.

With increases in inflation, your rental income and property value actually increase substantially. This is because as the cost of living goes up, so does their cash flow.

The inflation hedging capability of real estate comes from the positive relationship between GDP growth and the demand for real estate.

Tips for real estate investing beginners

Let's now walk through some tips for investing in your first property.

1. Buy a duplex

When you're first starting out, you're going to want to buy a single family home or a duplex.

We suggest going with a duplex. Duplexes are generally located in affordable areas primed for growth. This makes them an excellent investment for a first-time real estate investor.

The other advantages of investing in duplexes include:

• Ability to keep watch on your property 24/7
  
• Mortgage advantages if you buy a duplex that you also live in
• Duplexes give investors the ability to house-hack. House hacking means a landlord can live in one unit and rent out the other, which has many advantages.

House hacking

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.

You will also probably rule out most bad tenants that pay late and party into the night because they know they'll be living next to their landlord.

2. Use leverage

As mentioned previously, using leverage gives you a huge advantage.

With leverage, you're able to buy properties for 1/5 of the total cost, while borrowing the rest.

Naturally, you have to pay the lender back in the form of mortgage payments. But, this isn't an issue if your property is positively cash flowing.

When your property has positive cash flow, that means your rent exceeds your mortgage and operating expenses.

Cash Flow = total income - total expenses

This is the dream. You get to sit back and collect passive income whilst your property's value appreciates simultaneously.

3. Protect yourself by investing through an LLC

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’d invested.

Additionally, having an LLC could protect your retirement fund should something bad occur on the property.

4. Buy in an up-and-coming neighborhood

The ultimate goal of real estate investing is to buy a property in an up-and-coming neighborhood.

When you're able to get in on a neighborhood before it gentrifies, you will experience appreciation beyond your wildest dreams.

You will also able to bump up rents significantly in the future. This is because the area around your property is getting better and wealthier people are moving into the area.

If you're able to predict which areas will see the most future appreciation, you can easily double your money in 2-3 years.

Take areas like Williamsburg in NY, The Arts District in LA, and Columbia Heights in Washington D.C.

Had you invested in these areas before they began to appreciate, you would have made 2X your money in just a few short years.

Lofty AI is directly focused on identifying cash flowing properties in up-and-coming neighborhoods.

5. Decide on terms

After identifying your property type and location, you want to come up with the terms regarding your investment.

That starts with calculating your future rent, fees, yearly costs and emergency funds to keep a running budget.

You want to take into consideration all of the minor details. This includes if utilities will be included, ongoing maintenance, what to include in your security deposit, & more.

6. Consider hiring a property manager

Consider hiring a property manager, especially if you plan on having properties in different locations.

Property managers will oversee the daily operations of your investment property.

Their primary job is to make sure things are running smoothly and that your property is maintained up to the highest standards

For real estate investors buying properties outside of their local area, property management is a necessity.

7. Add value to your property

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

For example, replacing your roof costs around $3,000 and you can buy new granite countertops for $30/sqft.

With these two cheap upgrades, you can substantially increase the value of your property right off the bat.

8. Don't invest in a REIT

Investing in a REIT is like investing in a stock. When you invest in a REIT, you're giving a property investment fund money to buy properties on your behalf.

Investing in REITs used to be a very safe bet. In light of of the recent pandemic, our advice is to stay away from REITs for the foreseeable future.

REITs are mostly focused on commercial properties which have been significantly more affected by COVID-19 than residential properties.

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 - For obvious reasons.

Also, when you invest in a REIT, you're not actually learning anything about real estate investing.

The best way to get started is to apply these tips and just dive in.

9. Generate referrals

Savvy investors generate a large portion of their business through referrals. Because of this, it's important that you build your network and treat other investors with respect.

This includes any business partners, clients, tenants, and anyone with whom you've had a relationship with in the past.

Real estate investing groups are prevalent, and burning one bridge may potentially lead to many more burned bridges.

The best real estate investors pay extremely attention to detail. They're also typically very open to feedback including complaints and concerns, and represent their business in a positive manner.

This allows investors to build the kind of reputation that makes other investors interested in working with them in the future and referring their friends as well.

10. Know the rules and regulations

There are plenty of regulations that investors uncover after being in the business for a while.

For example, you may be considering turning a basement into a second rental unit. Little do you know that's illegal in the state you own your property in.

You want to pay attention to zoning laws, as they tend to differ in each local market. For example, you want to think twice about converting the first floor of a building you buy into a co-working space because local zoning laws may prohibit it.

You never want to assume you can add another room or second story to a building. Always verify first.

Even if you're able to obtain a permit, you want to understand the degree of work required to get a permit before you start the process.

‍

11. Create a network

Building a solid network of other real estate investors can provide important support and create opportunities for both new and experienced real estate investors.

You want to focus on making friends with more experienced investors that have been through the wringer, and even consider finding a mentor.

Because much of real estate investing relies on experiential learning, experienced real estate investors understand the importance of building a network and most wish they'd started much earlier.

12. Get an accountant

Talk to any experienced investor, and they'll tell you that taxes comprise a significant portion of their yearly expenses.

Besides being expensive, if you file your taxes incorrectly or miss out on a payment you were supposed to make, the expenses will be significantly higher.

Understanding the current tax laws can be very complicated and take time away from the business at hand. This is especially true for investors buying properties in multiple states, as the tax laws can be drastically different on a per-state basis.

Savvy real estate investors will almost always retain the services of a qualified, reputable accountant to handle their books.

The costs associated with retaining an accountant are often negligible when compared to the savings they will bring to your business.